The American real estate market is racist. Congress could easily help fix it if it wanted to.
- Black borrowers are 80% more likely to be turned down for a mortgage than white borrowers.
- The Fair For All Loans Act would establish a new federal office to ensure there is no discrimination in lending.
- The bill would help end discriminatory practices by clarifying that discrimination based on postal code or census tract is prohibited under the ECOA.
- This is an opinion column. The thoughts expressed are those of the author.
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In 2020, black borrowers were 80% more likely to be denied a mortgage than white borrowers. While this statistic is shocking, it is hardly surprising to those of us familiar with the US mortgage industry. A holistic look at the US real estate market shows that it disadvantages people of color in surprising and systemic ways that are not always evident in lending.
The Fair Loan for All Act aims to change that. Introduced by Congressman Al Green, a Democrat from Texas, the bill clarifies the language of the Equal Credit Opportunity Act (ECOA) to better combat systemic discrimination in mortgages. At the same time, it is establishing a new office within the Consumer Financial Protection Bureau (CFPB) to verify whether lenders are following federal guidelines set out in the Home Mortgage Disclosure Act (HMDA) and the ECOA. While seemingly obscure and legalistic, the Fair Loan Act will go a long way in making mortgages fairer and ending racial disparities in homeownership.
Historically, black homeowners have faced systemic racism in the mortgage industry, contributing to lower levels and slower homeownership growth among black Americans. Through redlining – a process in which real estate agents and mortgage lenders direct black tenants and buyers to specific communities, helping to de facto segregation – “agencies have deemed black communities too risky for federal home loan assistance, regardless of the income, wealth or education of residents, or the quality or location of their housing stack,” Jim Carr, former senior vice president of the Fannie Mae Foundation, wrote last month.
According to Carr, this significantly slowed the rate of homeownership among black Americans. The homeownership rate for blacks has only increased by 4% over the past five decades. Meanwhile, the homeownership gap between white and black Americans was 5% lower in 1920 than it was in 2020.
This problem is then compounded by new economic inequalities that black Americans face. A recent McKinsey Global Institute study found that black Americans earn on average 30% less than white Americans. A disproportionate number of black Americans have student loan debt, accounting for 13.4% of the population but almost a quarter of all student loan debt incurred in 2019. Black borrowers also inherit less and receive fewer financial gifts. of their family members than white Americans.
Debt-to-income and loan-to-value ratios were higher for blacks and Latin Americans. Data from the Federal Reserve shows that the median black family has less than 15% of the wealth of the median white family. What this means in practical terms is that black and Latino borrowers have a higher amount of debt relative to their income. In turn, they have to borrow more for their home, with less down payment to put into the purchase.
Many lenders and underwriters will say that there is no inherent racism here. If you qualify, you qualify, and if you don’t, you don’t. But in my own experience in the mortgage industry over the past decade, this type of discrimination is not always apparent, even for those discriminated against.
There are three types of discrimination that the ECOA prohibits: overt discrimination, comparative discrimination and disparate impact. There is overt discrimination when a lender blatantly treats an applicant differently based on a protected characteristic, such as race or gender. Comparative discrimination results from “differences in treatment that are not fully explained by legitimate non-discriminatory factors,” according to the Federal Reserve. The latter type of discrimination, with disparate impact, “occurs when a lender applies a racially neutral (or otherwise) policy or practice equally to all applicants for credit, but the policy or practice excludes or disproportionately overloads certain persons on a prohibited basis. “
If someone says “we don’t lend to black people” or “single women have to pay hiring fees”, that is blatant discrimination. Other types of discrimination are not always so apparent. Some financial institutions may have policies that take into consideration a borrower’s census tract or postal code, which, due to racist practices such as redlining, can have a discriminatory effect. This is one of the practices the Fair-for-All Loan Act hopes to curtail, making it clear that it is illegal to discriminate based on census tract or postal code.
This clarification is welcome as it will help loan officers and underwriters better understand the law. It will also require lenders to assess and even change the policies that currently lead to discrimination within the mortgage industry, whether unintentional or not. In doing so, it will make lending more equitable for those who have historically been excluded from equal access to credit.
Giving black homeowners a chance
Much of the discrimination that currently prevents Americans of color from equally accessing credit stems from seemingly racially neutral policies that are applied consistently but have disparate impact. Loan officers get commissions based on the loan amount, and loaning a smaller loan on a cheaper home may not be as appealing as loaning a larger loan in a more expensive neighborhood. I have certainly heard “it’s not worth the work” many times in my mortgage career, but never related to a candidate’s race.
Nonetheless, given the disparities in income and wealth discussed earlier, the possibility of comparative discrimination is obvious but would only be apparent to someone looking at the entire output of a loan officer or business. . As such, lenders ‘on the ground’ may well fail to see that they are discriminating, and borrowers who are covertly or comparatively discriminated against – and certainly those who experience disparate impact – may not realize it. no more.
That’s not to say the results aren’t so pernicious. In fact, these practices make it more difficult to close the racial wealth gap. Last month I was horrified but not surprised by the story of a black woman from Indiana who found out her home had doubled in value when she asked a white friend to replace her as as owner. Earlier this year, a study of house prices in Chicago’s black and Latino neighborhoods showed that there was a $ 324,000 gap in the value of those homes between comparable properties in white neighborhoods. While this may seem astronomically high, the same sociologists who examined the Chicago study found last year that it was a national problem, with the gap being $ 245,000 nationwide. . This, in turn, costs minority sellers hundreds of thousands of equity, which has a huge impact on the racial wealth gap.
Minority buyers are also disadvantaged. The pandemic has exasperated gentrification, with house prices skyrocketing even in once affordable communities. Having higher debt-to-income ratios (thus limiting the amount they can borrow) puts them at a disadvantage in bidding wars. On the other hand, borrowers with generational wealth and less debt might be able to either put more money for the down payment, thus lowering the LTV, or borrow more due to a lower DTI. But again, minority borrowers are at a disadvantage compared to their white counterparts. A Brookings Institute study last year found that “the net worth of a typical white family is nearly ten times that of a black family …” In a booming seller’s market, this wealth disparity may prevent minority borrowers from competing for housing.
These realities make equity and fairness in lending a top priority for the federal government and lenders. An agency tasked with looking at the problem from a bird’s eye view – and therefore able to get a more complete picture of the situation – is needed. For these reasons, I am so encouraged by the Fair for All Loan Act. This bill establishes an Office of Fair Lending Testing within the CFPB. Responsible for ensuring that these disparities disappear, the Office of Fair Lending Testing would use what essentially amounts to “secret clients” to assess whether lenders are complying with the ECOA and all other applicable anti-discrimination laws.
In doing so, the CFPB can better assess the intentions of loan officers and individual assessors, eliminating those who are overtly discriminatory and targeting companies that allow it. It can also correct behaviors that lead to comparative discrimination or disparate impact, helping businesses develop best practices that ensure a fair loan process for all Americans.
Ending the racial gap between income and wealth is an intergenerational project that we must start today. The Fair Lending for All Act can help blacks and Latin Americans better secure a part of the American dream to which whites have already widely had access. Congress must not pass up this opportunity to mend a broken rung on our nation’s housing ladder.