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Not a black and white issue; data that many non-industry observers see as documenting mortgage discrimination, tells only a tiny part of the story.

Data that many non-industry observers see as documenting mortgage discrimination, tells only a tiny part of the story. The real issue is much more complex and one that defies simple applicant turndown ratios. Many lenders have taken the lead in fighting the perception of lending discrimination by creatively finding ways to get more minority applicants approved.

The fall is usually a busy time for home sales, when mortgage bankers are pleased to see lots of prospective homebuyers coming through their doors. The 1992 season, however, was hectic in a different sort of way. A number of different forces (both carrots and sticks) were converging on lenders that together are expected to prod and persuade lenders and secondary market agencies to reexamine one more time whether there is anything about their operations that either overtly or inadvertently locks out deserving borrowers.

Many in the business believe that this rededication to rooting out anything remotely discriminatory for reasons other than credit and collateral considerations, should result in lenders seeing a lot more minority and lower-income loan applicants. If that isn't the case, the Congress and many new federal regulators are likely to attack this issue with newfound zeal.

The issue of mortgage discrimination became a matter of banner headlines in the last year or so. The issue came to a head with the release in October 1991 by the Federal Financial Institutions Examination Council (FFIEC) of some comprehensive data on the ratio of minority loan applications that were turned down versus the turndown rate for non-minority mortgage applicants. The data is required under the Home Mortgage Disclosure Act (HMDA).

The media glare created around this data, which lenders are required to supply on a loan-by-loan basis to federal financial regulators, put the spotlight on lenders in a way they had never experienced before. The turndown rates create great lists for newspapers to run but they actually do very little to pinpoint where genuine discrimination is going on versus where just careful and responsible underwriting is taking place. The problem is that a simple number is easier for the public to grasp and an extremely high turndown disparity among various ethnic populations served by the same lender certainly can suggest the appearance of discrimination. But in truth there is no absolute correlation between a high turndown rate and active lending discrimination. There are simply too many other variables about underwriting decisions that can never be caught and measured by an approach that is so simplistic.

Nevertheless, the HMDA data and the attendant media coverage have become a powerful incentive to encourage lenders to make sure they keep any trace of possible discrimination out of their origination operations. But beyond that, this experience has inspired some mortgage lenders and secondary market agencies to aggressively reach out to these lower income borrowers and minorities to take steps above and beyond what is the normal course of business to bring them into the ranks of homeowners.

To suggest ways that lenders might successfully reach out to historically underserved populations, a special HMDA task force was created by the Mortgage Bankers Association of America (MBA). The task force was chaired by Howard Levine, president of ARCS Mortgage Corporation, Calabasas, California and made up of 15 other mortgage industry executives. In addition to the task force, the MBA effort also helped coordinate a community lending working group made up of representatives from the Department of Housing and Urban Development, Department of Veterans Affairs, Fannie Mae and Freddie Mac, American Bankers Association, the former U.S. League of Savings Institutions and National Council of Community Banks, Independent Bankers Association of America, Mortgage Insurance Companies of America and the Consumer Bankers Association of America. That list of major players reflects the level of concern in the mortgage industry about the issue of guaranteeing that the mortgage finance system not unfairly shut out creditworthy borrowers - either intentionally or inadvertently.

The HMDA task force issued its report last September. That group of lending professionals had spent nearly a year studying reasons why the mortgage industry hasn't served all the prospective homebuyers it should, and coming up with concrete steps the association and individual members could take to remedy that.

And what about any lenders not persuaded by the MBA report and other similar calls for outreach efforts? Well last fall brought with it new "sticks" in what amounts to a "carrot and stick" approach to attempt to persuade as well as nudge lenders into seeing that it makes good business sense to aggressively make outreach efforts to bring in more low-income and minority mortgage business. There are several more forceful incentives that will push financial institutions to better serve minority and low-and moderate-income loan applicants. Most mortgage bankers must now collect and report to federal regulators statistics detailing their decisions on loan acceptances and rejections.

