Racial Disparities in Home Lending

Blacks and Hispanics pay more for home loans than whites, according to a new study. Unfortunately, the study did not look at the most obvious variables that would have made it useful.

Disparities Found in Sub-Prime Lending (WaPo, p. A2)

About 29 percent of African Americans who bought or refinanced homes last year ended up with high-cost loans, compared with only about 10 percent of white Americans, according to an a consumer advocacy group’s analysis of new data from 15 large national lenders. About 15 percent of Hispanics received such loans offered to borrowers with damaged credit, known as sub-prime loans, according to the analysis conducted by the National Community Reinvestment Coalition, which represents 640 nonprofit organizations. “The good news is that access to credit is more available in the home mortgage market, but the bad news is that it is being offered in a disproportionately unfair way,” said John Taylor, the coalition’s president and chief executive.

Lender groups do not dispute that there are disparities based on race and sex, but say borrowers pay higher rates if they pose a higher credit risk for any one of a variety of reasons, such as low income, poor neighborhood, bad credit history or low down payment.


The coalition says its analysis corroborates its long-held belief that lenders discriminate. Lenders say the new information does not provide a complete picture of the loan-making process. They say borrowers who have poor credit, bad records for paying bills on time, or live in troubled neighborhoods with high foreclosure rates and falling home values are riskier customers than people with good credit who live in neighborhoods where real estate values are rising. Lenders have to charge more money to compensate for the higher risk, they say. Such risk is generally measured by credit scores. In the past, lenders have opposed efforts to add credit scores to the federally required data, saying the obligation would pose an additional regulatory burden and potentially invade the privacy of borrowers.

That blacks and Hispanics pay higher rates on the aggregrate than whites is hardly surprising. No one disputes these groups are poorer, less well educated, have higher unemployment rates, are more likely to have credit problems, and so forth. The question is the causes of these disparities, not their existence.

The report [PDF] is spectacularly unhelpful in shedding light on this, though, since it ignores almost all useful variables. Most of it consists of simple correlational analysis without any cross-tabs. No information on the education, income, employment history, or other economic data save interest rate paid is given. Even the regression analysis is woeful, focusing only on neighborhood:

NCRC conducted regression analysis to determine if the portion of prime and subprime lending increased as segregation increased while controlling for housing affordability. We used a segregation index calculated by the University of Michigan and a homeownership affordability index developed by the National Association of Homebuilders.

NCRC developed a new variable, a ratio, in order to perform the regression analysis. This ratio is the percentage of all subprime loans made to a group of borrowers divided by the percentage of all prime loans made to that same group of borrowers. If the percentage of all subprime loans that are going to a borrower group is greater than the percentage of all prime loans going to the same borrower group then the ratio will be greater than 1. This ratio will be referred to as the fair lending performance ratio in the sense that it measures the performance of lenders at reaching certain types of borrowers. The higher the value of the ratio, the more aggressive subprime lenders are relative to prime lenders in offering higher portions of their loans to groups of underserved borrowers.

Regression analysis was performed for all six borrower categories: African-American borrowers, Hispanic borrowers, LMI borrowers, borrowers in LMI tracts, borrowers in minority tracts, and women borrowers. The regression analysis was used to determine the effects of different variables on the ratio for each of the six borrower categories.
NCRC was concerned with measuring the effects on the performance ratio for the following different variables: White/Black Segregation Index, White/Hispanic Segregation Index, Affordability Index, the percent of African-Americans in an MSA, the percent of Hispanics in an MSA, and the Median Family Income in an MSA.

So, basically, race/ethnicity was a variable that didn’t vary. It’s not particularly interesting that blacks or Hispanics that live in incredibly segregated neighborhoods pay higher lone rates. We all knew that. The questions is why: Because these people are a higher credit risk or because the banks discriminate on the basis of race even when controlling for other factors. If one doesn’t actually control for the other factors, then one doesn’t know.

Kevin Drum agrees up to a point but finds something insidious in the banks’ opposition to releasing information on credit scores:

Providing aggregate credit scores, or even individual credit scores unattached to names, obviously invades no one’s privacy. The fact that lenders are so eager to keep them secret tells you pretty much all you need to know here.

Actually, it doesn’t. Maybe they are hiding this data because they’re racist bastards trying to keep the Little Man down. Or maybe they are just averse to spending a lot of time (and thus, money) compiling data for others’ use.

FILED UNDER: Economics and Business, Race and Politics
James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.


  1. Michael says:

    James: I’m actually reading a book on mortgages right now and just finished a section on discriminatory lending.

    Gary Eldred, who is an expert in real estate, notes that almost all of this disparity has nothing to do with illegal discrimination. It has to do with education levels. White people, he says, tend to be better educated and know what questions to ask, and what practices to question.

    When the loan rep says, “Gee, this is the best I can do,” such borrowers are more likely to accept the terms offered. They don’t realize they should respond with their own negotiating gambit, “Really, that’s the best you can do? Well, Providence Mortgage quoted us a much better deal. Sorry, we’re just wasting our time here.” Or, “We found rates far less than that on quicken.com. You’re not trying to put one over on us, are you?”

    No matter who you are, many loan originators will charge you higher interest and fees when you let them.

    Anyway, that’s what he says.

  2. Michael says:

    That last sentence should read, “No matter who you are…” and should be in the blockquote. Sorry.

  3. James Joyner says:

    It’s not you. There’s some sort of glitch that makes blockquotes of more than a single paragraph not work in the comments.

  4. denise says:

    I agree there are too many variables in the real world statistics to draw any easy conclusions. However, that doesn’t mean there’s no way to know if discrimination is still taking place.

    It’s really easy for HUD and/or the FDIC to test for housing and lending discrimination. You just send people out with identical qualifications looking for homes in similar areas and different races and see what happens. It should be a pure numbers analysis, so any variation would about have to be racial discrimination. It’s not like job discrimination where so much of what goes on is a subjective character/personality assessment.

    I don’t know if they do that anymore. The last studies I heard about (during law school) would be at least 15 years old now. At that time, anyway, testing did show discrimination.

    One factor I am curious about. Why would buing a house in a neighborhood with high foreclosure rates make a difference, independent of housing values? There could well be a good explanation, but off-hand, it seems like double-counting.

  5. Scott Dillard says:

    We just refinanced our house. We went through a mortgage broker. The lender never saw us in person. How would it be possible for the lender to discriminate if the lender doesn’t even see the people he’s lending the money to? I’ve always thought these stories were just another way to put pressure on banks to lend money to people with bad credit who then default and blame the lender. We are ALL just credit scores.

  6. Meezer says:

    We had the same experience as Scott. We applied over the Net, were ok’ed, and finalized the deal all over the net and phone. When we finally saw a real person to sign the papers, he was just an agent of some sort.

  7. Dave Schuler says:

    I’m sorry to rain on you guys’ parade but racial discrimination is a serious problem in lending. Take a look at this from 1999. In NFHA audits, different teams posed as prospective borrowers. The teams had similar age, education, and credit history differing only in race. Racial minorities experienced substantially different treatment from lenders as described in the linked article.

  8. James Joyner says:

    Dave: It’s not inconceivable to me that there’s racial discrimination–or at least class/cultural discrimination–in lending. I’m just saying this particular study doesn’t come anywhere close to demonstrating that.

    I’ve seen variants of the studies you link. I’m always skeptical of such things simply because it’s hard to make the interviewees equal. I’d be less dubious, for example, if the test subjects were being paid to try to get themselves hired rather than trying to prove that bias existed. Anytime there’s a face-to-face meeting involved, personality and chemistry get involved. Aggregate studies get around much of that.