Five years ago, the banking industry was under siege on the fair- lending front.
The government's first disclosure of racial patterns in mortgage lending was prompting widespread charges of discrimination. Congressional leaders were pointing fingers at regulators and calling for hearings. Bankers were either attacking the data or trying to lay low.
Not anymore. Banks and other mortgage lenders have rolled up their sleeves and sharply boosted business with members of minority groups. As a result, the industry has been winning plaudits from a wide variety of government officials, community activists, and others.
Attorney General Janet Reno almost gushes about the progress.
"I have just appreciated the whole response of the industry," she said in an interview. "It is an example of what happens when people sit down and work together."
In this article and three to follow, the American Banker will explore what has transpired since those first disclosures about the racial makeup of the mortgage market. The series will examine the lessons that lenders have learned, the opportunities that many have found, and the new risks that the industry may have taken on.
In many respects, experts say, the fair-lending drive is still in its infancy. Recently developed lending techniques have yet to be tested in a recession. Many low-income markets have yet to be fully served. And lenders are still uncertain of all their legal obligations. (See story, page 3.)
Still, the progress has been unmistakable. Annual mortgage originations for African-Americans, Hispanics, and members of other minority groups have jumped about 130% since 1990, the first year for which lenders were required to report racial data under the Home Mortgage Disclosure Act. That's nearly twice the growth rate of the total market.
"No one can dispute that many banks have found a way to be lending in areas where they were not lending before," said Matthew Lee, executive director of Inner City Press/Community on the Move, a Bronx-based activist group. "The trend is clearly moving in the right direction."
Thousands of lives already have been changed. People who once felt excluded from the housing market are suddenly being courted by lenders offering a variety deals featuring low down payments and flexible underwriting standards.
Regina Burden-Cook, a 34-year-old black resident of Boston's Dorchester neighborhood, availed herself of one such offer.
"The program made it affordable for me as a single mom to get a home, keep it, and maintain it," she says.
In the view of many bankers and observers, the rise in lending to minority groups stems directly from the requirements of the disclosure act. The first unveiling of the racial data, in October of 1991, placed intense public pressure on the industry to reach out to minorities. The data showed that even within the same income group, white people were nearly twice as likely as blacks to get loans.
In subsequent years, experts say, the disclosure act information has served not only as a motivator but as an analytical tool for lenders exploring low-income markets.
"The fact is that before, we didn't get the information that we were missing this market segment," says Catherine Bessant, senior vice president and head of community reinvestment at NationsBank Corp.
Of course, the mortgage disclosure act also has attracted complaints from the industry. Bankers say that some activists have used the data to unfairly attack lenders. Indeed, some lenders have stayed away from inner- city lending for fear of running up high rejection rates that will be scrutinized and criticized. Meanwhile, the disclosure requirements have added considerably to compliance costs.
What do regulators think?
"The burden of HMDA troubles me," says Eugene A. Ludwig, comptroller of the currency. "But at the same time it has done good. It has produced information that allows banks to market loans more successfully to minorities."
A Law Takes Shape
The Home Mortgage Disclosure Act, oddly enough, grew out of what Emory University professor George Bentson calls an "anti-minority and anti-poor movement."
In the 1970s, he says, residents in Irish and Italian communities of New York and Chicago were seeking to renovate buildings out of fear that run- down properties would encourage members of minority groups to move in. The white residents, however, had trouble getting loans. So they began looking for data to back up their claims that lenders were avoiding their neighborhoods.
At the same time, William Proxmire, then chairman of the Senate Banking Committee, was expressing worries about the lack of credit in the inner city.
These two forces combined to push the initial Home Mortgage Disclosure Act through Congress. The law required banks to disclose the number and total dollar value of mortgages either originated or purchased by a bank in each metropolitan statistical area.
The act didn't evolve into a civil rights law until the mid-1980s, when activists in low-income and minority communities tried to use the data to show that banks discriminated. Their efforts, however, were stymied because the HMDA data did not include any information on the race, ethnicity, or income of borrowers.
Rep. Joseph P. Kennedy 2d, D-Mass., responded by tucking an amendment for expanded disclosure requirements into the 1989 thrift bailout bill. The amendment narrowly passed on the House floor. The industry eventually endorsed the measure after lawmakers agreed to let banks voluntarily report the reason for each rejection.
Rep. Kennedy said he saw no alternative but to push for better data.
"I kept running into working people who were turned down for mortgages," he says. "Yet, every banker I ever talked to about this denied that loan decisions had anything to do with race."
Although Congress substantially revised the act in 1989, the requirement for banks to collect race and gender information didn't kick in until 1990.
The first year's data, which covered 1990, focused public attention on disparate rejection rates for whites and minorities. The numbers were publicized on the front pages of newspapers across the country - and immediately drew charges of bias from activists.
But the real fire storm occurred the following year, when the 1991 data were released. They showed that originations of loans for blacks and Hispanics fell 4.6% and 10.5%, respectively, from 1990 to 1991 even as loans to whites rose 1.3%. Rejection rates, meanwhile, stayed high: blacks didn't get loans 37% of the time, compared to a 17% rejection rate for whites.
This second round of data came just months after race riots broke out in Los Angeles. The riots - provoked by the acquittals of police officers in the Rodney King beating case - had thrust urban issues like housing and fair-lending to the forefront of national debate. Bankers were very much on the hot seat.
Soon, the federal government was deeply involved in fair-lending cases. The racial data from HMDA "had a very profound effect on the Justice Department," said Richard Ritter, a former federal prosecutor. "But for the publication of HMDA, I doubt you would have seen back then the attention and interest in fair-lending as a major civil rights issue."
Beginning with the September 1992 settlement with Decatur Federal Savings and Loan in Georgia, the Justice Department has kept busy investigating banks.
Its 1994 settlement of redlining charges against Chevy Chase Federal Savings Bank sent shivers through the industry. Bankers feared the government would prosecute any lender that concentrated its marketing efforts on the suburbs rather than the inner city.
Although these predictions never materialized, banks did pump tens of millions of dollars into low-income and minority loan programs to boost their inner-city businesses.
Whether out of fear or a sense of duty, mortgage lenders of all stripes - banks, thrifts, mortgage companies, and secondary-market agencies - have taken big steps to even up the HMDA numbers.
And the fruits of those efforts became evident over the past few years; from 1993 to 1995 mortgage originations to blacks and Hispanics grew 70% and 48%, respectively.
Once shamed, the industry is now openly beating its chest.
"Commercial banking has made tremendous strides and responded to a big challenge," said Donald Mullane, executive vice president at BankAmerica Corp. "We candidly have done a tremendous job."
Though rejection rates remain stubbornly disparate, many observers share Mr. Mullane's view.
Ms. Reno said bankers have adjusted their underwriting criteria so more applicants can qualify for mortgages. This, she said, has produced "a significant increase in the number of Americans who now have the opportunity to achieve the dream of owning their own home."
Many lenders now offer a variety of low-income lending products. NationsBank and First Union Corp., for example, offer mortgages with no down payments or closing costs to borrowers who pass a homebuyer education program. Banks also work with Fannie Mae and Freddie Mac, which relax their underwriting standards for borrowers that complete home education programs. Others offer unsecured loans to help borrowers meet down-payment requirements for conventional loans.
"HMDA has made people look for ways to get people into the mortgage stream for the first time and lead to the creation of untraditional credit terms," said Joe Belew, president of the Consumer Bankers Association. "This has an upside and a downside, because some of these loans are not viable from the get-go because they can be so expensive to book."
Tomorrow: New Approaches to Lending