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Out of Reach 

For minorities applying for mortgage loans, the system is far from colorblind

For two years now, Sheila and Larry have wanted to move out of their rented townhouse and into a home of their own. The Colorado Springs couple, who asked that their last name not be used, have an 11-year-old son. Larry works two jobs, Sheila works part-time, and for the amount they pay in monthly rent, they should be able to afford mortgage payments.

"We need a lot of space, and right now we're getting really tight," said Sheila.

Twice, they've applied for mortgage loans to enable them to own a home. Both times, they were denied due to "bad credit."

Many more times, they've spoken with loan brokers and real-estate agents, many of whom have discouraged them from even applying at all by telling them they can't get favorable loan conditions until they improve their credit score.

So the two keep trying to do just that.

But Sheila and Larry, both in their 40s, also face another obstacle besides just improving their creditworthiness, an obstacle that keeps many from achieving the American dream of homeownership. They are African-American.

Decades after the civil-rights struggle, in a time when many Americans believe society has become -- more or less -- color blind, people of color continue to face a harder time accessing credit than do whites.

In fact, in an analysis of federal mortgage-lending data, the Independent has found that in Colorado Springs, people of color are far more likely than whites to be denied mortgage loans, regardless of how much money they earn.

The analysis shows that:

Blacks in the metro area are twice as likely as whites to be denied for all types of mortgage loans, while Hispanics and American Indians face denial rates almost as high as those of blacks;

When applying for "conventional," unsubsidized home-purchase loans, local blacks and American Indians are denied credit at a rate more than three times that of white applicants, while Hispanics are rejected twice as often as whites.

High-income blacks, Hispanics and American Indians in the metro area are still denied more often than low- to moderate-income whites.

The trend is set by the leading lenders in the Colorado Springs market, where the racial discrepancies in denial rates are, in some cases, even greater than those of the market as a whole.

The racial discrepancies in mortgage-loan denials have received little attention locally, though they mirror a national pattern that has been subject to extensive discussion.

It is a significant issue because homeownership is the key way indeed, often the only way for most working-class Americans to accumulate wealth.

"The problem is bigger than most people realize," said John Taylor, president of the National Community Reinvestment Coalition, a Washington, D.C.-based organization that focuses on fair-lending issues.

The Rev. Promise Lee, a local community activist who has long worked behind the scenes to push financial institutions to better serve minorities, said he hopes the Independent's analysis draws attention to the problem locally.

"I hope that it provokes anger," Lee said.

Black and white

When someone applies in person for a mortgage loan -- be it a home-purchase, home-improvement or refinancing loan -- lenders are required by the federal Home Mortgage Disclosure Act to note the applicant's race.

Lenders are also required to report yearly on details of their mortgage-lending activity, including numbers of applications, approvals and denials in each local market across the country. The data, which is publicly available, is broken down by race.

In examining reports for the Colorado Springs metropolitan statistical area which encompasses all of El Paso County the Independent found that in 2001, about 10 percent of mortgage-loan applications for whites were denied.

In comparison, the denial rate for Asian-Americans was 12.5 percent; for Hispanics, 18 percent; for American Indians, 19.4 percent; and for blacks, 20.7 percent. The 2001 statistics are the most recent ones available.

The numbers cover all types of mortgage loans, including loans made with government assistance through the Federal Housing Administration or the Veterans Administration, and refinance loans.

When looking strictly at "conventional" home-purchase loans, the differences are even more stark: While whites were denied 10.1 percent of the time, blacks and American Indians were denied more than 30 percent of the time, and Hispanics were denied more than 20 percent of the time.

And although people of color may have lower average incomes than whites, the data suggests that this does not explain the differences in denial rates.

In fact, high-income black and Hispanic applicants had higher denial rates -- 18.1 percent and 15.4 percent, respectively than low- to moderate-income whites, who were rejected just 14 percent of the time.

The local numbers roughly mirror national statistics, although overall denial rates for Colorado Springs are lower than the national average.

In looking individually at each of the largest lenders operating in the Colorado Springs market from 1999 through 2001, the Independent found that most exhibited significant racial differences in their denial rates -- especially for blacks and Hispanics.

