WASHINGTON -- Consumers Union has released a report that recommends steps for banks to identify and eliminate illegal discrimination.
"The Ammerican Dream: Ending Mortgage Discrimination and Opening the Door to Credit" deals with both overt bias and practices that may have an unfair impact on borrowers that is not obvious.
The report includes examples of specific programs that some of the nation's larger banks have offered to low-income and minority customers.
Consciousness Raising
"We hope the examples given will assist community groups that are seeking similar programs in their own regions and will expand the views of legislators, regulators, bankers, and other lenders to what is possible in serving poor and minority communities." said Michele Meier of Consumer Union's Washington, D.C., office.
The recommendations of the report include the following:
* Banks and regulators should conduct matched-paired testing to ensure that applicants of different racial and ethnic groups with similar financial circumstances are treated equally.
* Banks should review mortgage loan applications of minority and low-income applicants that are scheduled for denial to determine if a loan can be made.
* Banks should compare the rejected loan applications of minorities with approved loan applications of white applicants to determine if there has been discrimination.
* Fannie Mae and Freddie Mac should permit increased flexibility in loan underwriting for loans they will purchase. The report found that secondary-market underwriting guidelines such as housing and debt expense ratios of 28% and 36% are unrealistic. Most banks, it said, want to sell a large part of their fixed-rate home loans on the secondary market and will not make loans they cannot sell.
* Banks should make loans to creditworthy borrowers who do not meet the secondary-market criteria even if the banks cannot sell them to the secondary market.
* Private mortgage insurance carriers should set minimum goals to guarantee they insure an adequate number of loans to minority and low-income borrowers. They should also publicly disclose information, as banking institutions do, on the census tracts of the home loans they insure and the racial and ethnic characteristics of covered borrowers.
* Banking regulators should make it clare they expect banks and other regulated financial institutions to use creative ways to make loans to low-income and minority borrowers and increase the total amount of credit available to them. The report suggests that banks should concentrate on community outreach, including operating branches in minority and low-income areas and hiring people from those communities.
