Study Reveals Mortgage Lending Discrimination
The study found that mortgage denial rates in the Grand Rapids-Muskegon-Holland Metropolitan Statistical Area (MSA) “are clearly associated with race and income.”
Joseph Darden, a professor of Geography and Urban Affairs at Michigan State University, spearheaded the study, which he described as the most comprehensive one to date on the area’s mortgage lending market.
Darden conducted the study on behalf of the city, with funds provided in part by the city and the Steelcase and Grand Rapids Community foundations.
The study used U.S. Census reports and Department of Housing and Urban Development data related to lending purchases through Fannie Mae and Freddie Mac, two private companies chartered by Congress to provide money to lending institutions to increase home ownership in the United States.
Disparities were assessed using Home Mortgage Disclosure Act (HMDA) data. The research covered 52 lenders accounting for more than 90 percent of all reported HMDA loans.
Loan denial rates were set for conventional, government insured and refinanced loans by race, income and racial composition of neighborhoods, Darden explained.
As part of the study, a phone survey examined the outreach efforts and activities of lenders in Grand Rapids.
Darden’s full report listed the 52 institutions covered, though an executive summary of the study that the city distributed to the media did not.
Darden acknowledged the study did not cover examination of applicants’ loan files, their credit records or employment history, as that information is not available to the public.
“However, when regulators have examined information from other studies of other metropolitan areas, such as Boston, and examinations were made by the Federal Reserve, they found that once you control for these factors of credit worthiness, blacks were still denied loans 60 percent more often than whites, even when you control for that,” he said.
Area lenders were briefed on the results of the study the day before results were released to the public, said Ingrid Scott-Weekley, director of the city’s Equal Opportunity Department.
According to the study, in nearly every loan category, non-whites were denied home loans more frequently than whites, and low-income applicants were denied more frequently than higher income applicants.
Among the other findings:
- More limited information was provided on mortgage options when the tester was black or Hispanic in 60 percent of test cases.
- Minority and integrated neighborhoods received a much lower share of conventional home purchase or refinancing loans.
- Lending discrimination in application procedures caused a higher loan denial rate among blacks (42 percent of cases) and Hispanics (50 percent of cases) among 14 and four lending institutions tested, respectively.
- Blacks comprised 7.2 percent of the MSA population, yet received 1.2 percent of loans purchased by Fannie Mae and 1 percent of loans purchased by Freddie Mac.
- Only six of the 85 branch offices in the sample were located in service areas comprised of more than 50 percent racial minorities.
- More than half of lending institutions — or 29 of the 52 surveyed — did not engage in outreach to the minority community informing people of opportunities to obtain home mortgages from their institutions.
- Black and Hispanic households with the same education and income as white households have lower homeownership rates than white households.
- Whites are 1.8 times more likely to be homeowners than blacks and 1.4 times more likely to be homeowners than Hispanics.
- Sub-prime lending has substantially increased in metro Grand Rapids over the last six to seven years, particularly among minority and low-income borrowers.
Sub-prime lending usually requires higher interest rates than prime lending, and this finding suggests “a strong probability” that some minority low-income borrowers may not be receiving conventional loans even though they may qualify for them, Darden added.
Darden recommended that the report be used as an educational tool and that it be widely distributed to neighborhood organizations, community groups and lending institutions in metro Grand Rapids.
He also recommended that more attention be given to policies and programs that further reduce mortgage constraints imposed on blacks and Hispanics.
Furthermore, he said more Grand Rapids area lenders should introduce innovative programs such as zero down, or near zero down payment mortgages for eligible borrowers.
Among other recommendations:
- More lenders should advertise in minority-oriented media.
- The state Attorney General should determine the nature and extent of predatory lending in the metro area.
- Poorly performing lending institutions should be monitored to determine racial diversity of loan officers and what factors influence underwriters’ decisions to deny loans.
- Community agencies should publicize the rankings of local lenders based on annual loan denial rates by race, income and racial composition of neighborhoods.
- Lenders should engage in more outreach by visiting racial minority organizations and neighborhood associations to inform them of home loan opportunities.
- Community organizations should conduct more workshops to educate residents to review and correct their credit report before applying for a home mortgage loan.
Darden said more research, particularly research using larger samples, has to be done. Though it’s the most comprehensive study of area lending practices yet, he said his study opens the door to more research on the link between discrimination and home loan denial rates.
“Why am I not surprised by this report?” Third Ward Commissioner Robert Dean asked following Darden’s presentation. “It’s the same old, same old with anti-discrimination laws that have been passed in the United States of America. Jim Crow is alive and well.”
The city and the Fair Housing Center of Greater Grand Rapids intend to address the recommendations by working with local lending institutions, according to the city.