With the perennial regularity of the flu, charges of mortgage discrimination continue to afflict the nation's banks.
In October, Rep. Charles Schumer, D-N.Y., released a study showing that upper-income African-Americans were at least twice as likely as their white counterparts to have their mortgage applications rejected by New York-area banks.
In August, an Albany-based savings bank settled with the Justice Department rather than confront charges that it blatantly redlined entire minority communities.
Mortgage discrimination has profound societal consequences, unfairly dashing the American dream of homeownership for minority loan applicants.
Recognizing the gravity of the issue, Congress has tried numerous remedies. In the 1960s, evidence of redlining helped give rise to the Fair Housing Act, landmark civil rights legislation that prohibits discrimination in mortgage lending and in other components of residential real estate transactions.
In the 1970s, Congress enacted the Equal Credit Opportunity Act, requiring lenders to tell rejected applicants why they were denied credit, and the Community Reinvestment Act, obliging banks to extend credit to their entire communities.
The 1990s saw mortgage lenders subjected to an enhanced Home Mortgage Disclosure Act, requiring them to publicly compile demographic information on mortgage loan applicants, including the prospective borrower's race, income, property location, and whether a loan was approved.
Yet even after 30 years of remedial legislation and enforcement, the issue remains as contentious and amorphous as ever.
Critics of mortgage lending practices, such as Rep. Schumer, cite HMDA statistics which year after year show that minority applicants are more frequently rejected for loans than are whites. Lenders counter that these statistics cannot be used as evidence of discrimination, because they fail to reflect many key elements of a credit underwriting decision, such as property value and credit history. Banks further point to government examinations for fair-lending compliance which routinely afford them clean bills of health.
The seemingly ceaseless allegations and denials have added noise to the debate, but no light.
And whatever the merits, lenders, and particularly banks, are losing this battle in the court of public opinion. The mortgage industry's relatively complex and speculative explanations for disparity in lending to blacks and whites cannot compete with the simple and stark contrast reflected in the numbers offered by its critics.
Significantly, all sides agree on the goal of eradicating racial discrimination in mortgage lending. Not only are the societal benefits clear, but eradication is good for the mortgage business. Lenders make money from performing loans, and no rational lender wants to deny a mortgage to a creditworthy applicant.
But racial discrimination in lending cannot be eliminated nor will it be perceived as eliminated until the extent and nature of the problem is known.
HMDA data alone do not provide this information. Only a careful review of loan files can reveal what credit factors cause black applicants to be rejected at rates significantly higher than white applicants of like income.
File reviews provide the data necessary to test the various hypotheses offered to explain the discrepancy: Do blacks ask more frequently than whites for mortgage loans in amounts in excess of their ability to repay? Do blacks ask more frequently than whites for mortgage loans in amounts too large to be supported by the property's value? Are black applicants' credit or employment histories more tenuous than whites? Do they have less savings? And so on.
Some mortgage lenders already conduct file reviews in an attempt to root out any lending practice that has a racially discriminatory effect. But the results of their reviews are not made public, because lenders fear that doing so may expose them to legal liability. Indeed, in an attempt to encourage self-evaluations, federal law permits lenders to keep certain results confidential even from examiners.
Internal reviews with undisclosed findings, however, do little to assuage the public, especially when HMDA data continue to suggest that lending discrimination persists. As a result, the empirical evidence necessary to determine the nature and extent of home lending discrimination remains elusive or secreted.
It is in the interest of all parties, the industry, its customers, and its regulators to put this matter to rest, and it will require the cooperation of all parties.
Lenders must be willing to publicly provide the data necessary to analyze the issue; government must provide the framework for the analysis and protect the industry from any legal exposure that might result from the review; and the end result must be sound enough to convince the public that the nature and extent of the problem has been determined.
This is, no doubt, an expensive and resource-intensive process, as well as one that could prove embarrassing to some lenders. But it seems a reasonable price to pay for finally gaining access to the empirical evidence necessary to understand why HMDA data suggest that current lending practices are racially biased. The evidence would cause lenders to take corrective action where necessary, and any demand for additional legislation or regulation would be based on facts, not speculation.
And the broad brush of racism would no longer paint every lender. Some will find a rational basis for any disparity, and the public will know that their credit-approval processes are race-neutral. Others will be unable to reasonably explain the disparity and justifiably suffer the public relations consequences.
Or, the industry and its critics can continue to argue in a vacuum.