A multisite study of discrimination in loan approvals should build upon the intensive review and criticism generated by the Boston Fed Study. HOLC redlining maps: The persistent structure of - NCRC (i) If there is discrimination against minorities, and the appropriate factors have been controlled for, what is the sign of 1? Despite the unprecedented scrutiny and criticism to which this study has been subjected, our reanalysis shows that it clearly disputes claims that blacks and whites receive equal treatment from the lending industry. We do not believe that testing is a fraudulent activity, because testers would never actually close the loan transaction. Indeed, research clearly shows that minorities still face substantial discrimination in the process of looking for a home to buy (or rent).2, Many people believe that minorities also face discrimination when they try to obtain a mortgagea necessity for most Americans wanting to buy a home. However, NFHA provided the Urban Institute access to data from a large number of the tests it conducted, enabling researchers to construct and analyze a database of statistically tractable information (see chapter 2). In other words, achieving a world of truly fair lending will require remedies that go beyond color blindness. As discussed earlier, analysis of the NFHA test results suggests that there may be substantial differences between cities, and these differences need to be investigated more thoroughly. If this is the case, minorities who receive loans will be less likely to default than whites. Discrimination in the housing market increases housing insecurity for minority households and contributes to persistent neighborhood segregation. They start with the same word, but have decidedly different meanings. 2.1 Legal Framework for Discrimination. Test reporting forms should be as tightly structured as possible to permit objective comparisons of the treatment received by whites and minorities across a large number of tests. The commonly held view has been that if taste-based discrimination exists, loans approved to minority borrowers will have higher expected discrimination in mortgage lending For example, in about 10% audits in which a white and an African-American auditor were sent to apply for the same unit after 2005, the white auditor was recommended more units than the African-American auditor. This stage involves submitting an application that includes a range of information required to determine the applicant's creditworthiness, confirmation (or not) of that information, the lender's up-or-down decision, and, if the loan is approved, which loan product it is. The July For example, there is good reason to believe that marginally qualified whites receive more assistance and encouragement in correcting credit problems than do marginally qualified minorities. Listen. Nevertheless, these tests provide convincing evidence of significant differential treatment discrimination at the pre-application stage and highlight the need for further testing with a sample that is large and representative enough to allow for statistical estimation. The Boston Fed Study began with HMDA data for the Boston area and collected 38 additional variables for each application in the sample, covering the whole array of information needed to control for legitimate differences in applicant creditworthiness. In Chicago, all of the statistically significant findings were unfavorable to black testers. The purpose of this volume is to sort through the research evidence on mortgage lending discrimination, in order to provide policymakers with a comprehensive and comprehensible review of the current state of knowledge on lending discrimination and identify important questions that still need to be answered in order to recommend how best to further the goal of fair housing for all.4 Our review of the existing research evidence concludes that minority homebuyers in the United States do face discrimination from mortgage lending institutions. Thus, a study in which partners posed as marginally or poorly qualified borrowers might elicit different responses from lenders than a study in which testers pose as well-qualified applicants. Mortgage Lending Discrimination During the same period, it closed two officesthe one originally opened in the predominantly black neighborhood and another one in a neighborhood that had become predominantly black. and Overview - Federal Reserve Board Discrimination If so, advertising and outreach practices steer minority and white borrowers to different lending institutions (which may offer unequal products and services). The discrimination we find occurs at the initial information gathering What Constitutes Evidence of Discrimination in Lending But it did just thatconcluding that race was indeed a statistically significant and fairly large influence in lending decisions, even when a mass of detailed information systematically related to the lending decision was controlled for in the statistical analysis. But disparities between its denial rates for whites and for minorities are high, compared to metro-area averages. So it is possible that some organizations may be willing to incur the risk of conducting paired testing beyond the pre-application stageor that the federal government could issue guidance that would allow and encourage greater use of testing. Policies such as minimum loan amounts, which disproportionately affect minorities, are illegal unless they serve an explicit business necessity. This argument does not dispose of the discrimination issue, however. Discrimination at this stage cannot be detected through analysis of HMDA data or data drawn from lenders' application files. Studies of this kind of redlining face the same basic challenge as studies of discrimination against individual applicants, namely to find a data set with adequate information on loans and applicants, including applicant credit history. Unless researchers and test supervisors know in advance how lending institutions treat potential borrowers prior to the formal application stage, what different loan products are called, and to whom potential borrowers might be referred, it is difficult for pairs of testers to make identical requests and to record accurately the treatment they receive. But the courts have not yet ruled on this matter and any group that pushes paired testing into the loan approval stage of the mortgage process might face high legal bills, if