Essay, Research Paper: Discrimination In Mortgage Lending

DISCRIMINATION IN MORTGAGE LENDING
America is a land of opportunity where every dream can come true. The country is made up of all kind of race, color, culture, etc. All of these differences greatly contribute to make a United States. No matter who one is, one has slice of the American dream. A major part of the American dream is to own a home. In many well-developed areas a home price is usually so high compared to an average person income. Therefore, institutions to give them a mortgage loan. This maker to decide whether or not the buyer can buy a home. For decades, there have been a lot of discrimination problems in mortgage lending that disappointed many minority buyers. Disputes and lawsuits against financial institutions have broken out. The two sides are still fighting today but in a more subtle way. Banks deny that they discriminate while community activists argue that most of the decline reason are discrimination not under qualification. This is a complex issue and therefore, it needs careful analysis and reflection in order to discover the truth of the matter and come into a conclusion.
One way to show whether financial institutions practice discrimination or not are to study statistics and surveys. The Federal Reserve Board's Home Mortgage Disclosure Act (HMDA) surveys show that with identical incomes. African-American applicants were twice as often rejected as opposed to Caucasians. The data is collected from conducting a massive survey of 9,300 lender and 6.6 million of applicants. The distributions of rejection percentage are following: Africans 37.6%, Hispanics 26.6%, Caucasians 17.3%, and Asians 15%. For high level income, there are still rejections: 21% of Africans as opposed by the Federal Reserve Bank of Boston confirmed that there is a higher percentage of minority (mainly Africans and Hispanics) rejected than Caucasians. Alicia H Munnell, Director of Research, concluded that race or ethnicity is the main key in mortgage loan approval decisions.
Shocked by evident reports, federal regulators made many investigations of the banks' lending records to spot banks with low percentage of minority lending. When such bias is found, the U.S. Department of Justice will file lawsuits against discriminatory. In responding to complaints of credit discrimination, the government has passed many laws and regulations to ensure fairness. In 1968, the Fair Housing Act prohibited discrimination in housing and housing credit. In 1975, the Equal Credit Opportunity Act prohibited discrimination in all types of credit and the Home Mortgage Disclosure Act required disclosure of home lending by census tract. In 1989, the Financial Institutions Reform, Recovery, and Enforcement Act amends HMDA to capture loan denial rates by race and to require public disclosure of CRA bank performance reports. In 1994, Clinton administration took office and further enforces anti-discrimination in credit.
I think banks do discrimination but most of the times they don't mean to because there are many factors involve in the process of approving a mortgage loan. The first factor is the loan officers of the bank.
Financial institutions have their guideline and policies in decide the qualification of a loan. The actual decision made is not by the whole organization but one or a few loan officers. In most case the loan officer interview applicants and in that short interview he/she tries to find out as much information as possible regarding credit. Then the officer applies the bank policies to make the decision. The source of discrimination I think is starting with the mortgage loan officer. Bank totally relies on these officers to make a right decision. In some case, there is no clear-cut link between the policies and prospective borrowers'qualification and thus, it is very difficult for the officer to make the decision. There are many reasons, that really impact on the way officer makes decisions.
First, the loan officer has a great responsibility to make as many loans as possible for the bank, but at the same time he/she is under pressure to avoid as much as possible of potential default. Therefore, the officer has to take risk sometimes because high default rates will greatly effect his/her performance and this could result in no promotion or even loosing the job.
Second, the officer experiences can greatly impact his/her decision. Bad experiences of certain group of people subtly formed a conception in the mind that can mislead the decision. For instance, many times an officer gave a loan to African American borrowers and most of them ended with default. Then, the next time an unknown black person come to him/her for a loan, the officer tend to be aware of the past experiences and expect higher qualification than the bank requires or simply refuse to give the loan. This is very common preconception and is hard to take out of a person mind.
Third, depending on the officer's philosophy, he/she can be conservative to reject the loan when it is in a non clear-cut situation. We have to note that everyone is different, one officer can be more or less conservative that the other. In such a not clear-cut situation the loan applied can be accepted by one officer and reject by another in the same organization with the same guide line and policies. In the Peter and Dolores Green's case (Black enterprise, July 1996, pg. 48), the Greens applied for a $65,000 home mortgage loan from the Avenue Bank of Oak Park. They met a 10% down payment, collateral and good incomes, but they were rejected. Then they went to Northern Trust Co. and closed the deal within three weeks. We can see that the same was judged differently by two banks. Avenue Bank may be discriminating, but it denied it.
Other factor in the approval process is the bank policies itself. There are many common standards that banks provide the loan officers. Minimum loan or house size policies screen out large number of minorities who tend to live in a smaller mortgages. Rigid debt ratios (debt to income) do not make sense, because minorities often pay a higher share of their income on housing. The standard that bank set is based on the experience with non-minorities. In fact, if one can pay the rent at a comparable mortgage payment, then one can carry the loan. Another policy is that bank over emphasized the past record. Last payments as a result of a problem in the past doesn't mean one is not willing to pay. It is very true that banks most of the time targets the higher income people.
Besides bank policies, the appraisal value can be different when appraised by different banks because each appraiser may see different things in the property such as internal building structure, foundation etc. Sometimes, the appraisal that the bank uses is outdated and does not reflect true value because property value may be increased tremendously over a short period of time. Therefore, different appraisal values greatly affect the result of the decision.
Every financial institution set mortgage loan qualification at a certain income level in order to earn profit at a reasonable risk. Low-income people can never get home a mortgage loan because their incomes are under the requirements of the banks. These low-income people feel that they are discriminated because low income does not necessarily mean bad credit. Therefore, they fought back. Although the Community Reinvestment Act was passed in 1977, required banks to respond to credit needs of lower-income areas, most banks are reluctant to give mortgage loans to low income borrowers. One of the reasons is that most low-income people don't have a credit history because they never have any credit card or even a checking account. Therefore, it is hard for banks to know if the low-income borrowers will maintain good payments. Knowing the bank problem, Association of Community Organizations for Reform Now (ACORN) suggests that banks can look at how well the low-income people pay their rent and utility bills. In the present time, there is low demand for conventional mortgages, but applications from low-income people are high. It may be due to the low interest rates. A few financial institutions such as Continental and Huntington extend their service into the low-income market and have made good profit.
The federal government is strongly enforcing laws and regulation to eliminate credit discrimination, especially in mortgage loans. Banks have to make good profit. I think, it is all right for banks to focus more attentions to the higher income class, because that is where they can earn more money. However, banks should not leave the lower income class unattended. Many of them don't have credit but they can prove to be good borrowers. On the human side, when a minority comes to see a loan officer, banks must make sure that the officer follows exactly the banks approval policies not by his/her personal feelings toward a certain race, color or etc.
After all, we are all human being sharing the same earth. Why not put all the preconception in the mind away and help each other so that every one can own a home and really make a piece of the American dream come true?
BIOGRAPHY
No Credit Doesn't Necessary Mean Bad Credit, Business week, Iss: 3292 Date: Nov 9, 1996 p:43
Don't Get Soaked by Fair Lending Downpour, ABA Banking Journal, Vol: 85 Iss: 8 Date: Aug 1996 P: 30-33
How to Fight Mortgage Discrimination . . . and win!!!, Black Enterprise, Vol: 23 Iss: 12 Date: Jul 1996 p: 48-58