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The New York study: the real story.

They say no news is good news, but good news can also be no news sometimes in the eyes of the press. For example, the New York State Banking Department published in March 1992 one of the more revealing studies on the matter of discrimination in mortgage lending. The study concluded that it had found no pattern of mortgage discrimination among a sampling of 10 New York City area savings banks surveyed. Yet the study has been widely ignored by the press.

As a result of the lack of press notice, the Washington policymakers most actively involved with investigating the mortgage discrimination issue had not heard of this study when asked about it by Mortgage Banking. The study is a significant one, however, and contributes important case data to the ongoing discussion of whether discrimination is hampering minority borrowers from obtaining mortgage credit.

Titled "Are Mortgage Lending Policies Discriminatory?--A Study of 10 Savings Bank," the study's chief author is Ernest Kohn, deputy superintendent and chief economist for the New York State Banking Department, which regulates the state-chartered savings banks included in the study.

The study was designed to determine if the 10 savings banks, chosen as a cross section of the industry, were serving the credit needs of minority and female applicants, and of low-income and high-minority population areas in 1989. The institutions surveyed were Dollar Dry Dock Bank, Apple Bank for Savings, Emigrant Savings Bank, Roosevelt Savings Bank, Ridgewood Savings, River Bank America, North Side Savings Bank, Eastchester Savings Bank, Williamsburgh Savings Bank and Home Savings Bank. The banks ranged in asset size from $500 million to more than $5 billion and held mortgage portfolios valued from $234 million to $2 billion.

The study sought to determine if the differences in denial rates for mortgage applicants by race or sex reflect differences in creditworthiness. The authors examined, in close detail, 2,670 randomly selected loan applications, including both approvals and denials.

"These analyses did not indicate any pattern of these banks having approved loan requests by white or male and male/female applicants while denying minority or female applicants with similar economic characteristics. The difference in the decisions made on these applications reflected significant differences in creditworthiness with the denied minority and female applicants generally having seriously adverse characteristics that the approved white and male or male/female applicants did not have; conversely, the white and the male or male/female applicants generally had offsetting favorable characteristics that the denied minority and female applicants lacked."

According to the study, none of the savings banks originated FHA loans in 1989 or since, primarily because the limits on the maximum loan ($124,875 for a one-family house in 1989) were unrealistically low for the New York City area. Of the 1,698 loans approved, the majority met the banks' underwriting standards, although some loans were made that did not. This is at odds with the Boston Fed study, which found the overwhelming majority of applications did not meet underwriting standards.

Of the 972 applications denied in 1989, the rejections were all based on the banks' underwriting standards. The applicants generally had one of two problems. They had excessively high housing and/or debt rates far above 28 percent for housing and 36 percent for total debt. Or they had a poor credit history and had not cleared up delinquent debts.

The study examined all rejected minority candidates in the sample and compared them with all white candidates who were eventually approved even though they failed to meet all the underwriting criteria.

A look at the loans compared and analyzed in the New York State Banking Department study reveals a major divergence in credit quality between rejected minorities and the approved whites who had failed to strictly meet all underwriting criteria but were ultimately approved. The study does not examine whether or not clients were counseled to help them get their loans approved. It does suggest, however, that counseling for the minority candidates could not have saved their seriously flawed applications. Many of the rejected minority candidates could eventually qualify by either seeking lower loan amounts or paying off delinquent debts and maintaining a good credit standing for two or more years.

Only five savings banks had sufficient numbers of loans to be analyzed in the aspect of the study that compared the approved white borrowers who failed to meet all underwriting criteria with the denied minority borrowers. Following are those results, as excerpted from passages in the official report:

Dollar Dry Dock Bank--Fourteen of the twenty-five minority applicants were turned down because they had excessive housing and/or debt ratios, ranging from 8 to 35 percentage points above the maximum 28 percent or 36 percent standard. By contrast the ratios of the 16 white applicants who were approved in spite of failing to precisely meet underwriting standards averaged 1.5 percentage points higher than the maximum and in only one case exceeded 3 points above the maximum. In that one case, the debt ratio was 6 percentage points above the maximum. Dollar approved this loan based on a combination of favorable factors including an excellent payment history on another mortgage loan, substantial savings, a stable job and increasing income. None of the denied minorities with similar excess ratios had a comparable combination of characteristics.

All the remaining 11 minority applicants were turned down for both excessive ratios and for other reasons, mainly poor credit history and insufficient funds to close the loans. None of the approved white applicants had any other adverse factors beyond having ratios slightly higher than the maximum.

Apple Bank for Savings--Six of the eighteen minority applicants who were turned down had housing and/or debt ratios from between 12 to 28 percentage points above the maximum for one or both ratios. By contrast, the ratios for 19 approved but marginal white applicants averaged just 2 percentage points above the maximum, with only one white applicant higher than 4 points. In that case, the debt ratio was 6 points and the housing ratio was 5 points over the maximum, but the applicant had a net worth of $500,000, which none of the denied minority applicants came close to having. Of the remaining 12 of the 18 minority applicants who were rejected, 7 had ratios above the maximum and additional reasons for denial. None of the 19 approved, but borderline, white applicants had any other adverse factors. Of the other five denied minority applicants, the housing and/or debt ratios exceeded the maximum by 4 to 7 percentage points, a range within which three white applicants were approved. However, none of the five minority applicants had the characteristics of these white applicants; namely an unusually low loan-to-value (48 percent), excellent potential for future income (self-employed dentist), or high net worth ($500,000).

