Many Factors Limit Loan Approval

In the Bay Area and nationally, blacks and Latinos of all income brackets are more likely to be denied home loans than their white peers. While the disparity might suggest racism by financial institutions, experts say the problem instead stems from a complex web of factors facing minority communities.

Those factors include lowered financial literacy, poorer credit rankings, and less overall wealth than whites.

The findings are part of a recent report issued by ACORN, a lobbying group for low- and moderate-income families nationwide. The study also shows that upper-income blacks are more likely to be denied a new home mortgage than low-income whites, and that blacks and Latinos across all income types are more likely to be denied than whites in their respective income brackets.

The likelihood that a black or Latino will be denied compared to whites actually rises for people in brackets above $61,280.

“There is a need for the lending industry to do a self-examination of the underwriting practices, the staff, the executive decision-making . . . and unofficial biases that are still inherent that make it difficult for full objective decisions to be made,” said David Glover, executive director of OCCUR, or Oakland Citizens Committee for Urban Renewal.

While the numbers might suggest racism by financial institutions, The Greenlining Institute, based in Berkeley, has pointed out in past reports that major financial institutions such as Bank of America, Wells Fargo, Washington Mutual and Countrywide have all made changes to their pricing, marketing and outreach to try to reach out to blacks and Latinos.

As well, Freddie Mac and Fannie Mae have both instituted programs to increase home ownership among minorities.

Instead, experts say, a major reason for the disparity is credit risk.

Minority and lower-income populations have worse credit quality than other groups and their credit quality has deteriorated over time, according to a paper released earlier this year by Harvard University’s Joint Center for Housing Studies. The paper, entitled “Hitting the Wall: Credit as an Impediment to Homeownership,” was co-authored by several leading economists and professors from around the U.S.

One of the authors, Raphael W. Bostic, a professor at USC’s School of Policy, Planning and Development, said that while credit profiles can be a problem for minorities, there also are other factors for the lending disparity.

Minorities often apply more frequently than whites, Bostic said, and thus a single minority household may be denied in a number of circumstances. As well, minorities often buy in neighborhoods where housing prices don’t appreciate as much, which makes lenders more reluctant to lend, he said.

He also mentioned research that shows there is at least a small lending disparity between minorities and whites at almost every lending institution.

The ACORN study uses data about loan applicants that banks are required to file with the federal government under the Home Mortgage Disclosure Act. But that data is limited, critics says, and often banks only report one reason for denial, not all of the reasons.

“There is simply not enough information in this HMDA information to say why the loan was rejected. Had it included things like credit score, financial reserves, debt service coverage to income — once you build all of those other factors in — the racial (disparity) is not” as pronounced, said Jay Brinkmann, vice president of research and economics with the Mortgage Bankers Association.