This was the case for each of the three "giants" in the Colorado Springs mortgage-lending business Wells Fargo, Countrywide Financial and locally based Ent Federal Credit Union as well as other leading lenders such as Peoples Mortgage Corp., Bank One, North American Mortgage Co., First Horizon Home Loan Corp. and Irwin Mortgage Corp.

Only one major lender, GMAC, seemed to buck the trend by actually denying whites more often than blacks or Latinos.

Room to improve

Not all of the leading lenders in the local market appeared to be particularly aware of the racial differences exhibited by their own institutions.

"I've personally not seen the data," said Wayne Paton, Colorado Springs regional president for Chicago-based Bank One, though he added, "I know we have some room to improve."

Between 1999 and 2001, Bank One's local denial rate was 37 percent for blacks, 34 percent for Hispanics and 22 percent for whites.

Likewise, James Moore, vice president of Ent Federal Credit Union -- the largest locally based lender -- said he couldn't comment specifically on Ent's performance without having seen the data.

"I really don't have an answer right now, without taking a look at it," Moore said. He added, "We're sensitive to the kinds of issues that you're raising."

The credit union's three-year denial rate was 30 percent for blacks and 31 percent for Hispanics, compared with just 12 percent for whites.

Some lenders were more acutely aware of the differences.

"We've seen the same data that you're seeing," said Olivia Riley, a spokeswoman for Seattle-based Washington Mutual, which acquired North American Mortgage in January 2002. In the years prior to the acquisition, North American denied blacks more than twice as often as whites in Colorado Springs.

Riley declined to comment on North American's performance but said Washington Mutual is committed to improving upon it. "We definitely need to increase our lending to minority homeowners," she said.

Marty Smith, area manager for Wells Fargo Home Mortgage -- which along with other Wells Fargo affiliates constitute the leading mortgage lender in Colorado Springs -- also expressed familiarity with the situation.

"Yes, denial rates are higher in general for minorities," Smith said. "We're aware of that, and quite frankly, we don't think it's acceptable."

San Franciscobased Wells Fargo and its predecessor in the Springs market, Norwest Bank, racked up a 17.9-percent denial rate for blacks locally between 1999 and 2001, compared with 17 percent for Hispanics, 15.6 percent for Asian-Americans and 7.2 percent for whites.

Lenders don't believe it

At the same time, most of the lenders say they don't believe the differences have anything to do with discrimination.

"I certainly don't want to believe that exists in our world," Smith said.

He said he's convinced Wells Fargo employees do not treat anyone differently based on race.

Several of the lenders pointed out that nowadays, the vast majority of loans are automatically underwritten by industry-standard software programs that determine whether a person's credit is up to snuff. Each applicant's data, lenders say, are simply entered into a program -- sometimes called the "black box."

"It makes decisions completely without human intervention," said Jay Garten, president of Peoples Mortgage, the second-largest locally based lender. "So, we've taken the human bias out of the process."

Paton, of Bank One, said he was "100 percent confident" that the bank's employees wouldn't treat anyone differently based on race. Even if they did, it wouldn't affect the processing of applications, due to the automated underwriting, he said.

And because they are paid based on commissions, individual mortgage brokers and agents would have no reason to discriminate in the first place, several lenders said.

"Nobody gets paid a nickel for denying a loan," said Steve Covington, a spokesman for First Horizon Home Loans, based in Irving, Texas.

Consequently, several lenders said they were at a loss to explain why racial differences in denials continue to occur.

"I don't know for sure," said Paton, when asked why.

Others suggested that for whatever reasons, people of color generally just seem to have poorer credit ratings. This, they said, could be due to a combination of factors, whether economic, historical, cultural or educational.

"Wealth in the United States is not distributed equally," said Covington. "Whites would tend to have more assets and reserves" that can help them secure a loan.

Gene Mills, a senior vice president of locally based Classic Mortgage, said he believes people of color are still suffering from past discrimination, which has put them at an economic disadvantage.

"Because of disparate treatment in the past, they are still catching up," Mills said. "They're still struggling to dig themselves out of that hole."

