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Is Lending Disparity Truly Racial
The Association of Community Organizations for Reform Now (ACORN) study analyzes data on a national scale and in 115 metropolitan areas using 2001 and 2002 data on conventional home purchase loans and government-backed home purchase loans.
Nationally, the study found that in 2002 African American homebuyers were 2.38 times more likely to be denied a conventional loan than were white borrowers, and Hispanics were denied loans 1.63 times more often than were whites.
On a national level, the study also revealed that African Americans and Hispanics were more likely to be rejected for conventional home loans than white applicants in the same income range.
The data paint a similar picture for the Grand Rapids-Muskegon-Holland area.
Rodney Martin, a partner at Warner Norcross & Judd, just looks at the picture differently.
“You can clearly see where there are disparities in lending based on race, but you cannot explain those disparities from this data,” said Martin, who heads the firm’s Financial Services Group and specializes in banking law, consumer credit law and lending discrimination issues.
“The data will tell you whether or not disparities exist in denial rates but doesn’t tell you why they exist.”
Martin said the study indicates that there is a racial disparity, and that it’s always useful to call disparity to public attention. But the data can’t answer the question of whether or not there is discrimination in mortgage lending locally or nationally.
The only information researchers can get using Home Mortgage Disclosure Act (HMDA) data is the applicant’s race, income and the outcome of the application.
“The HMDA data cannot tell you whether somebody was credit worthy or not.
“You would need to know the amount of the loan request, what other debts the person has, whether they’re employed, how long they’ve been employed, where they’re employed and their history of paying their bills. A whole bunch of things go into it.”
Furthermore, he said, the analysis of data doesn’t give them a lot to work with and doesn’t address forces that are at work in the market, such as the differential impact that the recession might be having on different ethnic groups.
The study draws on data from 2001 and 2002 — a period of economic downturn — and compares that data with data from 1997 when the economy was still going great guns.
Kevin Kabat, president of Fifth Third Bank, Western Michigan, said comparing the economic environment and conditions in 1997 with 2001 and 2002 is like comparing apples to oranges.
People often hear of credit getting tighter during a recession, he said.
“If you look at this recession, while some of that has occurred and occurs naturally, a lot of it has been driven by the demand side,” Kabat pointed out.
“There’s a lot of businesses that we do lending to that simply stopped making the capital investments in their business, and that’s the largest reason for lack of credit in the marketplace.”
Martin explained that federal and state regulators periodically examine financial institutions and if they find high denial disparity rates, they use multiple regression analysis that looks at 25 credit characteristics simultaneously.
“I’ve done some of those tests,” Martin noted, “and my experience has been that almost always a denial disparity is going to be explained by some factors other than race.”
The disparity numbers in the ACORN study didn’t surprise Martin. He said they’re consistent with what the numbers have been in the past five years, though they are up slightly in the last year.
He finds it interesting that the report treats government loans separately from conventional loans, and he thinks the ACORN researchers probably did that because that’s the way the data is reported.
“But if you look at all home purchase loans together, the data really shows a different picture than what they are reporting,” Martin said. “Who cares what program the loan is under?”
When government loans and conventional home purchase loans are combined, the denial disparity rate for African Americans was 1.64 as opposed to the 1.85 that ACORN reports — and that compares to a rate of 2.06 nationwide.
“The African American rate is substantially lower than the national average when you look at all of the loans,” Martin said. “When you look at the denial disparity rate for all home purchase loans for Hispanics, the rate falls to 1.8, which is substantially lower than the rate they chose to indicate in their report.”
Looking at all the home purchase loans together gives a more positive picture of what’s going on in our community, he said.
“The one thing they did point out, and I applaud them for this, is that over the past five years, the number of conventional loans made to African Americans in the Grand Rapids market increased by 62.3 percent and to Hispanics by 43 percent.
“If you look at the data, the chances that you’ll be approved for a home purchase loan in the Grand Rapids market are very good.”
When the data for both loan programs is pooled, it shows that, locally, 78 percent of Hispanic applicants were approved, 80 percent of African Americans were approved and 88 percent of whites were approved.
Kabat commended ACORN and other advocate groups for raising the disparity issue and keeping it at the public forefront.
“The one thing that is concerning to us is that they don’t take into consideration a very important component to lending — and that’s the credit history. Obviously, when you’re in the risk business, that’s a significant issue.”