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How to fight mortgage discrimination ... and win!!! African Americans join forces to end racist lending practices. Black Enterprise reviews fight-back techniques that can work for you.

REGULAR TELEVISION VIEWERS MAY THINK that the Huxtable, Roc and Fresh Prince of Bel Air households have little in common. But they do: each sitcom family lives in its own home. They have slices of the American dream, an abode to place on that mythical 40 acres, next to the mule.

Of course, TV does not always reflect reality. In fact, recent federal reports indicate that too often when African-Americans try to buy a home, the main obstacle is not the quality of their collateral, but the color of their skin.

Peter and Dolores Green's tale typifies the problem, and its solution. The Greens have lived on Chicago's West Side for most of their lives. He is a state employee; she, a print buyer for a small publishing company. The middle class couple - with an annual income of $60,000 and net worth of more than $100,000 - could have moved to the suburbs. Instead they chose to stay and invest in their community.

For the Greens, that meant buying and remodeling the six-flat multifamily building they had called home for 34 years. Thus, in December 1989, the Greens applied for a $65,000 home mortgage loan from the Avenue Bank of Oak Park. They didn't worry. After all, they met the standard criteria to qualify for a loan: a 10% down payment, collateral and healthy incomes.

The first shock came when Avenue Bank rejected their application without explanation. The second hit when the bank did not respond to the Green's request for clarification. Undaunted, the couple filed a complaint against Avenue Bank with the Federal Reserve Board, which handed the case to the Federal Deposit Insurance Corp. (FDIC).

Less than a month later, the Greens applied for another mortgage from Chicago-based Northern Trust Co. and closed the deal within a few weeks. They had almost forgotten about Avenue Bank when the FDIC sent them a letter six months later. It said Avenue Bank was justified in its actions because the Green's building was appraised below the loan's value. And bankers don't like lending more money than they can recover by foreclosing on or selling a piece of property.

The Greens felt this made no sense, since the preliminary appraisal was outdated and Avenue Bank never conducted another one. Northern Trust's appraisal showed that the amount the Greens wanted to borrow was actually less than 75% of the property's value. The couple suspected racial bias was the real issue behind their loan denial and filed a federal lawsuit against Avenue Bank for violating the Fair Housing Act and the Equal Credit Opportunity Act. The latter requires lenders to supply a written reason for denial. "It's not our nature to accept that kind of mistreatment," says Peter. "When our rights are violated, we know there's a remedy."

Justice was on the side of the Greens. Last December, Avenue Bank ended up paying them $250,000, one of the largest individual court judgments in a lending dispute.

Still, the bank never admitted any wrongdoing. C. Paul Johnson, CEO and chairman of First Colonial BankShares, Avenue Bank's holding company, says, "The last two FDIC examinations show no evidence of racial discrimination at Avenue Bank. We are proud of our records."

Maybe so, but many banks are hiding theirs. Why? Because, their records show how many loan applicants with solid finances are rejected. Loan data alone are enough to show that race constitutes a major barrier to home ownership. Yet, now victims of credit discrimination are learning how to fight back and win. (For a step-by-step plan on combating mortgage lending discrimination, see sidebar "Fighting Back".)

In May, the Clinton Administration showed how seriously it takes the issue by authorizing federal banking authorities to use undercover agents to test if mortgage lenders are illegally discriminating against certain borrowers. Prior administrations neglected to use this tactic.

The battle rages on many fronts. Open-housing advocates are using a variety of sources and methods including reinterpreted mortgage lending data to refute claims that banks are colorblind and to teach loan officers how to create bias-free lending standards.

The numbers tell the story. In 1990 and 1991, the Federal Reserve Board's Home Mortgage Disclosure Act (HMDA) surveys revealed that black applicants were rejected twice as often as whites with identical incomes. Its data (from 9,300 banks, savings and loans and other mortgage lenders) compared the race, gender and income levels of 6.6 million applicants.

The 1991 Fed survey showed 37.6% of black conventional mortgage applicants were rejected. The Hispanic rate was 26.6%; whites, 17.3%; and Asians, 15%. Even high income blacks were rejected: 21% as opposed to 14% of similarly wealthy whites.