Roman Tafoya, immediate past president of the Colorado Springs Hispanic Chamber of Commerce, said he believes cultural attitudes play a role. Tafoya has worked for 30 years in the local mortgage-lending business, previously at Peoples Mortgage and now at Wells Fargo.

"I don't think that there's any discrimination," said Tafoya, who insisted that credit scores and automated underwriting are "too objective" for that to be the case.

Blacks and Hispanics might simply not pay as much attention to their credit histories as whites do, Tafoya speculated. Hispanics in particular, he said, may be "less responsible" about their credit than whites.

Back of the bus

Fair-lending advocates, however, say those who deny that discrimination still is a problem are living in a fantasyland.

"When it comes to issues like the lending practices of the mortgage industry, blacks are still in the back of the bus," wrote Ishmael Reed, the prominent African-American author, addressing the topic in a New York Times op-ed on Jan. 16.

Jim Stewart, president of the Colorado Springs Black Chamber of Commerce -- who also serves as board chairman for Ent -- agreed.

"We would like to believe that the problems that existed in the 1960s no longer exist," Stewart said.

But in reality, people are still treated differently based on race, he said.

"If I go downtown in blue jeans and go into a store, I'm treated differently," said Stewart, who is black. "My wife can still walk into a store and the clerk will follow her around."

Taylor, of the National Community Reinvestment Coalition, said his organization has done "mystery-shopping" tests in which it sends fake applicants out to apply for mortgage loans. Usually, a black woman and a white man will go to the same mortgage broker and present identical credit histories and other data. They then write detailed reports of their treatment, which frequently document differences, Taylor said.

For people of color, it's often a matter of brokers "not making them feel welcome, about making assumptions, about not being helpful," he said.

The coalition's findings are supported by a 1999 study carried out by the U.S. Department of Housing and Urban Development, which concluded that discrimination still plagues the national mortgage industry.

In addition to citing high differences in denial rates nationally, the department also did its own "mystery shopping" in several cities and found that people of color received less time and information when meeting with mortgage lenders, and were quoted higher interest rates, than whites.

"This is shocking to me," Andrew Cuomo, the Clinton administration's housing secretary, was quoted as saying when learning of the findings. "Discrimination is not just alive and well, it's flourishing. That's the sorry truth."

An easy out

Meanwhile, fair-lending advocates and even some lenders strongly question the "black box" argument -- the theory that automated underwriting has eliminated human bias.

"That response is somewhat of an 'easy out,'" said Mills, of Classic Mortgage. When an automated underwriting program rejects an application, a loan officer can still review the application to see if there are mitigating factors or other ways to qualify the customer for a loan, he pointed out.

In fact, most of the lenders interviewed by the Independent acknowledged that they have programs in place to manually review applications rejected by the black box.

Classic, which has some of the lowest denial rates for all ethnic groups, will manually underwrite many loans, Mills said.

And besides, even an entirely automated underwriting program wouldn't necessarily eliminate bias, critics charge.

Last year, a North Carolina woman who was denied loans several times filed a federal lawsuit against Fannie Mae, a quasi-governmental investment corporation that purchases mortgage loans from lenders. Fannie Mae has developed one of the most commonly used automated underwriting programs, the Desktop Underwriter. The lawsuit alleges that the program itself is written in such a way that it's inherently biased against people of color.

Fannie Mae is fighting the lawsuit, arguing that its program is "colorblind."

But Taylor says the mere fact that the program continues to produce skewed denial rates suggests the lawsuit may have merit.

"I think there's this mistaken belief that a credit-scoring system is a non-biased system," he said.

Under the one-size-fits-all approach of underwriting programs, minority populations may lose points for certain demographic characteristics that aren't necessarily true indicators of whether or not they are likely to default on a loan, Taylor argues.

"It's an ineffective way of dealing with a population that doesn't fall into this plain-vanilla history of performance," he said.

For example, blacks with college degrees are likely to change jobs more often than college-educated whites, Taylor says. For blacks working in a white-dominated business world, the quickest way to advance up the career ladder is usually to change jobs, he explained.

