There's No Place Like Home
There’s No Place Like Home: Access to Home Mortgages in the Rochester Area in 2004
Barbara van Kerkhove, Ph. D Principal Researcher and Author Empire Justice Center
January 2006 This research was supported by a generous grant from the City of Rochester.
Empire Justice is the only statewide, multi-issue, multi-strategy non-profit law firm focused on changing the “systems” within which poor and low income families live. With a focus on poverty law, Empire Justice undertakes research and training, acts as an informational clearinghouse, and provides litigation backup to local legal services programs and community based organizations. As an advocacy organization, we engage in legislative and administrative advocacy on behalf of those impacted by poverty and discrimination. As a non-profit law firm, we provide legal assistance to those in need and undertake impact litigation in order to protect and defend the rights of disenfranchised New Yorkers. Empire Justice Vision To be a statewide leader working to achieve social and economic justice for people in New York State who are poor, disabled or disenfranchised. Empire Justice Mission Empire Justice protects and strengthens the legal rights of those who are poor, disabled or disenfranchised through: systems change advocacy, training and support to other advocates and organizations, and high quality legal representation in civil matters. Board of Directors Rene Reixach, Esq. (Chair)
Tom Maligno, Esq.
Keith St. John, Esq. (Treasurer)
Barbara Finkelstein, Esq.
Amy L. Christensen, Esq. (Secretary)
James C. Moore, Esq.
James W. Lytle, Esq.
Lauren Breen, Esq.
JoAnn Smith Empire Justice Center Anne Erickson, President/CEO
Bryan Hetherington, Chief Counsel
One West Main Street, Suite 200 Rochester, NY 14614 (585) 454-4060 119 Washington Avenue 80 No. Broadway Albany, NY 12210 White Plains, NY 10603 (518) 462-6831 (914) 422-4329
There’s No Place Like Home: Access to Home Mortgages in the Rochester Area in 2004 was researched and written by Barbara van Kerkhove, Ph.D. in consultation with Ruhi Maker, Esq. Barbara van Kerkhove has worked with the Community Reinvestment Act (CRA) Project since April of 2001. In this capacity Ms. van Kerkhove analyzes mortgage lending and small business lending data for the Rochester metropolitan area. Such analyses include marketshare comparisons of the area’s top lenders and mapping their lending patterns. Her most recent analysis looked at lending patterns of HUD-designated subprime lenders. Ms. van Kerkhove provides support to the Greater Rochester Community Reinvestment Coalition (GRCRC) and maintains the City of Rochester-sponsored Housing Choice website (www.housingchoice.org ). She received her Ph.D. in Political Science from the University at Albany, SUNY in 2001. Ruhi Maker is an attorney with expertise in community reinvestment issues, including predatory lending, CRA and fair lending. Prior to Empire Justice Center, Ms. Maker worked as an attorney with the Monroe County Legal Assistance Corporation (MCLAC) in Rochester from 1989 to 1995 representing low-income tenants and working with the Community Development Block Grant Coalition on affordable housing issues in the City of Rochester. In 1994, she co-convened the GRCRC and now spends the majority of her time on community reinvestment issues. Ms. Maker has worked on an ongoing basis with non-profit organizations and area banks to develop strategies to address lack of lending to minorities. She participated in the committee that developed the Fair Housing Action Plan for the County of Monroe. Currently, she serves on the steering committee of New Yorkers for Responsible Lending. In 2004, Ms. Maker completed her three-year appointment to the Federal Reserve Board’s Consumer Advisory Council. She obtained her law degree in 1979 from the London School of Economics (University of London). The Greater Rochester Community Reinvestment Coalition (GRCRC) was convened in 1993 to generate discussion about lending patterns in Rochester. GRCRC has a membership of more than 30 locally based, not-for profit organizations and individuals. Using raw data made available through the Home Mortgage Disclosure Act (HMDA), the Coalition has released seven separate analyses of home mortgage, small business and subprime lending data for the Rochester area. GRCRC has used the analyses to identify strengths and weaknesses in lending patterns and to generate ongoing discussion with the banks that are monitored: Bank of America, JPMorgan Chase, Citigroup, Canandaigua National Bank, M&T Bank, HSBC and Charter One. The Coalition also submits comments, based on this data, to the appropriate State and Federal regulators who have oversight of the banks. Acknowledgements: Without ongoing support from the City of Rochester, this research as well as monitoring of mortgage lending and CRA compliance of Rochester’s top banks, would not be possible. Michelle Peterson and the rest of the Empire Justice Center design team were instrumental in the format and design of the report. Copyright © January 2006 Empire Justice Center Visit us online at: www.empirejustice.org
Table of Contents Introduction
1
Executive Summary
1
How 2004 Compares to 2003 Total Lending Home Purchase Lending Refinance Lending Conclusion: Outreach to minorities in low-volume v. high-volume years Lending in 2004 Applications Denials Originations High Cost Lending How the Rochester Area Compares to the Nation Overview Main Report Mortgage Lending in the Rochester Area How 2004 Compares to 2003 Changes in Total Lending Changes in Home Purchase Lending Changes in Refinance Lending Conclusion: Outreach to minorities in low volume v. high volume years A Focus on Lending in 2004 Applications Denials Distribution of Originations High Cost Lending Distributions of Originations Versus Distributions of High Cost Loans Comparing Rochester to the Nation