Pressure on lenders increased when the government stepped up its enforcement. In a landmark settlement with the U.S. Justice Department, a Georgia S&L agreed to pay a $1 million fine and change a number of its practices that the federal government said had resulted in discrimination against black mortgage seekers. Other government regulators, such as the Boston Fed, released new studies documenting lenders' failures to serve all their potential customers, documents that were more persuasive than the fall 1991 federal report on HMDA statistics.

Recommended solutions

The MBA task force set out a list of steps that mortgage lenders can follow to test their own organizations for weaknesses or practices that may result in underserving borrowers from lower income groups or ethnic communities. Some ideas came from individual financial institutions around the country. Other proposals came from local MBA chapters and from other lender associations. The major secondary market players, Fannie Mae and Freddie Mac, joined in too with recommendations and new programs of their own.

For many institutions, some of the proposal probably seemed familiar and easy to carry out. Other changes, however, will likely be difficult, time consuming and possibly costly to a lender's bottom line.


Few companies would challenge the MBA task force's first recommendation. It called for additional training of interviewers, loan officers, underwriters and others involved in loan decisions, to make them aware of their responsibilities under the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act. Those are the two primary federal laws that govern fair lending practices.

In its report, the task force also announced the association's plans to hold seminars early this year in six cities around the country to cover fair housing and lending. (February 23-Atlanta, Feb. 24-Dallas, Feb. 26-Los Angeles, March 24-Chicago, March 26-Denver and March 31-Boston) The report suggested other training possibilities, including doing in-house role playing, using MBAS Regulatory Compliance Manual as a reference, attending MBA compliance seminars and reading federal government agency fair lending guides.

Creative marketing


Such training, however, can even be used as a creative marketing tool, some lenders have found. For example, Texas Commerce Bank of San Antonio has applied a variety of strategies to publicize its "opportunity loan program," a 95 percent, loan-to-value (LTV) product with significant underwriting flexibility. The bank has done much work with churches and other local community groups. Texas Commerce also recently put on a breakfast meeting to promote its program with area real estate agents.

Along with another San Antonio institution, First Federal Savings Bank, Texas Commerce is cosponsoring a series of luncheons for local lenders' Community Reinvestment Act (CRA) officers and other interested persons. Ruben Ramos, a First Federal vice president and director of community lending, was featured last September in a front-page article in the newspaper of the San Antonio Board of Realtors, advising agents on how to help low-and moderate-income "non-traditional" homebuyers.


Besides staff training, another element of reaching underserved populations, according to the MBA task force report, is counseling for homebuyers. Like many other lenders dealing with first-time or lower-income loan applicants, First Interstate Bank of Arizona has integrated that counseling into the homebuying process. The bank contracts with a local community agency to do the counseling on an individual basis. The educational sessions are broken into three formal phases: pre-application, pre-purchase and a post-purchase period of four months.

In addition, for the life of the loan, First Interstate will call any homeowner who is more than 15 days late with a payment and have the counseling agency come back and confer with that person. "We don't contact borrowers with the attitude, |We're the collection agency,' but |How can we help you?'" says Ray Lechuga, a former bank employee who now works for the counseling agency. In rare instances, First Interstate has accepted partial payments when bank officials were convinced the homeowner could subsequently bring his or her payments current.

Hiring minorities

Part of First Interstate's success comes from its recruiting of black and Hispanic employees. Besides being bilingual, the Hispanic staff help bridge cultural differences that sometimes crop up, Lechuga points out. Hispanic loan applicants, he says, "don't want you to just come out and jump right into the mortgage application. They want to get acquainted first, to be friends before they fill out the forms."

"I've always thought," comments John Salgado, a First Interstate vice-president and community development Officer,"we should take someone from the community side and teach them the mortgage business. We can't take a mortgage person and teach them the community sensitivity as easily.

"To make an impact they have to be familia, to understand our culture, our problems," says Salgado, who hastens to add the bank does have non-Hispanic loan officers who know Spanish and who have worked well with all groups of mortgage applicants. The bank encourages all its staff members to be active with local community groups, such as serving on an organization's board of directors or contributing other volunteer time.