not worse. A major element of the American dream is a home of one's own in the neighborhood of one's choice. These differences have not been explained away by data errors, omitted variables, or other technical shortcomings. Thus, we conclude that the default approach produces unreliable estimates of the incidence of discrimination in loan approvals. Introduction, Summary, and Recommendations Fair Lending Racial and Ethnic Disparities in Ohio Mortgage Lending The applicants would then file genuine loan applications, and the progress that they made through the loan application and approval process would be monitored and documented. against African Americans Posting UI research papers on other websites is permitted subject to prior approval from the Urban Institutecontact [emailprotected]. Fair lending advocates and industry experts have identified a set of strategies that lending institutions should implement in order to comply with anti-discrimination laws. Proper attribution is required. WebMortgage lending discrimination and the decision to apply: A methodological note. Discrimination against minority borrowers (both differential treatment and disparate impact) can take place at the neighborhood as well as the individual customer level. Webmortgage lending, lenders may not discriminate in mortgage lending on the basis of any of the prohibited factors listed. In both the research and the enforcement communities, the issue of dis-crimination in mortgage lending is currently one of most controversial topics in the area of civil rights.1 Dening Racial Discrimination: Prejudice Over Prot? We assess racial discrimination in mortgage approvals using new data on mortgage applications. Over the course of a two-day site visit, the research team scrutinized the process used to assess applications and was favorably impressed by the combination of a highly transparent review process, a strong commitment to qualifying marginal applicants, and the genuine belief by all staff that their process is color blind. Specifically, we find that: This introductory chapter begins with a brief review of the issues involved in measuring the incidence and severity of lending discrimination, including different ways in which discrimination can be defined and measured and the reasons why lenders might discriminate. Moreover, testers should receive careful training and supervision to ensure that both members of each pair present the same attributes, qualifications, and financing needs and that both record their treatment fully and accurately. These maps Evidence on Discrimination in Mortgage Lending It is possible that because the case study lender serves more minority customers than other area lenders, these customers may be less creditworthyon averagethan minority loan applicants in the metro area as a whole. Although several treatment variables show the same general pattern across cities, differences between cities are substantial. Although assembling such a database presents significant challenges, federal government regulators have sufficient leverage and resources to obtain the necessary information from lending institutions if they make it a priority. In the mortgage market the researchers found that racial gaps in loan denial have declined only slightly, and racial gaps in mortgage cost have not declined at all, suggesting persistent racial discrimination. Lending institutions may believe that their practices and decisions have been "color blind," and the institutional changes they need to make to eliminate discrimination may not be obvious. Enterprise Fair Lending and Fair Housing Compliance Officials announce new mortgage discrimination enforcement With respect to type of loan, several research studies have examined the probability that a borrower will receive an FHA loan instead of a conventional loan. Weblending risk and determine which banks should undergo a fair lending examination. Stephen L. Ross and John Yinger, Technical Appendix to Chapters 3 through 5 Webevidence of discrimination. Congress originally passed ECOA in October of 1974. In Oakland, differences in treatment were rarely significant and, when they were, they often benefited African American testers. In other words, researchers need to compare fair lending performance for institutions with and without these best practices or for institutions implementing different remedial strategies. Thus, if an underwriting criterion or requirement systematically disqualifies more minorities than whites, but does not reliably predict future loan performance, it is discriminatory. This is an area where more research is clearly needed, which can build on the insights from the Decatur case as it defines and devises ways of measuring the incidence of these and similar practices across institutions and markets. In addition, researchers need to investigate systematically the uses of risk-based pricing and credit-scoring schemes, analyzing the criteria and procedures lenders use to determine interest rates and fees for individual borrowers. And researchers should attempt to collect and analyze information on various loan fees, again exploring differences between "advertised" and "actual" fees. WebIn a study of ten savings banks, the New York State Banking Department found that four had lending standards (such as high minimum down-payment ratios) that could ad- versely affect minorities, women, and low income and predominantly minority neighborhoods (cited by Galster, 1996, p. 689). But much of the evidence summarized here suggests that lending institutions may be discriminating without realizing itthrough policies and procedures that have a disparate impact on minority borrowers, through subtle differences in the level of encouragement and assistance provided to whites and minorities, or through unexamined assumptions about the types of products and terms for which minorities can qualify. Mortgage Lending Aug. 25, 2021, at 5:42 p.m. What Is Lending Discrimination? Copyright of the written materials contained within the Urban Institute website is owned or controlled by the Urban Institute. Mortgage Discrimination. This legacy includes racial and ethnic differences in characteristics that influence the creditworthiness of any mortgage applicantincome, accumulated wealth, property values in minority neighborhoods, and credit history. Robin Smith and Michelle DeLair, Does Discrimination in Mortgage Lending Exist? MLOs are essentially licensed