3 3 3 3 4 4 4 4 5 6 8 9 11 11 12 12 14 17 19 20 20 21 28 31 34 38
Appendix A: A Closer Look at Rochester’s Top 8 Banks Applications Denials High Cost Loans Lending by Rochester Area Top 8 Banks in Detail Applications Denials High Cost Loans Distribution of Originations Versus Distribution of High Cost Loans
42 42 42 42 43 43 43 48 52
Appendix B: Tables Table 1: Comparing Applications and Disposition by Race/Ethnicity, 2003-2004 Table 2: Disposition of Applications by Race/Ethnicity – AFI, Top 8 Banks, 2004 Table 3: Denial and High Cost Loan Disparities and Distribution of Applications And Lending by Race/Ethnicity-AFI, Top 8 Banks, 2004
56 57 58
There's No Place Like Home: Access to Home Mortgages in the Rochester Area in 2004 INTRODUCTION HMDA 2004—New Opportunities for Comparison The Empire Justice Center annually analyzes mortgage lending data for the Rochester Metropolitan Statistical Area (MSA).1 The 2004 Home Mortgage Disclosure Act (HMDA)2 lending data for the first time provides a new opportunity to analyze mortgage applications, originations and denials. The release of this new HMDA data includes, for each loan: • • •
the pricing of the loan and whether the loan’s Annual Percentage Rate (APR) exceeds the Treasury yield threshold (3% for 1st lien mortgages, 5% for subordinate liens) and, if so, how far above the applicable Treasury yield the loan’s APR is; better race/ethnicity data;3 and whether or not the loan is a federal Home Owners Equity Protection Act (HOEPA) loan.
In March, the Empire Justice Center requested the 2004 HMDA data from the area’s top banks4 and began examining their denial rates and the proportion of the loans that exceeded the APR threshold (and were high cost) by race and ethnicity. When we obtained the complete dataset from the Federal Financial Institutions Examination Council, we were able to compare the lending of the top institutions to other groups of institutions. EXECUTIVE SUMMARY As there was so much more information in the data from 2004, the Empire Justice Center focused on one area of analysis—lending and high cost lending to minorities, namely AfricanAmericans and Hispanics, and how they compare to lending to non-Hispanic whites. We examined applications, denial rates, originations and high cost loans for all applicants and African-American, Hispanic and non-Hispanic white applicants. We looked at total lending, home purchase lending and refinance lending for all financial institutions lending in the Rochester MSA, for the area’s top 8 banks and their affiliates, and for financial institutions other than the top 8 banks and their affiliates. These other financial institutions mainly consist of institutions that do not have Community Reinvestment Act (CRA) obligations in the Rochester area: depositories without a local branch presence, non-banks and 1
The Rochester MSA includes the following counties: Monroe (where the City of Rochester is), Livingston, Ontario, Orleans and Wayne. As of 2004, Genesee County is no longer considered part of the MSA. 2 For a definition of this and other lending-related terms, see Key Terms box on p. 2. 3 In the past, a large percentage of loans were recorded as race not available/applicable, thus skewing analysis of race ethnicity data. Lenders are now required to request this information for every applicant, even for phone and internet applicants. In the event the applicant refuses, the loan officer must enter the information to the best of his or her ability on the basis of observation. 4 The Rochester area’s top 8 banks based upon deposit marketshare are: Bank of America, Canandaigua National Bank, Chase, Citibank, Citizens Bank, HSBC, KeyBank and M&T Bank. Empire Justice Center
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credit unions. However, smaller depositories with a branch presence and CRA obligations in the Rochester area also are included in the “other financial institutions” category. We divided the area’s top 8 banks into those that had a history or tradition of subprime lending and those that did not have such a tradition. Our reasoning for this was that banks that had a history of subprime lending, through a Key Terms current or a past affiliate, would display AFI (All Financial Institutions): AFI include every HMDA-reporting different lending patterns than those financial institution in the market. Often an institution lending in a without such a history or tradition. particular category (for instance, low and moderate income census Banks with a history of subprime lending are more likely than banks without such a history to have mortgage products that fit higher-risk applicants. Historically subprime banks also may have a larger number of higher-risk applicants walking in their doors than historically prime banks. For example, they may have offices in traditionally underserved areas, work with mortgage brokers with a tradition of serving higher-risk applicants, and/or be seen in underserved communities to more likely approve loans. In determining whether a bank had a history or tradition of subprime lending, we looked at the Department of Housing and Urban Development (HUD) Subprime List to see if the bank had an affiliate or had acquired an affiliate that was recently on the HUD Subprime List.5 The banks with such affiliates are Chase, Citigroup, HSBC, and Key. These banks are considered the “four banks with a history of subprime lending” or, in the charts, the “Top 8 Subprime.” The banks that recently have had no affiliates on the HUD Subprime List are Bank of America, Canandaigua NB, Charter One, and M&T. These banks are considered the “four banks without a history of subprime lending” or, in the charts, the “Top 8 Prime.”
