JUST SAY NO
by ABC2 News Investigator Tisha Thompson

“You know, discrimination is a very ugly thing.”

That’s according to Congressman Elijah Cummings (D-MD) in response to a two-month ABC2 News Investigation that’s found Latinos, African-Americans and other minority groups received two to three times as many high-risk loans, regardless of their income, when compared to their white, non-Hispanic neighbors in the last few years.

Look at whether your race, ethnicity or gender influences the kind of loan you get:

Or look at if the county you live in makes a difference

The ABC2 News investigators looked at more than 1.7 million loans made in Maryland between 2004 and 2005. We found one out of six loans were what the Federal government terms subprime. “Subprime loans are not necessarily predatory loans,” says Phillip Robinson of Civil Justice Network, a Baltimore-based legal aid group.
He and other consumer advocates say subprime loans were created for people with poor credit scores to help them buy a home. They are typically 3% higher than a standard “prime” loan given to people with good credit. But Robinson says “what makes it predatory is when the system is abused. A prime borrower should get a prime loan, not a subprime loan.”

See if your lender’s subprime loans accounted for more than half of its total loans

The problem is the ABC2 News Investigators found what you look like may matter more than how much you make when it comes to subprime loans. The Center for Responsible Lending estimates as many as 50% of all subprime loans went to people who could have qualified for better interest rates. “A lot of them qualify for conventional loans,” Cummings. “That’s the part that eats away at my heart.”

Cummings and organizations like the Consumer Federation of America believe minority groups were targeted by unscrupulous brokers who thought they could “push” these more expensive loans onto minority groups, including the elderly and women. True subprime borrowers should “get a fixed rate mortgage,” says Ardie Hollifield for the Center for Responsible Lending. They need to avoid “designer” loans that carry high-risk options, like interest-only, payment-option, 100% financing and adjustable rates. “Get as traditional a loan as possible,” Hollifield says.

But critics say many subprime brokers advertise these exotic loans by pushing very low payments and rarely mention the high-interest rates – which often exploded two to three years into the loan agreement. “40% of borrowers don’t know how high their rate can get,” Allen Fishbein of the Consumer Federation of America says. “It can be blatant discrimination.”

Which greatly troubles Secretary Thomas Perez, who is charge of monitoring Maryland’s mortgage industry. “If you control for income,” like ABC2 News did in this study, “you still have disparities,” he says. “I find it offensive when people say ‘Oh, upper income African-Americans must have credit problems.’ That’s an offensive notion to me.” Instead, Perez says, “People are getting steered into loans that are setting them up for failure. Does discrimination play a role for explaining why African-Americans and Latinos have had so much difficulty? Absolutely.”

HOW WE DID IT
The ABC2 News Investigators analyzed more than 1.7 million loans made in Maryland in 2004 and 2005 using data provided by the federal government. Lenders are required to report race, ethnicity, gender, income and the location of each loan as required by the Federal Home Mortgage Disclosure Act (HMDA).

Unfortunately, the HMDA only requires lenders to report income and nothing else. As a result, ABC2 News was unable to determine whether credit scores, debt-to-income ratio, employment history or other financial factors impacted the price of the loan.

For lender information, ABC2 News looked at the total number of first and subordinate liens made by all lenders in both 2004 and 2005. For race, ethnicity, gender, income and location, ABC2 News further refined the data to concentrate just on single-family, first lien, conventional loans. We then divided the loans into three categories: home purchases, home refinance and home improvement loans. Income levels were based on the most recent Census data for the state of Maryland, which indicates roughly one-third of families in the state make $50,000 or less, one-third makes between $50,000 and $75,000 and another third makes $75,000 or more.

The Federal Reserve splits HMDA loans into two categories: prime/near-prime loans and subprime loans. Prime or near-prime loans have interest rates that are below 3 percentage points for first lien loans, or below 5 percentage points for all subordinate loans, of the comparable Treasury yield threshold. Higher-priced subprime loans have interest rates 3 points or more above the threshold for first-lien loans, 5 points or more for all subordinate liens.

In 2005, the Federal Reserve Board noted the short-term and long-term interest rate yield curve flattened and ultimately inverted, meaning the short-term interest rates which lenders often use to set mortgage prices rose above longer-term interest rates HMDA regulations use to set “reportable” high-cost or subprime loans. This means that some of the increase in reportable loans was the result of changes in the interest rate environment and does not necessarily mean that subprime lending substantially increased. However, as the Federal Reserve noted in its HMDA guidance report in April 2006, “business practices of lenders or the risk profiles or the borrowing practices also could have affected the proportion of loans reported as higher-yield loans.”