Are black and Latino home mortgage applicants charged higher fees or interest rates than white applicants? Are they turned down for market-rate mortgages more frequently and steered to higher-cost loans instead?
Those are sensitive questions this month inside hundreds of mortgage companies and banks. They have all just finished sending to the federal government detailed new reports on the race, gender, interest rates, fees and other characteristics of large portions of their 2004 loan application files. As of March 31, they must also provide their raw data to anyone who asks for it.
Consumer advocacy groups already have peppered lenders with demands for their reports, and are eager to publicize the preliminary results. The Association of Community Organizations for Reform Now, a national community action alliance, has asked for race and pricing tabulations from nearly 500 banks around the country. The federal government itself plans to analyze millions of files for indications of racial, ethnic, gender or other pricing disparities and announce the results in September.
For lenders who are found to charge applicants different rates or fees because of their race, there could be heavy prices to pay: costly civil rights litigation with the federal government, heavy fines and multimillion-dollar private class-action settlements. Plus horrendous publicity.
Banks and mortgage companies that have examined their own data reportedly are worried that seeming racial disparities in their raw statistics might mislead consumers into believing that they have discriminated against certain applicants illegally.
"This is the most worked up I've seen people in a long time," said Robert P. Schmermund, senior vice president for corporate communications of the Washington-based financial trade group America's Community Bankers. Some lenders are "getting pretty shook up by it," he said, not because they feel they have violated fair lending laws, but because the raw data might make it look as if they did.
For example, according to fair lending experts, it might not be unusual for a bank or mortgage company to report raw application data that show that twice as many black loan applicants were quoted above-prime rates and fees last year compared with white applicants. On the face of it, that might appear to be evidence of illegal discrimination.
But Shanna Smith, president of the National Fair Housing Alliance, said that looking at the raw application numbers alone is not enough to prove illegal discrimination in pricing. "You have to look at other factors that might have contributed" to the lender's rate quote or fees, such as the applicant's credit scores, down-payment percentage and debt-to-income ratio. The new federal pricing reports do not include those key risk factors, Smith said, so the data "can really only raise a lot of questions."
Six federal financial regulatory agencies with oversight in the fair lending arena issued a statement March 31 that essentially urged similar caution in interpreting individual mortgage lenders' race-and-pricing results as they become publicly available over the coming weeks and months.
"Without information about relevant price determinants one cannot draw definitive conclusions about whether particular lenders discriminate unlawfully or take unfair advantage of consumers," the statement from the Federal Reserve Board and five other agencies said.
John Taylor, president and chief executive of the National Community Reinvestment Coalition, which has also requested 2004 pricing data from lenders around the country, said that once investigators take a close look at some lenders' files, "there will definitely be [evidence of] disparate treatment" of minority home buyers and refinancers compared with white applicants. The most damning evidence of all, said Taylor, will be documented instances in which applicants with similar credit scores, income and down payments received different loan quotes from the same lender, and in which the key difference between the applicants was their race or ethnicity.
"There will be lawsuits," predicted Taylor, and possibly civil rights cases brought by the Justice Department.
In the meantime, what should mortgage applicants take away from the new fair lending efforts underway at the federal level? For one thing, don't jump to conclusions about any lending institution's pricing patterns until federal or private investigators do full case-file audits. Federal law permits lenders to vary pricing according to financial risk factors, but prohibits pricing on the basis of race, gender or age, among other things.
On the other hand, don't assume that lenders whose pricing data show heavily skewed racial or ethnic imbalances are playing the game straight, either.
Finally, be aware that when you apply for a mortgage, you will be priced through a risk prism: If your credit history is terrible, you will pay more. If you are making a minimal down payment, you will pay more. If your mortgage payments represent a large fraction of your monthly household income, don't expect to get the lowest rate quote.
Kenneth R. Harney's e-mail address is KenHarney@earthlink.net.