Roosevelt Savings Bank--Four of the five minority applicants turned down had very high ratios, ranging from 10 to 25 percentage points above the maximum. In all five cases, there were additional reasons for the denial. The ratios for the 43 marginal white applicants who were approved averaged only 3 percentage points higher than the maximum. In 12 of these cases, the ratios exceed the maximum by more than 5 percentage points. Two had ratios of 14 and 20 points above the maximum. The reason cited by the bank for approving nine of the twelve cases was a low loan-to-value ratio (median of 57 percent with a range of 27 percent to 76 percent). In two other cases, the applicants had good income potential. One was a senior associate attorney and the other was in the last year of medical school. The last applicant had a net worth of more than $1 million. None of the five minority denials had these positive offsetting characteristics.

For all seven white applicants approved despite a poor credit history, this was the only adverse factor in their file. For all four minority denials for bad credit history, however, there were additional adverse factors, mainly excessive housing or debt ratios.

River Bank America--Nine of fourteen minority applicants who were turned down had very high ratios averaging 18 percentage points above the maximum and ranging from 12 to 79 percentage points above the maximum. The remaining five applicants, who also had very high housing or debt ratios of 3 to 6 percentage points above the maximum, had additional reasons for denial. Three of the five had a poor credit history and wanted a 90 percent loan-to-value mortgage but could not obtain mortgage insurance due to their credit history. Another had insufficient funds to close and too short an employment record. The fifth failed to provide verification of the source of funds for the down payment and closing costs.

By contrast, the ratios of the 36-approved, yet marginal, white applicants averaged 3 percentage points above the maximum. Only four of these had excessive ratios of more than 6 percentage points (ranging from 8 to 12) above the maximum. Three of the four were approved because each had a low loan-to-value, ranging from 50 percent to 76 percent; excellent credit history; substantial savings and the absence of any other adverse factors. The fourth white applicant wanted a 79 percent loan-to-value mortgage, but due to the large size of the loan requested, River's policy called for a maximum loan-to-value of 75 percent. The 79 percent loan was approved because of the applicant's excellent credit history, virtually no other debts, a stable job history, substantial savings and high net worth. None of the minority applicants with a similar range of excess ratios had such a combination of characteristics.

The remaining 32 white applicants at River Bank had ratios ranging from 1 to 6 percentage points above the maximum. In 25 of these 32 cases, there were no other adverse factors and 19 of the 25 had low loan-to-value ratios ranging from 20 percent to 75 percent. In six of the seven other cases, poor credit history was cited as an adverse factor but in each instance, all previous delinquent debts had been fully paid off and the applicant's recent credit record had been excellent. None of the five minority applicants with a similar range of excess ratios had comparable characteristics.

All of the 13 white applicants who were approved despite a poor credit history had fully paid off their previously delinquent debts, and their more recent credit record had been excellent. In addition, nine had low loan-to-value ratios ranging from 53 percent to 75 percent; three had provided satisfactory explanations for their credit delinquencies; and one was a doctor with a net worth of $1.2 million. Of the five minority denials due to poor credit history, four involved loan-to-value ratios of 90 percent requiring mortgage insurance that they could not obtain due to their credit history. The other case involved an applicant with a debt ratio 18 percentage points above the maximum.

Williamsburgh Savings Bank--Fifteen of the seventeen minority applicants turned down for excessive housing and/or debt ratios had high ratios, averaging 23 percentage points and ranging from 7 to more than 100 percentage points above the maximum. The remaining two cases, as well as seven of the fifteen minorities, also had other reasons for the denial, mainly poor credit history or insufficient length of employment. By contrast, the ratios of the fifteen approved white applicants averaged just 2 percentage points above the maximum and in only three cases exceeded 4 points above the maximum. These three cases involved persons with substantial business relationships with the bank.

Five of the six white applicants who were approved despite a poor credit history had fully paid all of their previously delinquent debts and all six had low loan-to-value ratios ranging from 46 percent to 76 percent. By contrast, 8 of the 19 minority applicants had reasons in addition to poor credit history for the denial. The single most important was excessive debt ratios 14 or more percentage points over the maximum. Five still had outstanding delinquencies, charge-offs or judgments at the time of the application. Four had applied for "no-income-or-asset-verification" loans that require an excellent credit history. Two had loan-to-value ratios exceeding 80 percent thus requiring mortgage insurance, which they could not obtain due to poor credit history.

The study's authors concluded that "based upon the aforementioned findings, there is no pattern indicating that these five banks approved loan requests by white applicants while denying loan requests by minority applicants with economic characteristics similar to those for the approved white applicants. On the contrary, there generally were significant differences in creditworthiness between the two groups of applicants, as the denied minority applicants had seriously adverse characteristics that the approved white applicants did not have, and the white applicants generally had offsetting favorable characteristics that the denied minority applicants lacked."
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Title Annotation:racial discrimination in mortgages
Publication:Mortgage Banking
Date:Sep 1, 1993
Words:2133
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