Fed Examines Credit Scores, Finds No Bias

? Recent immigrants' scores might be improved by expanding the range of creditlike accounts reported to the national credit bureaus to include rent payments and other recurring accounts. Once in the bureaus' files, these accounts could then be used to help compute immigrants' scores, enhancing the bureaus' ability to predict future payment behavior.

? The types of credit used by various demographic groups "do not appear to be the source of differences in performance once credit score is taken into account." That finding runs counter to criticism by some consumer advocates that mortgage lenders and brokers tend to steer black and Hispanic borrowers into higher-risk, higher-cost loans -- subprime adjustable-rate home loans with hefty payment jumps, for example -- that increase the likelihood of default and foreclosure.

Researchers confirmed that black and Hispanic borrowers make heavier use of finance-company installment loans and that interest rates paid by blacks appear to be higher in general than those paid by whites.

Although most fair-lending groups have not yet fully reviewed the Fed's study, at least one consumer advocate lambasted the report. Calvin Bradford, formerly of the University of Minnesota's Hubert H. Humphrey Institute of Public Affairs and now a fair-housing consultant, challenged the study's statistical sampling methodology, selection of data and failure to probe more deeply into the marketing of credit products to minorities. Bradford said the Fed used "an old database" provided by the credit bureau TransUnion that dated to 2003 and underrepresented minorities with mortgages while over-representing whites, based on their proportions in the general population.

Bradford said he doubted that anyone in the statistical-modeling business would accept such small samples. He also rejected any conclusion that types of credit products marketed to minorities have no impact on payment performance.

"If blacks are paying more for access to the mortgage market than they really need to, then that is going to increase their household debt burdens" and contribute to higher delinquency rates, Bradford said.

Paul Hancock, former director of the Justice Department's fair-lending unit, now in private practice with the law firm of K&L Gates, called the study's results "startling."

"It is very troubling for me as someone who has been an advocate for fair lending for many years" to find such credit-score divergences among racial and ethnic groups. "It shows some very serious social inequities attributable to our history" -- the lingering impacts of segregation, unequal educational opportunities and severe economic differences.

Mortgage lenders are often accused of charging minorities more, Hancock said, but the Fed study suggests that credit scores accurately predict payment performances, "so the burden here can't fall entirely on the shoulders of lenders."

Kenneth R. Harney's e-mail address isKenHarney@earthlink.net.