Target marketing

First Interstate has also used census-tract data to identify lower-income and minority neighborhoods where it will run advertisements on billboards and in black and Hispanic publications. Some advertisers going after Hispanics' business create separate marketing programs highlighting that group's cultural characteristics, such as very strong family values. First Interstate, however, uses the same message for whites, blacks and Hispanics, only translating it into Spanish where necessary. For one campaign last year, "the message was, |We have loans for any worthwhile purpose: car loans, student loans and home loans,'" comments Joal Redmond, a bank vice-president and its manager of public relations and advertising.

Some financial institutions have found that an alternative to hiring their own bilingual employees is to work with real estate agents who come from various ethnic groups. One way to locate that expertise is to check the advertisements in any local foreign-language newspaper. Besides carrying a real estate agent's "sales pitch" in Spanish or Korean, for instance, an ad will usually also give the agency's name in English.

Community outreach

Even if a lender's employees are convinced they should focus more on minority and lower-income communities, it may be hard to persuade other industry professionals outside that institution. "People may have stereotypes of inner-city neighborhoods, but often they haven't even been there," points out Kim R. Starley, the Englewood, Colorado-based regional vice president of American Residential Mortgage Corporation.

To deal with those misperceptions, the Colorado MBA Equal Credit Opportunity and Affirmative Housing Committee, which Starley chairs, rented a double-decker bus for a tour of Denver neighborhoods. Guided by local residents, the 90 loan officers, appraisers and other real estate professionals who went along "got a real insight into what the neighborhoods looked like," says Starley. "They saw there was good business to be done there."

That same committee has produced and sold some 1,000 copies of a 90-page looseleaf "affordable housing guide." Updated periodically, the manual contains information on the rationale for more active outreach, Colorado lenders' special affordable housing loan products, counseling agencies and anti-discrimination laws.

A second look before deciding

An approach Starley's mortgage company may add in 1993 is a so-called "second-look" technique. Also recommended in last fall's MBA task force report and pioneered by Pasadena-based Countrywide Funding Corporation, at the direction of its President and Chief Executive Officer Angelo Mozilo, it simply means giving some additional consideration to a loan application that is provisionally rejected. Mozilo spearheaded the creation of the MBA HMDA task force and his company has been successfully experimenting with second reviews of initially rejected applications.

The "second-look" strategy can take a variety of forms. For instance, by using the listing of affordable mortgages in the Colorado MBA manual, Starley points out, lenders who don't have an appropriate product for a particular applicant can refer the person to another institution. "By giving them an alternative," he says, "they won't go away totally disappointed."

A coalition of Philadelphia lenders applies a related technique with their various affordable housing loan programs. At weekly meetings, the institutions review mortgage applications that fail to meet one company's criteria but that might be acceptable to another lender. In such cases, the first institution refers the homebuyer to the second lender.

A second chance

Some mortgage companies take a second look in-house. ARCS Mortgage last year began a daily review of all loans initially rejected. In a meeting with other bank officials, explains Don Dorion, ARCS executive vice president of underwriting, "we ask the underwriter first to review all the |pluses' and then the reasons for turning down the loan. That's a good exercise."

In some cases, the underwriter is asked to go back to an applicant and request additional information before a final decision is made. In other situations, it may be possible to revise the application. One minority prospect, for instance, was asked to increase his loan request, to pay for renovations the property needed.

Countrywide Funding has a group of several underwriters working at its Pasadena headquarters who review all initial rejections from its offices around the country. About one-third of those loans are eventually accepted, according to Jerry Baker, the Countrywide managing director who oversees production and directs the company's "House America" program, which targets lower-income and minority borrowers.

That oversight process, says Baker, is especially helpful in identifying applications that the initial loan processors may not know fit the underwriting standards of Fannie Mae. Last May that secondary market agency committed itself to buying $1.25 billion of the Countrywide loans under its Neighborhood Investment and Community Homebuyer's programs.