Figures disclosed last October bolstered claims of mortgage lending bias. A Federal Reserve Bank of Boston survey of 4,500 mortgage applicants revealed that African-Americans were denied loans more than whites even if they had similar credit records. This finding weakened the popular defense among lenders that high debt and poor credit caused the unmistakable racial disparities.

According to the Boston Fed's former Senior Vice President and Director of Research Alicia H. Munnell, less than 20% of mortgage applicants surveyed were unquestionably qualified or unqualified for a home loan. The other 80% had a credit flaw that could trigger a rejection (whether it was something as small as an unpaid bill or as big as too much debt). Thus, says Munnell, race or ethnicity of an applicant was a key factor in loan approval decisions.

Spurred by the reports, federal regulators are attacking lending bias with new spirit and teeth. This summer, the Fed, FDIC Office of the Comptroller of the Currency, and Office of Thrift Supervision are probing 100 financial institutions with poor minority lending records. If bias is found, the U.S. Department of Justice plans to file lawsuits against discriminators.

There has always been a difference between de jure and de facto discrimination. The Fair Housing Act within the 1968 Civil Rights Act prohibits redlining (denying loans in certain neighborhoods on the basis of race, ethnic composition or standards other than creditworthiness). The 1974 Equal Credit Opportunity Act outlaws credit denial to individuals because of race, age, sex, marital status, religion or receipt of public assistance. And the Community Reinvestment Act (CRA) of 1977 requires banks and thrifts to meet the credit needs of areas where they take in deposits.

Housing advocates say the issue is not creating laws, but enforcing them. Under CRA, financial institutions must determine the credit needs of their communities and adopt policies, procedures, programs and products accordingly. Their efforts are rated "outstanding," "satisfactory," "needs improvement," or "substantial compliance." Regulators can use these ratings to block a lender's bid to acquire other banks or build new branches.

But have enough banks been admonished? Compliance with the law appears sketchy. Since 1977, there have been 70,000 bids for expansions, mergers and acquisitions, but only 20 bids have been rejected for poor CRA compliance. In fact, 90% of lenders have received "satisfactory" or better and less than 1% have gotten "substantial compliance" ratings.

For 16 years, the Association of Community Organizations for Reform Now (ACORN) has challenged bank mergers using CRA. In that time, the 75,000-member, 26-chapter national group has extracted loan commitments from several commercial banks. CRA partnerships have resulted in about $30 billion in loans.

Unfortunately, this is not the norm, says Brian Maney, research director for the Washington, D.C.-based national office chapter of ACORN. Lenders churn out reports on their contact with community groups, run ads in minority media and hand out minority-packed brochures, but they do not make more loans to minorities, he says. An ACORN 14-city study found that banks and thrifts reinvest monev deposited in white neighborhoods at twice the rate of the funds deposited in minority neighborhoods.

You Can Fight City Hall

There is a key problem in enforcing fair lending laws. It is a complaintdriven system and most people don't know they have been discriminated against. So, they aren't likely to do anything about it. Allen Fishbein, general counsel for the advocacy group Center for Community Change in Washington, D.C., says: "The average person will buy one house in a lifetime. And he or she isn't-an expert on mortgage lending practices."

But Toledo, Ohio, couple Gail and Orlando Walton weren't apprehensive about pressing an antidiscrimination case. It was settled out of court last fall with Centrust Mortgage Co. Their story is a young couple's nightmare.

In 1990, the Waltons enrolled in an Ohio loan program for first-time home buyers with incomes under $50,000. Two weeks prior to applying for a loan, the Waltons met with a CenTrust loan officer to make sure they qualified. "He told us that we met all the criteria for a mortgage," says Gail, a 28-year-old state employee, "but we would have to stand on line like everyone else." With her husband, a 31-year-old driver for Coca-Cola Corp., she waited with 100 other couples for two and a half days to fill out an application.

Weeks went by. "We heard nothing," she says. Her telephone calls to the lender went unreturned. Meanwhile, other couples they had met were notified, says Gail, noting she and Orlando were the only black couple in the line.

