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Mortgage detectives.

Mystery shoppers are going undercover to spot subtle signs of mortgage discrimination. Lenders are sending these pretend borrowers into their shops to look for signs of second-class treatment for minority or low-income borrowers.

ROBERT, A YOUNG AFRICAN-AMERICAN MAN, approaches a local financial institution to get financing for a house he wants to buy in Oakland, California. However, he's told by the loan officer, "We don't lend in that neighborhood, but I'm sure that the bank down the street does."

Consider the repercussions this one conversation might have if Robert was actually a federal regulator looking for discriminatory practices by mortgage lenders. Such a scenario is not that improbable as the federal government starts to move more aggressively to root out mortgage discrimination.

Lenders are seeking the services of companies that offer tailored programs to test for the disparate treatment of loan applicants to help combat discrimination where it takes place--in the loan office. Disparity testing is a successful qualitative approach used across the country by both financial institutions and mortgage companies to ensure that loan representatives are offering all customers equal lending opportunities.

To test for disparity based on income, race or gender, "mystery shoppers" (local area residents who pretend to be potential customers) approach loan officers asking about a home mortgage or home equity loan. Without knowing the explicit purpose of the program, shoppers are trained to evaluate the service and sales skills of loan officers and ask questions designed to detect overt and subtle discrimination among other general service quality observations.

To maximize their research dollar, lenders are using mystery shoppers to aid their equal lending efforts in several ways:

* Reveal overt and subtle discrimination;

* Identify sales processes that contribute to discrimination;

* Monitor Community Reinvestment Act (CRA) awareness and referrals;

* Evaluate representatives' product knowledge of low-income loan programs;

* Monitor the way representatives handle customers who don't qualify;

* Focus diversity training efforts.

Overt and subtle discrimination

Studies designed to test for overt discrimination can reveal company representatives who seem unwilling or hesitant to lend, those who make disparaging remarks about a customer's neighborhood, those who change their tone of voice once the neighborhood is mentioned by the shopper or those who simply refer customers to another bank.

Within the last 12 months, Market Trends has trained mystery shoppers on both coasts, down South, and in the Midwest (a total of 15 states) in order to conduct nearly 3,000 shopping exercises designed to test for overt and subtle discrimination for financial institutions. Over the telephone and in person, mystery shoppers asked about home equity loans and home mortgage loans.

Across the country, disparity testing has revealed that there are few cases of overt discrimination (less than 4 percent of the shopping exercises) and that representatives are more likely to overtly discriminate over the telephone than in person. But as the "Robert" scenario points out, even one case of discrimination can have a potentially damaging impact on the future of a lending institution, as well as the industry as a whole.

A financial institution with more than $5 billion in assets located in a major metropolitan city designed a disparity testing program to identify both overt and subtle discriminatory practices by bank representatives over the telephone. Mystery shoppers called branches asking for information concerning home mortgages and home equity loans. When loan officers asked what neighborhood the shopper lived in, the control group mentioned a moderate- to high-income-level neighborhood, while the target group mentioned a low-income neighborhood. While none of the representatives indicated that they would not lend to the moderate- to high-income customers, 4 percent of the low-income neighborhood mystery shoppers reported comments such as:

* "I'm sorry, we don't lend in that area."

* "You have to go to the bank down the street. I believe that they serve that neighborhood."

* "Do you really think it's worth it to buy a home in that neighborhood?"

To identify subtle discrimination, researchers compare the results of a visit by a minority shopper to the results experienced by a Caucasian shopper to reveal any significant disparities in service. Disparity testers have found that while overt discrimination is rare, subtle discrimination is common.

The greatest disparities in service have fallen in the general category of probing needs (asking questions to determine the customers' loan needs, such as what type of loan they are interested in, whether they want a fixed-rate or adjustable-rate loan, the preferred length and term of the loan and qualifying questions, such as debt, savings, household size and employment). Disparities were also seen in presenting various financing options to the home equity customer (second mortgage, consumer loan or credit line) and in the amount of loan information presented to low-income and minority customers.

Although minority shoppers reported that their mortgage financing needs were probed, further analysis reveals that the probing questions were "qualifying" in nature rather than information necessary to best meet the applicant's mortgage needs. When loan officers probed the needs of Caucasian shoppers, they were more likely to ask questions to learn what type of mortgage the customer wanted and the type of financing that would best fit the customer's needs. In contrast, minority shoppers were asked questions concerning their credit history, debt, savings and length of employment.

A mystery shopper study conducted for a bank determined to grow in surrounding states in the West revealed that while more than one-half of the minority shoppers were asked probing questions about their home mortgage needs, minority customers were more likely to be asked qualifying questions. The study revealed that while none of the non-minority customers were asked "screening questions," representatives asked nearly one-in-ten minority customers for details concerning their current savings/debt. Although infrequent (less than 5 percent), it is interesting to note that the only time representatives asked, "Why did you select this branch?" was during minority shopper visits.

Disparity testing has revealed that representatives are less likely to present various financing options to minority customers. On average, mystery shopper studies reveal that while more than one-half of the non-minorities are offered various financing options, less than one-third of minority customers are presented similar options. For example, Caucasian customers were more likely to receive a home equity presentation that also included information concerning a line of credit or consumer loan (that may have lower origination fees than a home equity loan), while minorities and low-income customers were presented only the home equity loan.