mortgage salespeople who assist customers with loan applications and have the ability to offer and negotiate the terms of a The difficulty of obtaining complete information on factors that influence default risk, as well as the covariance of many such factors with race, means that the default approach probably understates the incidence of discrimination at the loan approval stage. But certain complex analytical questions remain that some analysts conclude are enough to undermine the credibility of the original findings. Discrimination in mortgage lending: Evidence from a correspondence experiment, Journal of Urban Economics (2016).DOI: 10.1016/j.jue.2015.12.004 Most studies focus on outcomes by census tract, while one attempts to isolate the role of lenders (Schill and Wachter 1993; Phillips-Patrick and Rossi 1996). Despite individual instances of discrimination uncovered at every major stage in the mortgage lending process, almost no research has focused on the advertising, outreach, and referral stage or on the loan administration stage. Finally, a former Decatur Federal account executive told investigators that she was specifically instructed by the bank not to solicit loans south of interstate 20, an area that included many of Atlanta's black neighborhoods (Ritter 1996; Siskin and Cupingood 1996). Racial Discrimination in the U.S. Housing and Mortgage Lending Markets: A Quantitative Review of Trends, 1976-2016 was published recently in the journal Race and Social Problems. From choosing baby's name to helping a teenager choose a The process actually begins with advertising and other outreach effortshow potential mortgage applicants find out about lending institutions and loan alternatives. Some researchers have used information on differential default rates as a strategy for determining whether discrimination occurs at the loan approval stage. Traditionally, the lender's role in credit availability has been scrutinized. The evidence shows the persistence of discrimination in peer-to-peer lending against African American borrowers. Thus, denying mortgage credit to a minority applicant on the basis of information about minorities on averagebut not for the individual in questionmay be economically rational. Redlining. Maine law incorporates the federal Truth in Lending Act. Although the loan approval/denial decision is what comes to mind when most people think about the mortgage lending process, the process starts considerably earlier than that, with the preliminary stages filtering out some would-be mortgage applicants before they even get to a loan officer (see exhibit 1 for an overview of key stages in the process). As discussed earlier in this report, paired testing appears to be the only research methodology that would disentangle differential treatment discrimination from disparate impact discrimination at the loan approval stage. Is it possible that lenders discriminate unknowingly? This report does not address potential discrimination by other important actorssuch as real estate brokers, appraisers, insurers, and secondary loan institutionswho are not direct decisionmakers in the mortgage lending decision. WebEvidence on Discrimination in Mortgage Lending by Helen F. Ladd. Health & Parenting Guide - Your Guide to Raising a Happy Mortgage Lending As discussed earlier, evidence of higher default rates among minority borrowers than among whites does not prove the absence of discrimination at the loan approval stage. Mortgage Lending Discrimination In this paper, we further examine racial disparities in mortgage lending along HMDA mandated the annual reporting of information, by mortgage lending institutions with at least $10 million in assets, on the number and dollar amount of both home mortgage and home improvement loans, by census tract or county. Differential treatment discrimination would exist if minority applicants were systematically treated less favorably in a large sample of cases. But whether these differences are the result of discriminationrather than the inevitable result of objectively lower creditworthinessis the subject of a raging debate. Discrimination Federal law also prohibits discrimination in housing based on sex, family composition, religion, and disability. In order to test the hypothesis that high rejection rates for minorities are entirely due to legitimate underwriting criteria, researchers need to assemble and analyze data on loan performance and defaults as well as information on loan applications and originations. Topics/Tags: | Economy/Taxes | Housing | Race/Ethnicity/Gender. See 18 U.S.C.S. WebParenting is one of the most complex and challenging jobs you'll face in your lifetime -- but also the most rewarding. Overt evidence of discrimination A lender openly discriminates against an applicant based on a protected trait. The best way to determine whether the observed minority-white differences in loan denial rates are the result of underwriting practices justified by business necessity would be to replicate the Boston Fed Study in other cities, with the addition of loan performance data. WebIn a study of ten savings banks, the New York State Banking Department found that four had lending standards (such as high minimum down-payment ratios) that could ad- versely Evidence on Discrimination in Mortgage Lending. Discrimination Experimentation with different testing scenarios should be encouraged to reflect different classes of potential borrowers, different segments of the lending industry, and different types of pre-application requests. But they may also make special efforts to reach (or avoid) particular segments of the population. But it was not until the 1992 publication of an influential report by the Federal Reserve Bank of Boston (Munnell et al. Much of the current debate about mortgage lending discrimination stems from disagreement about the extent to which differential success in obtaining a mortgage is due to credit-relevant factors that vary with race or ethnicity and how much is due to ongoing discrimination. Helen F. Ladd. Currently, there is a tendency to identify lending institutions as "high performers" if they are implementing a widely accepted set of best practices, not because they have eliminated unequal treatment of minorities. The first focuses on the case-by-case process of approving or denying loans. Example: A lender offered a credit card with a limit of up to $750 for applicants aged 21- There is no question