It’s hard enough to buy a home, without someone gaming the system against you. Although the predatory and discriminatory lending practices that fueled the 2008 housing crisis have since been forbidden under the Dodd-Frank Act, today mortgage loan discrimination is subtler, more insidious — and perhaps just as costly.
Loosening the grip of tight lending standards
After the housing collapse, a tight credit environment reduced the number of mortgage loans issued to potential homeowners with less-than-perfect credit, especially minorities. Research conducted by the Urban Institute in 2014 found a drop of as many as 1.2 million loans could be attributed to tightening credit, with African-American and Hispanic borrowers disproportionately affected.
Even now that some lending restrictions have been eased, a credit gap persists in America.
“Equal access to mortgage credit for minorities remains a serious issue,” Laurie Goodman, director of the Housing Finance Policy Center at the Urban Institute, tells NerdWallet. “In fact, equal access to credit for all creditworthy borrowers is a major challenge. And, since minorities generally have lower credit scores than white, non-Hispanic Americans, this challenge disproportionately affects minority borrowers.”
Mortgage discrimination remains
"I am hopeful that many of the unfair practices that we saw in the marketplace, particularly during the recent foreclosure crisis, are no longer present," Nikitra Bailey, executive vice president with the Center for Responsible Lending, tells NerdWallet. The passage of Dodd-Frank regulations sought to stem mortgage lending abuses such as balloon payments, teaser interest rates and high fees — called "fee packing."
Today, lenders are required to make a good-faith determination of a borrower's ability to afford a mortgage.
"We've solved some of the challenges in the marketplace, but we haven't eliminated mortgage discrimination," Bailey concedes.
That discrimination often comes in the form of higher mortgage interest rates. Black borrowers pay home loan rates more than a quarter-point higher than comparable white borrowers, according to research led by Ping Cheng of Florida Atlantic University, published in 2015 in The Journal of Real Estate Finance and Economics.
The higher rates are most often given to young borrowers with low education and to black women more than black men, according to the paper.
“It is the more financially vulnerable black women who suffer the most,” the study concludes.
Creditworthy minorities without access to credit
However, in many cases, mortgage discrimination surfaces not only in the form of higher costs but also as barring access to a mortgage. And the discrimination can impact individual families and entire neighborhoods.
In 2015, the Consumer Financial Protection Bureau and the Department of Justice accused Hudson City Bancorp, a Paramus, New Jersey bank, of engaging in the practice of "redlining" — excluding entire majority-black-and-Hispanic neighborhoods — in New York, New Jersey, Connecticut and Pennsylvania from home mortgage lending services.
The regulators announced a record-setting $33 million settlement with the bank in September.
"Lower-income families and moderate-income families and many borrowers of color have been pushed out of the marketplace. Now what we're wrestling with is figuring out a way to ensure that the market is actually serving all creditworthy borrowers,” Bailey adds.
What you can do if mortgage discrimination happens to you
Federal regulations are clear. The Fair Housing Act makes it unlawful to discriminate in the rental or sale of housing — or to impose different terms and conditions of a transaction — based on national origin, race, color, religion, sex, familial status or disability. And the Equal Credit Opportunity Act bans credit discrimination based on race, color, religion, national origin, gender, marital status, age and if a borrower receives income from any public assistance program.
State or local laws may prohibit discrimination for other reasons as well.
To avoid mortgage discrimination, potential borrowers should shop multiple lenders. Not only will that help you find the best mortgage interest rate, but it could also identify lenders that are discriminating with higher rates — or a lack of credit access.
Slight differences in rates from one lender to the next — a quarter point or so here or there — are to be expected. But if one lender quotes a rate that seems way off base — or declines your application altogether when others didn't — you may want to raise a flag.
Of course, if a lender offers you a high rate that seems way out of line, you'll naturally want to snap up a lower interest rate offer and go about your business. Regardless of whether you believe a lender is truly discriminating, it's worth raising the issue — if not for yourself, then for other would-be borrowers who don't shop multiple lenders and might be taken advantage of.
So if you suspect discrimination?
"The first thing you should do is complain to the lender," says Bailey of the Center for Responsible Lending. She also suggests:
Generally, you should file a complaint within one year, but HUD suggests you file as soon as possible.
Knowing what mortgage discrimination is — and refusing to let it continue — can help your family, and generations to come, live in the safe homes and friendly neighborhoods they deserve.
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