A mystery shopper study in the Midwest revealed that when loan officers were not available, auxiliary personnel were more likely to make an effort to provide basic details about a mortgage or equity loan to high-income customers. On the other hand, low-income customers were immediately referred without any loan information to another branch or bank.

We're too busy to discriminate

Given the current lending environment, lenders commonly remark that frankly, they can't handle all of the incoming calls. The sheer volume of refinancing inquiries means that customers with mortgage inquiries may have been qualified over the telephone rather than in person. Mystery shopping over the telephone has discovered that harried telephone representatives may reduce phone scripts to "pre-screening" customers, asking only "Where is the house located and how much is it worth?" Busy loan officers may prioritize inquiries by loan amount, leaving low-income customers at the bottom of the list. Or if the lender fails to return the customer's call, low-income customers may perceive this as discrimination based on their home location. While these forms of discrimination have been inadvertent, according to financial institutions, the mystery shopper approach has been useful in discovering them.

Incenting representatives to discriminate

Financial institutions across the nation are finding that while they have created products to meet the special credit needs of the low-income and minority customer, sales figures for these types of borrowers have remained lackluster. Further investigation reveals that lenders' commissions/incentives are not set up to encourage representatives to originate loans for low-income customers.

Not surprisingly, preliminary research indicates that when shoppers asked about special credit packages, representatives were either uninformed or gave only quick, cursory presentations that lacked enthusiasm and emphasized none of the true benefits of the products. Although few institutions have evaluated special credit presentations, mortgage lenders have acknowledged that a lack of incentives and product knowledge may be a cause in poor delivery of these products by their loan officers.

This has prompted some lenders who have commissioned sales staff to employ salary-based employees to increase the origination of loan packages designed to serve the low-income market. These representatives meet with community groups, visit CRA neighborhoods and even set up mobile offices to meet the special credit needs of their low-income communities.

CRA awareness

For financial institutions, an important foundation for ensuring that all customers are given equal lending opportunities is put in place when all bank or thrift employees have a basic awareness of CRA. A large West Coast financial institution implemented a mystery shopper program after bank representatives and loan officers completed an intensive CRA training awareness program. Mystery shoppers who were trained to evaluate CRA awareness among bank representatives found that while most of the representatives had some understanding of CRA, many loan representatives were clearly uninformed. The following observations were noted during the mystery shopping visits:

* "The officer did not know what I meant by CRA. She looked puzzled when I asked about it."

* "The representative said she had never heard of the Community Reinvestment Act."

* "The bank officer only stated that I would have free checking, and then restated this again when I pushed further."

One area commonly overlooked, but equally important, is the way a referral to a CRA representative may be handled by other loan officers or branch staff. A Midwest bank instructed loan officers to refer low-income customers to CRA representatives, but after conducting a mystery shopping exercise in the bank, management found that the referral from branch representatives lacked sensitivity. In some cases, when mystery shoppers posed as low-income customers inquiring about a first home mortgage, they were hastily referred to a CRA representative. Mystery shoppers reported that they thought this process was handled without tact. In the words of one of the mystery shoppers:

"I felt that once I mentioned where I wanted to buy a house that I wasn't worth his time. The representative abruptly said, 'Oh, that's a low-income area. You need to talk to a special representative.' He just quickly gave me a number and hung up."

Handle with care

Mystery shoppers also monitor the way representatives handle customers who don't qualify for a home mortgage. Shoppers are provided specific background information in order to answer any probing questions a representative may have about their savings, employment, financing needs or debt. Setting up scenarios that clearly reveal that the shopper will not qualify for a loan (insufficient savings or too much debt) enables shoppers to evaluate the representative's willingness to lend in the future and how tactfully the representative handles the customer who does not qualify.

The single most important outcome that can come from employing mystery shoppers to conduct disparity testing is discovering the power to create change. Frequently, representatives are unaware of their discriminatory behavior. Most representatives are surprised to learn that they are less likely to probe a minority's mortgage needs, present various financing options or ask a low-income customer for the sale. However, with the results of disparity testing in hand, trainers can provide the "evidence" that diversity training is important, as lenders strive to offer all customers equal lending opportunities.

Lenders who have used disparity testing to evaluate the service they extend to borrowers of all income levels and ethnic groups, thought it was valuable for different reasons. The following quotes offer some insights into why lenders find this approach worthwhile. One lender said, "We used the disparity testing program to show our staff that we were serious about meeting our CRA goals." Another concerned lender said, "We felt it was in our best interest to conduct disparity testing to reinforce product knowledge, verify compliance and check for CRA awareness."

Obviously, lenders are aware that the issue of mortgage discrimination has become a top priority for federal government policymakers and regulators. This is an added incentive for lenders to get a report card on how they are doing. Along those lines, one lender who conducted disparity testing commented, "The regulators felt that it was a positive addition to our CRA program (and they had initially suggested it), but they made it clear that we shouldn't do it once and drop it. They wanted it done on a periodic basis for the long term."

Clearly, the commitment to eliminate all forms of mortgage discrimination must come from the top and extend all the way down to the front ranks. And it must be a genuine commitment.

Susan M. Smith is director of Service Quality Programs, Market Trends, Inc., Seattle.
COPYRIGHT 1993 Mortgage Bankers Association of America
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

Article Details
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Title Annotation:investigating mortgage discrimination
Author:Smith, Susan M.
Publication:Mortgage Banking
Article Type:Cover Story
Date:May 1, 1993
Previous Article:Affirmative lending.
Next Article:Managing in rosy times.

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