Countrywide headquarters reviewers sometimes call Fannie Mae representatives to ask about a specific application. That helps reduce concerns - shared with many other institutions - that a secondary market agency will force the lender to buy back an inappropriately underwritten loan.

"The expanded Fannie Mae guidelines are much more flexible than many underwriters realize," comments Baker, "such as for debt ratios and the amount of reserves after closing. Underwriters used to writing to even FHA standards may not know what flexibility there is."

Countrywide's second-look program "has worked well," says Baker, but he looks forward to phasing it out. "Eventually we'll have educated underwriters to the more flexible guidelines."

Fannie and Freddie's efforts

Freddie Mac has also tried to make lenders more aware of the underwriting leeway they have under the corporation's guidelines. Last January the secondary market agency announced revisions to 28 sections of-its Sellers' and Servicers' Guide following review of that manual by a nationwide panel of more than 30 lenders and community groups.

Last year Fannie Mae and Freddie Mac both announced new or revised, more flexible affordable housing packages, with many features in common. Among these are 95-percent LTV ratios, eased restrictions on sources of the 5 percent down payment, and monthly debt-to-income ratios as high as 40 percent. MBA will be working with the two agencies to further evaluate traditional underwriting standards. Task Force Chairman Levine raises a valid question when he says, "Are all the criteria we're using, really indicative of what may happen in the future?"

Last summer Fannie Mae introduced additional homeownership initiatives for Hispanics, who have a homeownership rate 25 percentage points below the 68 percent figure for whites and just below the 43 percent for blacks. The agency had several of its consumer brochures translated into Spanish and also launched a $20 million pilot program with the National Council of La Raza, a major Hispanic advocacy organization. Initial efforts were to focus on several cities with a high proportion of Hispanics, including Los Angeles and Phoenix.

Some tough carrots in the


Few lenders are likely to object to all the various inducements to increase lending to minority and lower-income persons. Some of the "carrots," however, may come with some surprising consequences - ones affecting a lender's bottom line.

For instance, hiring a more culturally diverse staff will automatically mean more loans for minorities, won't it? That's not necessarily so, according to some lenders who have taken that step.

One reason for this is that mortgage providers add new employees but leave their old compensation systems in place. "The commissions are the big obstacle," notes Colorado MBA member Starley. "Blacks and Hispanics are like anyone else. They like to make money too, and they'd rather get a commission on a $100,000 loan than on a $30,000 one."

Much the same situation can be true for the extra time and energy a lender needs to move a first-time homebuyer through the mortgage application process, noticeably more time than it takes with a higher-income family buying a move-up residence.

Raising fees on smaller loans is unworkable, Starley believes. "If you charge more," he says, "community groups will call it discrimination....Until we change the commission system, we can't get anywhere. We'll have to pay people a salary to get them to do this [handle smaller mortgages]."

And that's a change Starley firmly believes the mortgage industry should make. "It's not a money-making venture, but we should be doing it. We owe it to our communities to serve them."

In making that point, Starley is far from alone in the mortgage industry. Former MBA President Angelo Mozilo said much the same thing in the Washington, D.C. press conference the association held last September to release the work of its HMDA task force.

And what about the lenders who might not agree with Starley and Mozilo? lo? Whether they like it or not, a number of events last fall made it clear financial institutions will have less and less choice in the matter.

HMDA extension

This is certainly the case for mortgage companies. In contrast to many other types of lending institutions, up until late last fall more than 80 percent of mortgage companies were exempt from the data collection and HMDA reporting mandates, according to Federal Reserve Board estimates. All that changed, however, with new regulations the Fed issued at the end of November.

The new rules are a final version of ones put out for comment last August. They require that a mortgage company, with an office in a metropolitan area, disclose data on its home lending activity if, in the preceding year, its assets exceeded $10 million or the lender made 100 or more home purchase loans. Refinancings count toward that 100-loan standard.

