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National research shows widespread discrimination against minority mortgage applicants

By: Mia Watson on 2/22/2018

A new report from the Center for Investigative Reporting reveals that lenders across the United States are denying conventional mortgage loan applications for African American and Latino applicants at higher rates than comparable White applicants.

Minority groups in the United States have historically struggled to access homeownership, in large part due to racially biased lending practices. In response, the federal Fair Housing Act of 1968 was passed in order to help protect individuals from discriminatory practices by landlords and financial institutions. The Community Reinvestment Act was later passed in 1977 to provide incentives for financial institutions to help meet the credit needs of their local communities. Despite these positive efforts, racially biased lending – also known as red-lining – continues.

According to Pew Research Center, data collected under the Home Mortgage Disclosure Act shows that overall in 2015, 27% of African American applicants and 19% of Latino applicants were denied mortgages, compared with about 11% of White and Asian applicants. The Center for Investigative Reporting report finds that in many markets, inequality persisted even after controlling for applicant income, loan amount, and the neighborhood.

The racial divide in mortgage lending and homeownership was widened by the housing crisis beginning in 2007. The Urban Institute describes how African American households in particular were disproportionately targeted with predatory lending practices before the crisis, lost a greater proportion of household wealth during the recession, and have recovered more slowly than other groups. Only 20% of African Americans aged 30 to 34 owned homes in 2016, compared with 34% back in 2000.

In the wake of the crisis, tight credit market conditions have made it difficult for all households with lower credit scores and modest savings to obtain a home loan. It can be difficult to separate the effects of the well-documented history of racially biased lending with a housing market that has significant barriers of entry for many homebuyers. Housing experts consulted by the Urban Institute argue that the problem must be tackled on both ends – including increasing transparency and accountability in the lending process to ensure fairness, strengthening enforcement of federal housing laws, and by reevaluating the loan approval process to consider a broader range of creditworthiness factors.

State housing finance agencies like VHFA can also play an important role in dismantling barriers to homeownership for low- and moderate-income households by offering mortgages with low interest rates and low down payment options as well as down payment and closing cost assistance.




Is it true that black and hispanic groups are denied mortgage loan applications at a higher rate than whites, I believe that's true. Fannie Mae issues underwriting guidelines to lenders for loan approvals. The lenders input the information they have gathered and if the borrower meets underwriting guidelines they are automatically approved. If you're a lender and make your living issuing loans do you care which race the borrower is, I don't think so. So why are blacks and hispanics "under represented"? Fannie Mae issues guidelines that the borrower must have a minimum 620 FICO score, with the best terms for scores 740 and above. Whites have an average score of 745 while blacks have an average score of 677. The inverse of this statistic is that 5.4% of white borrowers and 21.3% of black borrowers have credit scores below 620. Based on the average scores if these borrowers were putting 10% down Fannie Mae will add 0.25% to the white borrower and 2.25% to the black borrower for loan approval. Does that mean that based on the FICO score and the added interest premium it is discrimination to charge the lower FICO score a higher interest? Your local lender has no say in loan pricing, it's mandated by Fannie Mae for loan approval. If you believe that this is discrimination, then the discrimination is emanating from the federal government, not your local lender.

Hello Mike,

Those are good points. The article from the Center for Investigative Journalism that was referenced in the blog post acknowledges that their research could not control for credit scores because that information was not publicly available. It's certainly possible that the disparity in approval rates can be attributed to some extent to differences in credit scores. At the same time, while credit scores can be an important tool for lenders to determine risk, it's worth noting that some scholars have raised concerns that the credit score system itself may be based on criteria that are discriminatory towards minority groups.  

While you are correct that in theory lenders should want to make the most sales possible to qualified borrowers, the long history of red-lining and other discriminatory financial practices in the United States means that we cannot assume that this is always the case. Since credit scores are not the only factor considered in mortgage lending, there is still the potential for conscious or unconscious bias to impact the approval process. The Federal Reserve Bank of St. Louis has an excellent paper on this issue. And even when minority borrowers are approved, they are more likely to receive subprime loans than White applicants with similar credit profiles. 

This blog post certainly wasn't meant to call out specific lenders. VHFA is proud to partner with many excellent mortgage lenders to offer our affordable loan options. Rather, it was meant to share news about an important issue in housing, and to highlight ways that VHFA and our partners can be part of the solution.

Thanks for your thoughts on this complicated topic.