Gail went back to CenTrust. "The same loan officer from the previous meeting said my poor credit record would keep me from getting a loan." Gail argued that the few old tardy bills were paid off and her recent credit was good, but to no avail.

Deflated but not defeated, the couple applied for a loan at another Toledo mortgage company, Northern Ohio Investments. Within weeks, they got a mortgage under the same program and underwriting standards. The swift transaction prompted the Waltons to call Toledo's Fair Housing Center to investigate CenTrust's lending practices. Under the agency's advice, the couple filed a federal suit against CenTrust (recently sold to Chemical Bank) for handling their loan differently from white applicants. CenTrust paid the couple $20,000 without ever admitting any wrongdoing.

Guilty Till Proven Guilty

Conservative theorists dismiss such cases as the Walton's and the Green's. Last April, Gary S. Becker, the 1992 Nobel Laureate for Economics, wrote in Business Week, "The flaw in all studies of discrimination by banks in applications for mortgages is that they have not determined the profitability of loans to different groups ... A valid study of discrimination would calculate default rates, late payments, interest rates and other determinants of the profitability of loans."

Should hypothetical data about minority borrowers as a group be used to decide whether to grant or deny a loan to a single person? No, says Howie Hodges II, director of the American Bankers Association's Center for Community Development. He sees a need for extensive analysis, but says that banks must dig deeper to reach markets they may have missed, in order to uncover a new group of acceptable borrowers.

In January, Forbes magazine writers Peter Brimelow and Leslie Spencer posed the question of whether the higher rejection of blacks was "an objective, color-blind application of sound credit standards." The 1992 Boston Fed study compared the default rates of approved mortgage applicants across census tracts but did not find higher default rates among African-Americans.

The Forbes writers argued that the "market, in short, worked. Mortgage lenders somehow weeded out extra credit risks among minorities down to a point where white and minority defaults were at an equal, apparently acceptable, rate." Their point: if good minority applicants were discriminated against, then their default rates wouldn't be equal to but lower than whites.

Constance R. Dunham, a financial economist affiliated with the Urban Institute, a policy research institute in Washington, D.C., calls that reasoning "entirely bogus." The opposite should apply, she says, when you consider lenders' claims that white applicants tend to earn more, make larger down payments and have more net wealth compared to black applicants. Then, why aren't white default rates lower?

Racial perception clouds the issue. Conservatives deny the everyday reality of American history when they contend white loan officers shed all cultural and racial baggage while evaluating applications.

Moreover, if lending to blacks is so risky, why aren't the delinquency and default rates at minority-owned banks higher? According to William Michael Cunningham, a Washington, D.C.-based financial consultant specializing in minority institutions, default rates at black banks are comparable and sometimes less than at white-owned banks.

Cunningham isn't alone. The 1988 Atlanta Journal-Constitution Pulitzer Prize winning series on mortgage lending discrimination, "The Color of Money," showed that Citizens Trust Bank - No. 7 on the BE FINANCIAL LIST - made more home loans to black customers and had a lower default rate than any bank its size in the country.

Unfortunately, not all 36 black-owned banks are capable of pursuing mortgage lending. Most have a smaller capital base than their white counterparts. But ABA's Hodges says it has nothing to do with lending to a group of people who may objectively be perceived as riskier than others.

Cordell Hayes, senior vice president and manager of the Industrial Bank of Washington's real estate loan department, agrees. Furthermore, he rejects any notion that minority-owned banks apply more lenient credit standards. Industrial, the No. 4 bank on the 1993 BE FINANCIAL LIST and last year's BE Financial Company of the Year, has granted the second highest percentage of mortgage loans to predominately black, low- and moderate-income families in Washington, D.C. And roughly 65% of the bank's $72 million loan portfolio is real estate.

"But this [loan approvall is a judgmental versus a point system, which means loan officers' decisions to grant loans are discretionary," Hayes says.

The problem of lending bias arises from white bank officers viewing circumstances differently, says Earnest Skinner, vice president of community reinvestment in Citibank's Washington, D.C., office. Job changes are one example. "You may have two loan applicants, one black and one white, who have changed jobs several times in the last two years," he explains. "With the black applicant, a loan officer may automatically see this as job-hopping. But with the white applicant, there may be an assumption each move was career advancement."