that minorities are less likely than whites to obtain mortgage financing and that, if successful, they receive less generous loan amounts and terms. This approach is premised on the argument that lenders who discriminate against minority applicants do so by effectively raising their underwriting standardsrejecting minorities who meet the standard required of whites and only accepting minorities who meet a higher standard. Analysis conducted for this project shows that this simple and intuitively appealing argument runs into severe methodological hurdles when used to measure discrimination in mortgage lending (see chapter 5). We use the term "color blind" in this volume to refer to policies and practices that appear to treat people equally regardless of their race or ethnicity. Two more recent studies examine discrimination in overages, defined as the excess of the final contractual interest rate over the lender's official rate when it first commits to a loan. This chapter explores the literature on mortgage discrimination and offers recommendations for future research. Discrimination in mortgage market makes it more difficult for minority households to build wealth through housing. Discriminating against someone whos trying to get a mortgage loan is against the law. Fed paper confirmed racial discrimination in Boston Although the U.S. Web"Use of Statistical Models to Provide Statistical Evidence of Discrimination in the Treatment of Mortgage Loan Applicants: A Study of One Lending Institution." Chegg WebEvidence on Discrimination in Mortgage Lending Helen F. Ladd T he ability to get a mortgage is often the key to an individuals ability to purchase a home. Paired testing can be effective for both research and enforcement purposes, although the procedures used for these two purposes are not identical. The reduction in the most exclusionary forms of housing discrimination suggests that in most cases discrimination will not block persistent efforts by black or Hispanic households to move into white or affluent neighborhoods. It is important to understand the distinctions clearly, because the different forms of discrimination may require different measurement strategies, as well as different remedies. In addition, the lending institutions where tests are conducted should be selected systematically, to be representative of all lenders of a particular type or those serving a particular market. Indeed, there is some suggestive evidence that applicants may sort themselves by race in selecting lenders, but not that this form of "cultural affinity" results in differential loan denial rates (Longhofer 1996a; Hunter and Walker 1996; Black, Collins, and Cyree 1997; Bostic and Canner 1997). 1014. However, such a study still would not be able to distinguish between differential treatment and disparate impact discrimination. Federal law prohibits discrimination in the homebuying process, mandating that all would-be homebuyers must be treated equally by real estate agents, lenders, appraisers, and insurance brokers.1 However, existing enforcement mechanisms may not be effective enough to guarantee equal treatment or equitable results. WebUsing a general equilibrium model of credit market discrimination, I find that both taste-based discrimination and statistical discrimination have similar predictions for the intergroup differences in loan terms. Example. Webevidence that discrimination played a major role in mortgage lending decisions in the early 1990s.1 Since then, the mortgage industry has evolved in many ways, including However, analysis of loan defaults does have an important role to play in the analysis of possible disparate impact discrimination. The OCC may also conduct nonmortgage lending analysis when non-Home Mortgage Disclosure Act (HMDA) data are available (e.g., small business, small farm and/or consumer loan information maintained for other purposes). Disparate impact discrimination occurs when a lending policy, which may appear to be color blind5 in the way it treats mortgage loan applicants, disqualifies a larger share of minorities than whites but cannot be justified as a business necessity.6 A widely cited example is the policy of minimum mortgage loan amountssetting a dollar limit below which a lending institution will not issue mortgages. We conducted in-depth, structured interviews about the mortgage lending process to determine what role employees played in decisionmaking, whether they were aware of fair lending requirements, how they perceived fair lending issues, and how they were monitored by their company for fair lending compliance. Both borrowers and lenders have an interest in this choice. Organizations that lobbied for the passage of ECOA also claimed that mortgage lenders were more likely to deny credit to single women relative to other applicants. WebLittle evidence is found that discrimination is occurring among insurers, but there is some evidence that redlining is. The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. After the visit, the impressions of our site visit team were compared with standard HMDA indicators of the lender's fair housing performance. If You Dont Get the Loan. 3:02. This would involve finding a pool of actual candidates for mortgage loans. discrimination in mortgage Comparing the interest rates quoted for these 30-year mortgages reveals that African American testers were more likely to be quoted higher interest rates than their white counterparts in three of the five cities. This may require advance researchor "scouting"on the products offered and procedures followed by lending institutions in the study sites. It is also possible that some lenders target direct mail solicitations to white communities, or get their referrals primarily from real estate agents who serve white neighborhoods. The goal of this research is to test the efficacy of various remedies and institutional reforms that lenders implement. but controversial, new evidence of discriminatory treatment by lenders against mi-norities. Indeed, HUD is currently funding a pilot study that will develop several alternative paired testing methodologies and estimate levels of differential treatment at the pre-application stage for at least one market area. 2015 Urban Institute | 2100 M St NW | Washington, DC, U.S. Department of Housing and Urban Development, Partner Spotlight: The Data Center and the New Orleans Index, Drivers of Growth in the Federal Prison Population.