BYU Professor Uncovers Racial Discrimination in Mortgage Lending

Applying for a mortgage can be a stressful experience. Aside from the difficulty of gathering all the necessary documents, there is the stress of waiting to find out what type of loan one qualifies for, and for what amount. A lot depends upon those two pieces of information. One hopes that one’s race is not one of the factors taken into consideration by the bankers when deciding what loan to approve you for, but a 2015 study by BYU Sociology . Professor Jacob Rugh, proves that that is not the case, at least in the city of Baltimore in the early 2000’s.

Subprime Lending

Of all the mortgage financing options available, subprime loans are perhaps some of the least desirable, as they carry higher interest rates and are designed for those who don’t qualify for prime loans. Dr. Rugh and his co-authors, discovered that, in that city at that time, even if some African Americans qualified for prime loans, they were given subprime loans. Furthermore, extra clauses and more fees were often attached. Their study was published in the journal Social Problems. In June of 2016, it was awarded the John Hope Franklin Prize for the Best Article on Race, Racism and the Law. The prize is named after a historian and civil rights pioneer who studied racial politics.

“Not only were black borrowers more likely to receive more costly mortgages on the basis of race and neighborhood composition,” says Rugh, “they were also more likely to be channeled into riskier loan products. After controlling for underwriting criteria, loan characteristics, and contextual factors, the likelihood of receiving a combined-risk loan  was greater for black than white borrowers by 14.8 percent and greater for black borrowers living in black neighborhoods than for whites living in white neighborhoods by 15.1 percent.”

The Result: Large Settlement

In 2012, according to the Baltimore Sun, the city alleged that Wells Fargo steered minorities into subprime loans, gave them less favorable rates than white borrowers and foreclosed on hundreds of Baltimore homes, creating blight and higher public safety costs. Wells Fargo is the largest residential home mortgage originator in the United States. The company agreed to settle with the city of Baltimore for $175 million. Says Rugh: “This was the first time that a city had sued [an entity for this reason], and the settlement was the second biggest of its kind.”
Of the purpose of the study, he adds:”we demonstrate how processes of cumulative disadvantage continue to undermine black socioeconomic status in the United States today,” but adds: “Social stratification isn’t necessarily always the result of intentional discrimination. Sometimes it’s the result of unintentional processes.”

Take-aways

Regardless of its causes, Rugh makes the following recommendations for policymakers, lenders, consumer protection groups, and individuals:
  • implement, or advocate the implementation of, increased civil rights enforcement by institutionalizing ongoing audits and other cost-effective means to monitor racial disparities and increase transparency in ways that remediate systematic patterns at the level of structure and policies rather than isolated acts of individuals.
  • offer only safe, fixed-rate mortgages and down payment ratios that make home ownership, wealth accumulation, and social mobility accessible for borrowers of color.
  • own other assets besides a mortgage, thus reducing your risk

 

What do you think of this study?

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