Data collected by bank regulators under the Home Mortgage Disclosure Act indicate that neighborhood mortgage lending declines as the percentage of minority population increases. and that the frequency of denial of mortgage applications is comparatively high for minority applicants.

In large measure, these patterns result from factors beyond the control of mortgage lenders. Nevertheless, there may be room for improvement in the way mortgage lenders serve minority communities.

Mortgage lending is a complex process involving several stages -- marketing and advertising loan products, delineating credit standards, advising or counseling prospective applicants. and processing applications.

A lender may miss an opportunity to extend credit to minority borrowers at any stage in the complex process of mortgage lending. The key to improvement is to remain mindful of potential pitfalls that may hinder borrowing by minorities.

The following hypothetical scenarios are intended to illustrate this point. I arrived at the first after considering that in two well-publicized cases, the Boston Federal Reserve Bank study and the Decatur Federal investigation, lenders appeared to exhibit bias in their treatment of "marginal" applicants.

Scenario One: Too few applications were coming in. and fixed costs were cutting into profits. Therefore, we relaxed our underwriting standards slightly. We also recruited a mortgage broker to tap into a new market outside our area. After six months business returned to normal.

Ordinarily, a third of our applicants are black. Over this six-month period, however, only one-fifth of our applicants were black because the mortgage broker's activity was confined to white neighborhoods. As a result, the proportion of white applicants increased, at the same time that we had relaxed our underwriting standards

This lender might conclude that next time the institution should make sure the broker has a good record of serving minority, communities.

Some observers of the mortgage lending industry have argued that appraisals can create unwarranted obstacles to minority borrowing. In particular, lenders sometimes rely on appraisers who are unfamiliar minority neighborhoods.

Scenario Two: We are a small institution whose primary service area is predominantly white. We receive an application to purchase a property just outside our traditional service area, in a black neighborhood. Although the appraisers we usually deal with are not familiar with that neighborhood, we rely on one of them to appraise the property.

This property is on a nice block, though adjacent blocks are in poor condition. Because similar houses on these adjacent blocks have sold for less than the price of the house in question, the appraisal comes in low. What the appraiser does not know is that the price of the property in question reflects its true value, because there is little risk that properties on this particular block will fall into abandonment or disrepair. We deny the loan.

This lender could conclude after reviewing this situation, that the appraisal is suspect because the appraiser has had no previous experience with properties in this neighborhood. The next time around an effort should be made to find an appraiser more qualified for assessing the value of the property.

In my research I have found that the Delaware Valley Mortgage Plan. a community reinvestment initiative undertaken by a group of banks in Philadelphia, has succeeded at widening the scope of mortgage activity in the city's low- and moderate-income neighborhoods.

In part, this success can be traced to working closely with neighborhood realty agents and community organizations.

Thus, it appears that lenders can influence mortgage demand. Households that may have stayed out of the mortgage market, because of uncertainty whether they could obtain a loan. may be encouraged to enter. My next scenario focuses on a lender who may be missing an opportunity to thus reach out:

Scenario Three: Our institution wants to expand low-income lending while maintaining acceptable credit standards. We contact two realty agents, one in a low-income black neighborhood (agent 1) and one in a low-income while neighborhood (agent 2).

Agent 1 sends three applicants; they do not meet our credit standards and are rejected. Agent 2 also sends three applicants, two of whom meet the standards and are accepted. We phone agents 2 and express our gratitude. We do not phone agent 1. Subsequently, only agent 2 sends us applicants, almost all of whom are white.

This lender might conclude that the decision not to make a follow-up call to agent 1 was premature and it's not too late to phone agent 1, reaffirm the institution's willingness to lend, and explain its credit standards.

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