December 7, 2004
Sue Kirchhoff

Consider this: Well-off African-Americans who refinanced their homes in
the greater Boston area in 2002 were more than six times as likely as
well-off whites to take out a higher-cost, subprime loan.

well-off blacks, defined as those with annual incomes $90,000 or above,
were also three times as likely as low-income whites, those with
incomes up to $38,000, to turn to the subprime market, according a
study for the Massachusetts Community & Banking Council, a
coalition of community groups and banks.

data do not prove discrimination. High levels of subprime borrowing in
minority neighborhoods and among minority buyers, however, do indicate
they are more likely to be targeted by unscrupulous lenders.

are a lot of folks out there who are convinced their credit is not good
enough to get a conventional loan. Some of that has to do with
aggressive marketing of these subprime lenders,” says Tom Callahan,
executive director of the Massachusetts Affordable Housing Alliance.
“If you’re lower-income minority, (you’ve) been told for years that
sometimes traditional lenders don’t want to deal with people that look
like you.”

Jim Campen, a
research associate at the University of Massachusetts Gaston Institute,
a Latino public policy institute, who wrote the Boston study, says the
data could reflect legitimate lending decisions based on lower credit
scores of some minorities. But he points to years of research showing
minorities are denied prime loans more often than whites, even with
equivalent credit records.

way the subprime industry works, it’s not about denying blacks more
often. It’s about making loans, too many high-cost loans, to blacks,”
Campen says.

lending, as a share of overall refinancing, was nearly six times higher
in the predominantly minority neighborhoods of Boston than in white
areas. Overall, subprime refinance activity rose 41.8% in 2002. Similar
racial patterns were found in seven other Massachusetts cities. In
Boston, subprime lending was highest in neighborhoods such as Mattapan,
Roxbury, Dorchester and Hyde Park.

Boston data track studies in other cities that show concentrated
subprime lending in minority neighborhoods and higher foreclosure rates
in such areas. A March report on Chicago neighborhoods by the
non-profit Woodstock Institute found that for every
100 additional subprime loans from 1996 to 2001 there were an
additional nine foreclosures in 2002 compared with the average in
Chicago neighborhoods.

lending industry points to economic data that show Hispanics and blacks
have lower incomes and wealth than whites. Immigrants are more likely
to have impaired or incomplete credit ratings or lack documented
income. Prospective borrowers may have a sparse credit history because
they lack consumer education or access to mainstream banks. Some
upper-income borrowers may prefer low document or no down-payment loans.

Theologides, executive vice president of corporate affairs at New
Century Mortgage, a national subprime lender, disputes charges of
minority targeting. “Our pricing is automated, is absolutely
colorblind,” Theologides says. “The program they (minorities) are
offered is identical to the program that would be offered if they were
white and lived in the suburbs.”

says New Century’s internal statistics do not show an
over-concentration in minority markets. Nationally, 52% of New Century
borrowers in 2003 were white, 20% Hispanic, 16% black and 4%
Asian/Pacific Islander. That includes purchase and refinance loans.

Geoff Smith, project director at the Woodstock Institute,
says research finds a high concentration of subprime lending in
minority areas, even after controlling for such factors as income and
earnings. “I think it is an example of subprime lenders targeting
minority neighborhoods and borrowers,” he says.

of racial patterns in lending, and much of the data about the subprime
market, comes from the Home Mortgage Disclosure Act. The law requires
many lenders to report data about loans, including race of borrowers.
Mortgages are classified prime or subprime depending on whether they
are offered by a firm that makes predominantly subprime or conventional
loans. That has the effect of classifying some prime loans as subprime
and vice versa.

Canner, senior adviser to the Federal Reserve Board, which oversees the
law, says reporting probably picks up about 80% of subprime lending.
The Fed has tightened the rules so that data for 2004, to be released
in 2005, will pick up more data about loan price as well as more
subprime firms. The effect will be more data allowing researchers to
link race and price.

data is supposed to be effective as a screen to identify potential
problems, it’s not supposed to be evidence of a problem,” says Canner.

lenders worry the change will damage reputations and even destroy the
subprime sector. They say the data will not show factors that determine
creditworthiness and pricing.

American Financial Services Association (AFSA), which represents
lenders, including subprime mortgage firms, in May asked the Fed to add
a disclaimer to the data indicating it does not include factors
integral to loan pricing.

misperception should not be permitted to destroy the subprime mortgage
market,” the group said. “Looking at race and price without additional
context may lead to a wide-based perception that race correlates to
cost. It does not.”

AFSA officials have not heard back from the Fed and are considering options to get their message out.

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