tracts) is measured against the lending of AFI for that same category. Also called “all institutions” in graphs.
HMDA: The federal Home Mortgage Disclosure Act requires lenders to publicly disclose information about the income, race, ethnicity and geographic area of the recipients of home mortgage loans. Information about applications and denials is also required. HOEPA (Home Ownership and Equity Protection Act): This act, passed in 1994, creates a special class of regulated loans that are made at high rates or with excessive costs and fees. These loans are subject to special disclosure requirements and lenders are prohibited from imposing certain terms that are deemed abusive. HUD (Department of Housing and Urban Development): HUD is a governmental organization that aims to increase homeownership, support community development, and increase access to affordable housing. MSA (Metropolitan Statistical Area): HMDA data is organized into Metropolitan Statistical Areas. The Rochester MSA includes Monroe, Livingston, Wayne, Orleans and Ontario Counties. Up through 2003, it also included Genesee County. OFI (Other Financial Institutions): OFI include every financial institution other than those included in the table. If the table represents lending by the top 8 banks, OFI will be lending all lenders but the top 8 banks. Also called “other institutions” in graphs. Origination: A mortgage loan made by a lender and secured by some amount of the mortagee’s or borrower’s real property. Subprime Loans: Loans are split up into two categories, prime and subprime. Subprime loans are meant to accommodate those who carry greater risk for the lender, and typically have higher interest rates than prime loans. Top 8 Banks: The top 8 depositories in the Rochester MSA based upon dollar amount of deposits. In order of deposit marketshare they are: HSBC, JPMorgan Chase, M&T, Citizens, Canandaigua NB, Bank of America, Citibank, and Keybank. Top 8 Subprime: Four of the top 8 banks with a recent history of having or acquiring affiliates which have been on the HUD Subprime List. These banks are: Chase, Citibank, Keybank and HSBC. Top 8 Prime: Four of the top 8 banks without a recent history of having or acquiring affiliates which have been on the HUD Subprime List. These banks are: Bank of America, Canandaigua NB, Citizens and M&T.
5
HUD Subprime and Manufactured Home Lender Lists can be found at: http://www.huduser.org/datasets/manu.html Empire Justice Center
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Following is a summary of our findings, which are described in more detail in the report. How 2004 Compares to 2003 Compared to 2003, the Rochester MSA in 2004 saw: • • • •
Significantly fewer mortgage loan applications overall One-third fewer mortgage originations A greater number of denials A substantially higher overall denial rate
Total Lending Total applications and originations were down for all applicants and non-Hispanic whites. However, total applications from, and loans to, African-Americans were up. Home Purchase Lending There were substantial declines in total lending and refinance lending between 2003 and 2004. However, home purchase lending for owner-occupied, 1-4 family units remained relatively stable. There was little change in the number of home purchase applications received by all financial institutions. Most denial rates increased slightly and most originations declined slightly. • • •
Home purchase lending to non-Hispanic whites decreased somewhat between 2003 and 2004. Home purchase applications from African-Americans increased by 20 percent and originations to African-Americans increased by 17 percent. For Hispanics, home purchase applications increased by 8 percent, while the number of originations remained stable.
