For the past month, an activist group named The Center for Investigative Reporting (CIR), has been using a deeply flawed analysis of government lending data in order to prop up a story about racial disparities in mortgage lending that they have been peddling to news outlets.
Make no mistake, discrimination is unacceptable in any way, at any time. Period. End of Story. And yes, members of minority communities are being denied mortgage loans at a greater rate than white borrowers. But it is flat-out incorrect, defamatory and disgraceful to accuse the mortgage lending industry of denying loans to borrowers simply based on the color of their skin.
What this group is doing – not just relying on a study that fails to consider many of the key data-based variables that lenders rely on to make an individual loan decision, but also cherry-picking among loan types – is actually counterproductive to the important discussion we are having regarding access to credit challenges in our nation’s communities.
CIR’s conclusions come from a simple look at data collected from all lenders by the government under the Home Mortgage Disclosure Act (HMDA). This despite the Federal Reserve itself warning that racial disparities in loan denial rates are driven by factors that are not included in the HMDA data:
differences in denial rates and in the incidence of higher-priced lending (the topic of the next subsection) among racial or ethnic groups stem, at least in part, from factors related to credit risk that are not available in the HMDA data, such as credit history (including credit score), ratio of total debt service payments to income (DTI), and LTV ratio.
The Federal Reserve goes on to say that when it is examining a bank’s fair lending performance, it does review these additional factors.
When examiners for the federal banking agencies evaluate an institution’s fair lending risk, they analyze HMDA price data and loan application outcomes in conjunction with other information and risk factors that can be drawn directly from loan files or electronic records maintained by lenders, as directed by the Interagency Fair Lending Examination Procedures.36 The availability of broader information allows the examiners to draw stronger conclusions about institution compliance with the fair lending laws.
As part of the HMDA reporting process, lenders can report their reasons for denying a loan. As you can see from the chart below, the two most frequently cited reason for denial are debt-to-income ratio (DTI) and credit history – two factors that CIR failed to control for in their analysis.
Source of the quotes above and table:
Now, another major flaw in their reporting is CIR’s inexplicable decision to look at only conventional loans, and ignore government lending, particularly FHA. There is no rational reason for failing to include FHA loans. They are widely available, allow smaller downpayments, and in some ways are more flexible with respect to credit history than conventional programs
And, as you can see in the chart below, they are the predominant means of financing for black and Hispanic home buyers.
Listen, MBA and its members have been working long and hard to find ways to responsibly expand the credit box in order to serve borrowers of all demographics, with different credit profiles and income levels. With the coming of the Millennials — the largest, most diverse generation this country has ever seen — it is of paramount importance we solve this.
But false narratives constructed in an effort to generate scintillating headlines and tarnish an entire industry are not a productive means to have this important discussion. This kind of faulty reporting is insulting and insensitive to the realities of credit access in the US housing market and only serves to distract from the real issues that are preventing minorities from being able to enjoy the benefits of homeownership.