Calif. Group Sees Redlining in Data; Lenders Disagree

A community group says minorities in California were twice as likely as whites to have a home loan application denied in 2008, raising concerns that large lenders have returned to the practice of redlining.

In a study titled "From Foreclosure to Re-Redlining," the California Reinvestment Coalition used Home Mortgage Disclosure Act data to analyze lending patterns in five California cities.

The 45-page report, which the group was to release today, examined the overall drop in prime lending from 2006 to 2008 and claims that lower-cost prime loans fell dramatically in minority neighborhoods during that period as compared to white neighborhoods.

Redlining, the practice of denying, discouraging or increasing the cost of banking services to residents on the basis of race or ethnicity, is forbidden by the Community Reinvestment Act of 1977.

The report claims Bank of America Corp. and Citigroup Inc. were three times as likely to deny loans to minorities than to whites in Los Angeles in 2008, while Wells Fargo & Co. was three times more likely to do so in Oakland and San Diego.

In a statement, Bank of America took issue with the report. "Our performance is better than CRC claims and, specifically, our denial disparity ratios are lower than they calculate," it said. "We have not been able to replicate the numbers CRC is publishing, nor are we able to determine their exact methodology, but we hope to discuss this with them in the near future."

Lenders have claimed for years that there is no way to link high-cost lending with abusive practices, because data compiled by the Federal Reserve banks omits credit scores and loan-to-value ratios out of concern for borrower privacy.

After reviewing the report, lenders raised the same issues, saying there is likewise no way to link loan-denial rates to minority status.

"All of our lending decisions are based on risk factors such as credit scores and not the customer's race," said Kevin Waetke, a Wells Fargo spokesman. He said his company was the No. 1 originator of home loans to African-Americans, Hispanics, Asians, Native Americans and residents of low- and moderate-income neighborhoods in 2008.

Mark Rodgers, a spokesman for Citi, said the risk profile of each borrower is based on credit scores, loan-to-value ratios and debt-to-income ratios. "We consider each applicant by the same objective criteria, which are blind to race, ethnicity and gender," he said.

Kevin Stein, the associate director of the California Reinvestment Coalition, a nonprofit that has 275 nonprofit and public agency member groups, said the denial of prime loans has been felt disproportionately in "neighborhoods of color."

Using Los Angeles as an example, Stein said more than one-third of prime loans in 2006 were made in minority neighborhoods, but that this number had dropped to 28% by 2008.

"You would think that if prime lending had dropped overall, it would drop equally."

The report also claims that minority borrowers are being denied loan modifications because they received a disproportionately higher number of subprime and option adjustable-rate mortgages, which are harder to modify, during the housing boom. (The study acknowledges that public HMDA data does not identify option ARMs separately.)

Several lenders pointed out that while the Treasury Department collects data (data that is not made available to the public) from servicers on the Home Affordable Modification Program, defaulted borrowers are not identified by race or ethnicity, making it hard to tell whether denial rates for loan mods are higher for minorities.

Ed Pinto, a mortgage industry consultant and former chief risk officer at Fannie Mae, blamed policymakers for forcing the adoption of loose underwriting guidelines in the late 1990s in an effort to increase homeownership, particularly among minorities. "It was only by eliminating or weakening underwriting principles that the goal of increasing [loan] demand could be accomplished," he said.

Stein said his coalition had advocated for stricter lending standards that would make credit available equally to qualified borrowers regardless of race or ethnicity.

"For the last decade, we've been saying that we need to stop flooding these neighborhoods with bad credit, and the industry fought against it and made loans without regard to the borrower's ability to pay," he said. "Now the pendulum has swung back, so people are having a hard time getting a loan or a mod. The banks made a lot of money in the short term by selling unsustainable loans, and they've been getting assistance from the government while the communities have been destabilized."