Mortgage companies that meet the new requirement will have to start collecting data for loans as of January 1, 1993. They'll report the year's results to federal regulators in March 1994.


Mortgage companies will likely face other new forms of scrutiny in 1993. One possibility is testing, where carefully matched pairs of white and minority "loan applicants" approach a lender to gauge whether or not they are treated differently.

The MBA task force recommended that association members take it upon themselves to test for discrimination at the loan prequalification and application stages. However, because deriving statistically valid testing data can be a complex and time-consuming task, many lenders may choose not to try to attempt that.

Nevertheless, those financial institutions may end up with testers in their offices anyway. Several government agencies, including the Federal Trade Commission and the Justice Department, have had mortgage discrimination testing programs in place for some time, and HUD is scheduled to award $1 million in contracts under a new loan testing project early this year.

Fair housing advocacy groups are also taking a harder look at mortgage lending. In the past, most of their testing focused on possible discrimination by rental companies and real estate sales agents. Last October, the National Fair Housing Alliance held a San Francisco training session for some 100 representatives of private organizations and local and state government civil rights agencies. The alliance believes their intensive two-day workshop w-as the first ever to deal just with testing for mortgage lending discrimination.

More aggressive

enforcement expected

Fair housing advocates are also applauding what they see as more vigorous enforcement of the nation's fair lending laws by the U.S. Department of Justice. This was clear, they say, from the settlement reached last September between the federal government and Decatur Federal Savings and Loan Association of Atlanta.

"[The Department of] Justice has never been very active in the mortgage lending field," comments Stephen Dane, a Toledo, Ohio attorney with the firm of Cooper, Straub, Walinski & Cramer who has extensive experience litigating antidiscrimination cases. "It's a sign the department has decided to [investigate] discrimination in mortgage lending, as they have in other areas of housing."

In the Atlanta case, the thrift denied the discrimination allegations but still agreed to pay $1 million to 48 blacks rejected for mortgages between 1988 and 1992. The lender also plomised to make a number of changes in its business practices. Among these were advertising more in black publications, opening an office in a black neighborhood and retraining employees and paying them incentives to target more sales efforts toward black communities.

New studies

In its investigation of Decatur Federal, the Justice Department analyzed more than 4,000 loan applications, controlling for differences in income, credit history and other underwriting factors. The Federal Reserve Bank of Boston took much the same approach - and found similar evidence of racial discrimination - in a study of some 4,500 white, black and Hispanic mortgage seekers in the Boston area.

Released three weeks after the Decatur Federal settlement, the Boston study addressed one explanation sometimes offered for higher minority loan rejection rates. That is that blacks, Hispanics and other minorities on average tend to have worse credit histories than whites do - and that prudent financial institutions should and would, in such instances, turn them down. "The Boston Federal Reserve reviewed |reasonable, legitimate' reasons for denying credit," points out John Taylor, executive director of the National Community Reinvestment Coalition, a Washington, D.C. advocacy organization formed early last year. "With all things being equal, they still found a 60 percent disparity [in minority rejections]."

Clinton: less paperwork,

more loans

Similar tough scrutiny on this issue appears likely to continue under the Clinton administration. A week after the presidential election, Marc Weiss, a Clinton-Gore campaign adviser on housing policy, who is a professor at Columbia University and director of its Real Estate Development Center, affirmed: "We want more loan production rather than paperwork. Lenders have been working on slick brochures and promotional programs rather than loan production. We want to reduce regulations and paperwork and increase incentives, to get more loan production."

Long before the November balloting and long before all the other events last fall, many mortgage bankers had concluded their industry needed to better serve minority and lower-income individuals. "It's preventive," says Shanna Smith, director of programs for the National Fair Housing Alliance. "If they don't address this themselves, they'll be forced to do it."

Bill Black is a Washington, D.C. writer. He has written for Mortgage Banking, Real Estate Finance Today, and a number of other business and finance publications.
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Author:Black, Bill
Publication:Mortgage Banking
Date:Jan 1, 1993
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