However, under the current credit-scoring system, they lose points for changing jobs too often, Taylor points out.

The scoring systems also take away points for unpaid medical bills, even though studies have shown such unpaid bills are not a factor in whether a person is likely to default on a mortgage loan, Taylor says. People of color are more likely than whites to lack sufficient health insurance, so they are disproportionately affected, he says.

Financial illiteracy

Taylor also discounts Tafoya's theory that certain ethnic groups may be "less responsible" toward their credit.

"That isn't something that goes along racial lines," Taylor countered. A century ago, "they used to say that about the Irish 'they're lazy, they don't want to work.' ... It's just biases."

Still, he and others acknowledged that cultural differences -- tied with factors such as financial literacy and differences in education -- might be part of the reason why people of color generally have lower credit ratings.

Because they have historically been poorer, many blacks and Hispanics don't have the experience of growing up "watching your father or your mother balancing the checkbook, sending in the bills on time," Taylor said.

Stewart, of the Black Chamber of Commerce, said many Asian-American populations -- who are denied credit only slightly more often than whites -- have a long history of business ownership in America and consequently "know how money works."

In contrast, the black community, where business ownership has historically been low, "doesn't have a clue," Stewart said. "The Hispanic community generally doesn't have a clue."

A huge market

Almost all of the leading lenders in the Colorado Springs market say they have programs in place to increase their lending to minorities, and many are launching new efforts.

Stewart says that as chairman of Ent, he has insisted on improving performance through increased minority hiring at all levels, employee training, and financial-management classes for credit union members.

Nonetheless, Ent continues to show great racial differences in denial rates.

Riley, of Washington Mutual, said it's her company's goal to be the No. 1 financial-services retailer in the country, and "we cannot do that without minority homeownership. It's a huge market."

Washington Mutual and First Horizon have each recently entered into partnerships with Fannie Mae to make hundreds of billions of dollars worth of credit available to low- and moderate-income customers, nationwide.

Wells Fargo, meanwhile, has developed a new "emerging markets" program that aims to increase lending to minorities by offering more flexible underwriting standards, and the company is planning to target underserved communities in Colorado Springs with dozens of financial seminars this year, Smith said.

Rick Gillespie, a spokesman for Horsham, Penn.based GMAC Mortgage, said his company has a fair-lending "oversight committee" that examines performance and does its own "mystery shopping" at GMAC branch offices. The company also emphasizes training and hiring minority employees, Gillespie said.

Between 1999 and 2001, GMAC and its affiliates had a local denial rate of just 3.2 percent for blacks and 4.5 percent for Hispanics, vs. 8.6 percent for whites.

Other lenders cite a variety of programs involving flexible underwriting, or their participation in mortgage-assistance programs through the Housing Finance Authority, which target first-time homebuyers.

The bulk of the programs, however, mainly just target low- to moderate-income people. That might not necessarily address the racial discrepancies in denial rates, because the discrepancies occur regardless of income level.

For example, in 2001, one-third of all the black and Latino applicants who were denied credit in Colorado Springs actually earned more than the median income for the area -- and consequently wouldn't benefit from programs that only target low- and moderate-income people.

Meanwhile, market-share data suggest a big part of the lenders' challenge is simply getting their marketing message out to people of color.

In 2001, Wells Fargo attracted 9.9 percent of all mortgage-loan applications from whites in El Paso County, but only 7.2 percent of all applications from minorities. The No. 2 lender, Countrywide Financial, attracted 7.6 percent of all applications from whites vs. just 6.5 percent of minority applications.

Taylor calls such discrepancies "disturbing." When large, mainstream lenders fail to target or reach minorities in their marketing efforts, so-called "subprime" lenders often step in to fill the gap, he says. Subprime lenders generally charge higher interest rates and fees than mainstream or "prime" lenders, and are frequently accused of hoodwinking customers into signing "predatory" loans, with exorbitant interest rates and fees [the Independent detailed this phenomenon in a Feb. 2, 2002 piece, which can be read online at www.csindy.com].

