Minorities pay more for mortgages, studies find.

Lenders charge minority borrowers higher mortgage rates than white borrowers, even when risk factors are the same, according to studies of the latest data collected under the 1975 Home Mortgage Disclosure Act (HMDA), which requires lending institutions to report public loan information.

Last year, for the first time, lenders were required to report details on subprime home loans, which carry higher rates based on the amount of risk represented by a borrower who can't get credit in the prime market.

"Predatory lenders often steer borrowers into subprime loans when the borrowers are actually eligible for prime-rate loans," Edward Kramer, a Cleveland attorney who handles Fair Housing Act cases, wrote in the Spring 2006 issue of the Civil Rights Section newsletter. "A loan becomes predatory when a lender, broker, or home-improvement contractor takes steps to knowingly mislead a borrower; hide loan terms that are highly unfavorable to the borrower; or charge a borrower unreasonable costs, fees, and interest."

A 2005 Federal Reserve report attributed the disparity in the 2004 HMDA data between white and minority rates for higher-cost mortgages to factors like differences in the groups' distributions of income, loan amounts, and the choice of lender. Consumer groups began conducting their own studies, which point to the disparities as evidence of discrimination.

The Center for Responsible Lending (CRL)--a nonprofit, nonpartisan research and policy organization--recently concluded that the disparities are attributable to unjustified charges built into the loans. It combined HMDA data with a proprietary subprime database to better compare borrowers with similar credit risks--and found disparities that are "large and statistically significant."

For most types of subprime home loans, CRL reported in May, African-American and Hispanic borrowers were 30 percent more likely to get higher-rate loans than white borrowers, even after controlling for legitimate risk factors. African-Americans were 31 percent more likely to get a higher rate on a subprime fixed home mortgage and 15 percent more likely to pay more for an adjustable-rate mortgage. Other findings:

* Two-thirds of refinancing plans for existing homes offered to African-Americans included prepayment penalties, and refinancing rates were higher (34 percent higher for fixed-rate refinance loans and 17 percent higher for adjustable rates).

* Hispanics were 45 percent more likely to get a higher fixed-rate subprime loan and 29 percent to 37 percent more likely to pay more for an adjustable-rate mortgage.

CRL said it could not estimate precisely how much prices are influenced by the borrower's race and ethnicity but suggested several possible causes for the higher rates offered to minorities.

"The considerable leeway mortgage originators have to impose charges beyond those justified by risk-based pricing ... may include the inconsistent application of objective pricing criteria, targeting of families of color by higher-rate lenders or brokers, and lack of investment by lower-cost lenders in these communities," the study reported.

It recommended that lenders and policymakers work to ensure more equitable pricing by requiring objective pricing standards, holding lenders and brokers responsible for providing loans that are suitable for a given borrower, expanding HMDA to require disclosure of more detailed pricing and underwriting information, ensuring regulators have adequate resources and authority to enforce fair lending laws, and creating incentives for the market to better serve communities of color.

"In the meantime, lenders already have submitted 2005 HMDA data to their federal regulators, and early reports suggest that disparities have increased since 2004," the study found.

The National Community Reinvestment Coalition (NCRC)--which calls itself "the nation's trade association for economic justice" and has community-based organizations as members--found this to be true when it repeated a survey it conducted last year. Between February 2004 and early June 2006, high-cost lending to minorities and women comprised 28.2 percent of total loans, compared with 12.2 percent in the previous year's sample.

"This year, the data has more precision. Yet, the fact remains that fair lending disparities by race, gender, and income remain stubborn and persistent," the study concluded.

The group's sample comprised 17 large lending institutions in six markets--Atlanta, Baltimore, the District of Columbia, Chicago, Los Angeles, and St. Louis--accounting for "perhaps up to one-third of the loans reported by institutions in HMDA data." Minority and white testers visited the same mortgage brokerages to apply for home loans of similar amounts; the African-Americans and Hispanics had slightly higher incomes, better credit scores, and longer employment backgrounds than the white testers. Nevertheless, the study found "pervasive discriminatory and predatory practices by mortgage brokers." For example:

* 54.5 percent of all conventional loans made to African-Americans were high-cost loans; 40.7 percent of loans to Hispanics and 23.3 percent of loans to whites were high-cost.

* Brokers discussed loan fees with 74 percent of whites but only 31 per cent of minorities.

* Brokers discussed fixed-rate first mortgages with 90 percent of whites but only 56 percent of minorities.

* Almost 40 percent of minorities were asked for details on credit and other financial problems versus 9 percent of whites.

NCRC wants more investigation of the price differentials among racial and other groups.

"NCRC feels strongly that Congress must enact strong, comprehensive national anti-predatory-lending legislation ... [and] that federal agencies must step up their antidiscrimination and fair lending oversight," the study said. The coalition also recommends that HMDA data "be enhanced" with pricing information for all loans, not just high-cost loans.

The NCRC has begun filing complaints with the Department of Housing and Urban Development's Office of Fair Housing and Equal Opportunity--the first against Allied Home Mortgage Capital Corp. of Herndon, Virginia, alleging its brokers were quoting different interest rates and fees on the basis of race.

Private actions may also be viable.

"A person discriminated [against] by a bank can prevail by proving intentional discrimination or by showing disparate impact--that is, statistical evidence showing that the defendant's policy or practice has a greater impact on protected class members than on others," said Kramer. "A disparate-impact claim under the Fair Housing Act, specifically 42 U.S.C. [section] 3604 and [section] 3617, can be brought." He has settled such cases, and others have successfully tried them, he said.

The CRL report, Unfair Lending: The Effect of Race and Ethnicity on the Price of Subprime Mortgages, is available online at www.responsiblelending.org (click on "Predatory Mortgage Lending," then "Mortgage Lending Research").

The NCRC study, 2005 Fair Lending Disparities: Stubborn and Persistent II, is available online at www.ncrc.org (click on "Press and Publications," then "Publication List").