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September 14, 2005
Subprime Lenders Bear Scrutiny
The Federal Reserve is out with a study that finds blacks and Hispanics are considerably more likely than non-Hispanic whites to get subprime mortgage loans. It said the difference couldn't be fully explained by differences in borrowers' income, loan amounts, and the location of the property. It raises the possibility that "some minority buyers may be steered to lenders who typically charge higher prices [i.e., rates] than the credit characteristics of these borrowers warrant."
The Fed said it didn't have sufficient data to determine whether or not discrimination was involved. But it said the issue bears further inquiry. I talked today to two people with sharply opposing viewpoints, Allen Fishbein of the Consumer Federation of America, and Douglas Duncan, chief economist of the Mortgage Bankers Association. Here's how they spun the Fed study in different directions:
Fhisbein, the consumer guy, said, "This data is going to make a difference in the market. It?? going to subject the whole subprime industry to greater scrutiny. It will result in a fairer market."
While the Fed study doesn't prove discrimination, "It will provide a roadmap for identifying those lenders" who could be discriminating, Fishbein said.
The Mortgage Bankers Association, which represents both prime and subprime lenders, is putting a different spin on the Fed study. The MBA says the Fed study ...
concluded that there has been an expanded availability of home loans to all borrowers and warned against making unwarranted accusations of illegal bias which could discourage lenders from participating in the non-prime segment of the market. The analysis also showed that the vast majority of the differences in loan pricing and approval are explained even in the absence of detailed credit factors.
In an interview afterward, Duncan pointed out that the Fed said only about 2% of the 8,853 lenders covered by its study exhibited a statistically significant difference in rates by race and ethnic group.
(It would be interesting to know the names of those lenders, but the Fed doesn't want to pillory them with bad publicity without investigating more closely whether or not there's an innocent explanation for their lending patterns.)
Interestingly, when non-Hispanic whites do get subprime loans, they pay about the same rates as blacks and Hispanics, after adjusting for differences in a wide range of variables including their income, loan amounts, appraised value, loan-to-value ratios, FICO scores, and whether the loan had low documentation and was arranged by a broker. That's according to a Fed analysis of data from Georgetown University.
The Fed study found that minority borrowers are more likely than whites to choose subprime loans even when they could qualify for prime loans. This could be because some subprime lenders market much more aggressively than prime lenders, using highly compensated brokers to "push" costly loans on people who don't realize they have alternatives. For instance, Fishbein points out a study by mortgage buyer Fannie Mae Corp. that found blacks are less likely to bargain than whites when choosing a mortgage.
Are blacks and Hispanics being steered toward high-cost loans? It's a serious question--and the Fed is going to demand answers.
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