Subprime lenders supposedly charge higher rates and fees because their target market is borrowers who don't have good credit and therefore pose a greater risk. But about half of all subprime borrowers actually qualify for prime loans, Taylor says. And a disproportionate number of the people who end up with unnecessarily high rates and fees through subprime lenders are minorities, according to Taylor.

Good for business

Taylor has a series of recommendations that he encourages lenders to adopt in order to make serious headway.

They should certainly take advantage of government programs to help them reach low- to moderate-income people, he says. But they should also increase the use of flexible underwriting, and examine their pool of employees to see if they are "reflective of the communities they're trying to serve."

Lenders should also make sure bias is addressed in employee training, and they should offer financial-education programs in cooperation with community groups, Taylor recommends.

Reaching out through community groups is good business, because it will help lenders build relationships with prospective customers, Taylor argues.

"[If] they develop those kinds of relationships, those people are going to come back as clients," he said.

He also suggests that lenders advertise through minority-owned or minority-oriented media.

Meanwhile, community groups need to address the issue as well, Taylor says.

He recommends that groups use a "carrot and stick" approach. The carrot consists of learning which lenders are truly serving minority communities and rewarding them by doing business with them and urging local governments to do the same.

The stick part is to "make it known who's disproportionately denying blacks and Hispanics," and holding them accountable by filing complaints against them, Taylor said.

In judging lenders, he recommends ignoring their publicity-oriented efforts, such as issuing grants to local organizations. The proof is in the pudding, so organizations should simply look at who's actually lending money to minority customers, he says.

"Look at the data," Taylor advised. "The data does not lie."

Pooling their money

But whether local groups are ready to take up the cause is a big question, according to Pastor Lee.

Lee says he's tried to get community organizations interested in the issue for years, with limited success. He has recommended that local black churches and organizations, and their members, pool their money and then challenge lenders to make them offers for financial services, tied with commitments to hire people of color. Such a strategy would work by wielding the financial clout of the black community, Lee maintains.

"Blacks spend a lot of money in this town," he said.

But he's been frustrated by a general lack of enthusiasm for the idea. "To others, it seems like an impossibility."

Deborah Wilson, president of the Urban League of the Pikes Peak Region, acknowledged that mortgage denial rates have not been a focus of the League, even though its mission centers on creating equal opportunities for minorities.

"We haven't done a lot of work locally in looking at this," Wilson said.

But the issue is important, she said, because homeownership is the key to attaining economic parity for minorities. As of 2001, only 48 percent of black families in the United States owned their homes, compared with 74 percent of white families, Wilson said.

"That was the rate in the 1940s, so we're not making a lot of progress," she observed.

According to Lee, all the challenges facing minorities -- from education to health care -- are ultimately connected to economics. And for minorities to have a say in the economy, it is critical that they have access to capital.

"Everything evolves around economics," Lee said. "It's important to have a strong economic base. Without that, you get nothing."

How this report was researched

To determine mortgage-loan denial rates, the Independent analyzed data filed with the Federal Financial Institutions Examination Council by the lenders themselves, as required under the Home Mortgage Disclosure Act. The data is available online at www.ffiec.gov.

The analysis focuses on mortgage applications where race was specified but does not take into account applications where race was unknown or listed as "other." Joint applications where co-applicants listed different races were also excluded. The rates are based on cumulative totals of applications for government-assisted home-purchase loans, conventional home-purchase loans, home-improvement loans and refinance loans.

In analyzing individual lenders, the Independent counted different affiliates of the same company as a single lender. In the case of Wells Fargo, numbers for 1999 and 2000 include affiliates of Norwest Bank, which became Wells Fargo in 2000. "Leading lenders" are defined as those that processed the greatest numbers of mortgage-loan applications in Colorado Springs in the 1999-2001 time period.

capsule

If you're worried about being a victim of racial discrimination when applying for a mortgage loan, an option is to apply online. When applying online, you may be asked to state your race, but you can choose not to. (When you apply in person, the broker is legally required to enter your race into the application.) Most large lenders offer online applications through their Web sites, or you can use third-party sites such as eLoans.com or LendingTree.com.

  • For minorities applying for mortgage loans, the system is far from colorblind

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