Blind Justice

If lenders have adopted policies against discrimination, how does biased lending survive? Cunningham, president of Creative Investment Research, believes lack of enforcement is the culprit.

In some grievances against lenders, regulators have simply taken banks at their word. But that's not good enough, says Lisa C. Rice-Coleman, executive director of the Toledo Fair Housing Center, because lending bias crops up in all steps of the mortgage lending process. It may occur in the prescreening, loan committee review, appraisal of the home or closing costs procedures. Rice says, "We've seen files from several financial institutions where the rejected minority applications looked much better than those accepted for white applicants."

Does that mean biased lending is a permanent situation? No. In fact, a precedent ruling has established a method for investigating lending practices. Last December, the Justice Department won a federal suit against Decatur Federal Savings and Loan Association in Atlanta. Under a consent decree, the bank agreed to pay $1 million ($20,833 on average) to 48 black individuals whose mortgage loans had been rejected in the last four years.

The Justice Department's review focused on 4,000 loan applications between January 1988 and May 1992. James P. Turner, acting assistant attorney general for the civil rights division, says black applicants were turned down at three times the rate of white applicants. Out of 72 rejected black applicants for fixed- and adjustable-rate mortgages, 25 should have been accepted. Moreover, roughly 95% of all loans were granted in white neighborhoods. Upon further investigation, the department identified a total of 48 black applicants who were victims of disparate treatment. "Even after checking for any differences in income, credit history, debt levels and other underwriting variables, we found race was a major factor in Decatur Federal's loan decisions," says Turner.

Since the suit, Decatur Federal was acquired by Charlotte, N.C.-based First Union Corp. First Union officials were unavailable for comment.

Avenging Bankers

Not to be outdone by community activists and federal regulators, the banking industry is acting against bias. In 1991, the American Bankers Association created the Center for Community Development, which helps banks examine their underwriting criteria to ensure they don't exclude creditworthy minority borrowers.

"This is a long-term commitment to make the home buying process fairer, less intimidating and more accessible to all creditworthy Americans," says Center Director Hodges. The Center is working to dismantle systematic barriers to fair lending by producing joint initiatives with secondary mortgage lenders, real estate brokers, private mortgage insurers, appraisers, city planners and other industry players.

Some lenders are trying to turn their numbers around by sending rejected minority applicants to review panels for a second or even a third look. The Harris Trust and Savings Bank of Chicago created a six-member review board to "bring more sensitivity into the loan approval process, " says Edward Williams, Harris Trust senior vice president. According to 1991 HMDA data, Harris Trust rejected black applicants at 16 times the rate of white applicants.

Harris Trust and other lenders worry that an influx of minority applicants due to community outreach programs could show up negatively in HMDA reports. "Not everyone who walks into the bank qualifies for a loan," Williams says. "But we do want to work with potential home buyers through credit counseling."

Other lenders, including Freddie Mac and Fannie Mae, are making loan guidelines more flexible, allowing gifts from relatives and friends to cover down payments. Some lenders are marketing loans to minorities and to low- and moderate-income buyers. Many of these programs allow for smaller down payments, offer lenient income-to-debt guidelines and knock off a few closing points.

But despite these and other such efforts, pressure on the nation's financial institutions to improve minority lending is not likely to ease. Even if lenders follow the three "c's" of credit - capacity (to repay), collateral and character - when evaluating applicants, the record shows African-Americans are often judged by a fourth "c" as well - the color of their skin.



For decades, New York's East Harlem and South Bronx communities watched major banks abandon them for upscale parts of the city. Without other banks in their area, residents turned to Bank of New York (BoNY), but found difficulty being accepted for loans. Finally, after those with moderate and higher incomes complained that their loan applications were rejected unfairly, the community swung into action.

