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At a recent White House
conference on increasing minority homeownership, President Bush
highlighted the fact that black and Hispanic families continue to have
much lower homeownership rates than white, non-Hispanic families. "It's
a gap that we've got to work together to close," the president said,
"for the good of our country, for the sake of a more hopeful future."
The president's objective is admirable, but his recent proposals fail to
address a key contributor to this homeownership gap: discrimination in
mortgage lending.
For years, mortgage discrimination has been swept under the rug by the
federal government, which refuses to collect the information needed to
measure it. A careful study based on 1990 data by scholars at the Boston
Federal Reserve Bank found that black and Hispanic applicants were 82
percent more likely to be turned down for a mortgage loan than were
equally qualified whites. The federal financial regulatory agencies
(such as the Federal Reserve Board and the Office of the Comptroller of
the Currency), the major secondary mortgage market institutions (such as
Fannie Mae and Freddie Mac) and the U.S. Department of Housing and Urban
Development all have the ability to collect the information needed for
another study of this kind, but not one of them has done so.
Even more troubling is the failure of the federal financial regulatory
agencies, which have the main responsibility for fair-lending
enforcement, to implement effective enforcement techniques.
This nation's fair-lending laws prohibit two forms of discrimination:
disparate treatment and disparate impact. Disparate-treatment
discrimination arises when a lender uses different standards to evaluate
loan applications from families with different racial or ethnic
backgrounds. Disparate-impact discrimination arises when lenders use the
same rules for everyone, but the rules place families in certain racial
or ethnic groups at a disadvantage without any business justification. A
history of paying rent on time, for example, might be a good indicator
of creditworthiness, and ignoring rent-payment history for all loan
applicants might have an unjustified disparate impact on blacks,
Hispanics, and other groups with a high share of renters.
The enforcement techniques used by the financial regulatory agencies are
explicitly designed to capture the most dramatic cases of
disparate-treatment discrimination by large lenders, but they fail to
find many other cases of disparate-treatment discrimination and do not
even bother to look for disparate-impact discrimination.
Some people have argued that the rise of credit scoring and other types
of automated underwriting schemes, some of which operate over the
Internet, should minimize discrimination because the loan approval
decisions are automated and the lenders may not observe the customer's
racial or ethnic identity. This claim may accurately reflect
developments in disparate-treatment discrimination (although there is no
evidence to back it up), but it does not apply to disparate-impact
discrimination, which operates even when a lender does not know if a
customer is black or Hispanic. In fact, there are good reasons to
believe that disparate-impact discrimination could be magnified by a
move to automated underwriting, where it can be hidden in the weights
placed on the various factors in an underwriting scheme.
Moreover, current fair-lending enforcement procedures turn a blind eye
to disparate-impact discrimination and therefore create a loophole that
can be exploited by any lender who wants to discriminate.
President Bush has called for a modest amount of spending to support
down payments for low-income families, to subsidize affordable housing
and to counsel potential homeowners. These programs are unlikely to
lower homeownership gaps significantly unless black and Hispanic
households can obtain mortgage loans on a nondiscriminatory basis. The
federal government needs to provide regular information on the extent of
mortgage lending discrimination and to adopt fair-lending enforcement
procedures capable of identifying discrimination no matter what form it
takes.
If President Bush and other public officials are serious about, in his
words, "dismantling the barriers that prevent minorities from owning a
piece of the American dream," they must stop sweeping mortgage lending
discrimination under the rug.
Stephen Ross is an
Associate Professor of Economics at the
University of Connecticut. John Yinger is
Trustee Professor of Public Administration and
Economics at The Maxwell School, Syracuse University.
Copyright 2002,
Hartford Courant