First, they raise the possibility that lenders are illegally steering non-white borrowers into GBLs when many could qualify for mortgages with more favorable terms. That would be a violation of fair housing laws, similar to the conduct that resulted in the recent $175 million settlement of claims by the Department of Justice and Illinois Attorney General against Wells Fargo.


Second, the findings also suggest that we now have a mortgage market with only two products, conventional prime loans and GBLs. FHA mortgages, the most common GBLs, require a credit score of 580 for a 3.5 percent down payment loan, although some lenders are requiring a 620 score. According to the Department of Housing and Urban Development, the current average credit score for borrowers receiving FHA loans is 700. That means a lot of borrowers, almost certainly non-white borrowers, with credit scores of well over 700 are being offered loans designed for people with much lower credit scores. The market needs to have loan products for people who are qualified for something better than a GBL but who do not have the very strict qualifications currently required for conventional financing. The secondary market should better support meeting these intermediate credit needs as well. Research shows that conventional loans can be safely made to borrowers with a broad range of credit scores if the underwriting is otherwise sound.


Third, the conclusiveness of the findings is limited because we were not able to control for the borrower’s credit score, the loan-to-value (LTV) ratio, debt-to-income ratio, and other crucial loan approval criteria. Unfortunately, the current Home Mortgage Disclosure Act (HMDA) data do not contain those variables. That is a serious omission because regulators, researchers, and the public all need those data to monitor lenders’ behavior and to see whether they are abiding by the rules. Ethical lenders can benefit and see whether they are up against unfair competition from unethical lenders who are not meeting their community reinvestment obligations. The reporting requirements for HMDA should be expanded to include the key metrics that determine whether the loan application is approved. As it currently stands, research such as ours can raise questions but cannot make more definitive claims about steering and discrimination without more complete HMDA data.


A fair and equitable mortgage market is important not only to the civil rights of prospective home buyers, but to the recovery of our housing market as well. Studies like “Paying More for the American Dream” show that there is still a pressing need for regulators and law enforcement officials to continue to hold lenders accountable for how their practices impact all communities.