Two New York City-based nonprofit economic and social development organizations took on the investigation: the Community Coalition for Fair Banking (a project of East Harlem Interfaith) and Inner City Press/Community on the Move. They charged that BoNY placed branches in wealthy Manhattan communities and then bypassed Harlem and the South Bronx. Last September, the community group created a legal precedent to fight mortgage lending discrimination and define a bank's service area, by using provisions of the Community Reinvestment Act (CRA) to stop BoNY from purchasing 62 branches of Barclays Bank. They convinced the New York State Banking Department that the BoNY did not meet the credit needs of low-income residents (per CRA).

"We argued that the Bank of New York does have a presence in our communities because they advertise with us through radio and television," says Claudette Spence, director of East Harlem Interfaith. And with that presence comes a responsibility to address the community's needs. Many people in East Harlem had accounts at BoNY branches in Manhattan and they used the bank's services through its 800-number and electronic teller machines.

East Harlem is a 250-square-block area often referred to as "Spanish Harlem." Across the Hudson River to the east is the South Bronx, a low-income black and Latino community.

Interfaith officials say banks are reluctant to invest in the inner city because it's not considered profitable. They prefer to spread their risk by doing million-dollar projects in conjunction with the city and community organizations, rather than making individual loans.

Last November, "good faith negotiations" to determine the bank's financial responsibility to the community began. The Barclay's acquisition was also approved. Although no agreements had been finalized as BE went to press, community leaders hope for a multi-million dollar commitment to supply home mortgage loans, small business loans for start-up and expanding ventures, grants for low-income housing and nonprofit community organizations. "We're optimistic," says Spence. "The regulators are actively trying to get banks and community groups into relationships that will benefit both parties, and banks now recognize that we are people to be reckoned with."


If you suspect lending racial bias has held up a loan

here are tips on how to fight back.

* Check out the common practices of the lender or company you are dealing with. A loan applicant must meet 30 or so standards, all of which may be subjectively applied. Find out what they are from bank representatives before you even apply for credit.

* Get a copy of your credit report. This way you can fix any errors and you'll have your credit history in hand should you need to confront a lender. The major national credit bureaus are CBI/Equifax, Atlanta (800-685-1111); Trans Union Credit information Co., Chicago (312-408-1050); TRW Information Services, Dallas (214-235-1200); CSC Credit Services Inc., Houston (713-878-4840).

* Maintain detailed letters and get additional documents from creditors or employers explaining unusual circumstances. Many lenders will accept these in eliminating certain causes for rejection, such as poor credit high debt or job-hopping.

* If your application is rejected, go back to the lender and ask what you can do to satisfy requirements. By law, a lender must tell you why you were denied within 30 days of the day you applied.

* Turn to local housing advocates such as the Association of Community Organizations for Reform Now (ACORN: 202-547-2500) and the National Fair Housing Alliance (202-898-1661). Make sure you present all application documents, including a detailed narrative of your experience. Someone on staff can help confirm whether your denial was legitimate. You can get a bank's lending records on your own, now that Community Reinvestment Act and Home Mortgage Disclosure Act data are public.

* Refer to written materials as well, including two free pamphlets from HUD: Fair Housing: Its Your Right and If You Can Open This Door (800-343-3442).

* If you have reasonable cause to believe that the lender rejected you because of race, file a complaint with your state mortgage review board. Regional boards review the appeals of mortgage rejections under the Community Reinvestment Act.

Also, you can file grievance forms with the Federal Reserve Board (202-452-2412) or the U.S. Department of Housing and Urban Development (800-669-9777); the Federal Deposit Insurance Corp. (202-898-6947), Office of Thrift Supervision (202-906-6000) or the Office of the Comptroller of the Currency (202-622-2000).

Note: If you pursue a lending suit, be prepared to spend at least two years before receiving a judgment whether you go before a judge or settle out of court
COPYRIGHT 1993 Earl G. Graves Publishing Co., Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:includes related articles on New York, New York's East Harlem and South Bronx communities and ways to investigate lensing institutions
Author:Scott, Matthew S.
Publication:Black Enterprise
Article Type:Cover Story
Date:Jul 1, 1993
Previous Article:Desire + national service = education: a national service program will enable more black students to obtain advanced degrees.
Next Article:The bounce-back solution: is your job on the line? Here's how you can rebound from a career crisis.

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