Refinance Lending The vast majority of the decline in lending between 2003 and 2004 is due to the decline in refinance mortgage lending (1-4 family units). • • •
Refinance applications declined by 30 percent to 39,731. Refinance originations declined by 55 percent to 14,282. The refinance denial rate jumped to 30 percent, an increase of eight points.
The total number of refinance denials declined between 2003 and 2004. However, they increased for African-American and Hispanic applicants and remained stable for white applicants. Refinance denial rates, however, increased for all groups, particularly for whites. Still, nonHispanic whites had the lowest denial rate in 2004. One in four whites were denied a refinance loan in 2004. One in two African-Americans and over one in three Hispanics were denied a refinance loan.
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Conclusion: Outreach to minorities in low-volume v. high-volume years Total lending and home purchase and refinance lending in the Rochester area declined between 2003 and 2004. Residents submitted fewer applications and lenders made fewer loans. However, it looks like lenders are “casting a wider net” to African-Americans and Hispanics. Total lending and home purchase and refinance applications were up for African-Americans and Hispanics. Moreover, total originations and home purchase originations were up for African-Americans. As a result of these changes, African-Americans and Hispanics were able to capture higher proportions of total, home purchase and refinance applications and originations in 2004 than in 2003. The refinance origination and application figures, however, also show something troubling. Changes in refinance lending appear to be driven, in large part, by decreases in applications from, and loans to, whites. During “big” refinance years such as 2003, lenders may do less to reach out to minorities. This apparent lack of outreach to minorities during high volume years may be due to loan origination staff being overwhelmed by the inundation of applications. As banks consolidate community lending departments into their overall mortgage lending areas, there will be even fewer staff persons able to conduct outreach to traditionally underserved communities during high-volume years. Lending in 2004 Applications Of the 56,886 1st lien 1-4 family mortgage applications submitted to financial institutions in 2004, 40 percent were to the area’s top 8 banks and their affiliates, and • • •
71 percent were from non-Hispanic whites 7 percent were from African-Americans 3 percent were from Hispanics
While only 26 percent of white applicants submitted applications to the area’s top 8 lenders with a history of subprime lending, 39 percent of African-American applicants and 30 percent of Hispanic applicants did so. Denials Of the 56,886 applications submitted in the Rochester area in 2004, 13,355 or 24 percent were denied. The four banks with a history of subprime lending had an average denial rate of 34 percent. That was twice the 16 percent denial rate of the banks without a history of subprime lending. Other financial institutions had an average denial rate of 21 percent. Refinance loan applicants were denied three times as often as home purchase loan applicants— 30 percent v. 9 percent. Empire Justice Center
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No matter what the loan purpose, African-American and Hispanic applicants were denied more frequently than white applicants. For all loan types, African-American applicants were denied twice as often as whites, while Hispanic applicants were denied 1.6 times (or 60 percent) more often. African-American and Hispanic home purchase loan applicants were denied loans at twice the rate of non-Hispanic whites. Almost 1 in 2 African-American refinance loan applicants were denied loans, while only 1 in 4 non-Hispanic white refinance loan applicants were denied. Income as an Explanation for Denial Disparities Is the race/ethnicity of the applicant really just a surrogate indicator of applicant income? As African-Americans and Hispanics, on average, have lower incomes than whites, it makes sense that the apparent relationship between race and denial rates is really a relationship between income and denial rates. However, we found denial disparities across race for applicants with similar incomes, particularly for total lending denial rates. Within every income group, African-American and Hispanic applicants were denied substantially more frequently than white applicants. In fact, for applicants with incomes of at least $70,560 (120% or more of the HUD area median family income), African-Americans were denied over twice as frequently as whites—29 percent v. 13 percent. Income did a slightly better job at explaining denial disparities across race/ethnicity for home purchase lending than for total lending. At three of the five income levels African-American home purchase loan applicants were denied at least twice as often as non-Hispanic white applicants. Denial disparities between whites and African-Americans were less stark for applicants at the lowest income level (household incomes of less than $29,400) and at the second highest income level ($58,800 to $70,560). In fact, African-American applicants at the second highest income level were denied at the same rate as white applicants (five percent). Originations Of the almost 28,000 loans originated by all financial institutions in the Rochester area in 2004: • • • •
83 percent went to whites 5 percent went to African-Americans 2 percent went to Hispanics 10 percent went to others
There was little difference across type of lender in the proportions of their originations going to African-American and to Hispanics. Each type of lender made between 4 and 5 percent of its loans to African-Americans and between 2 and 3 percent of its loans to Hispanics.
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We would expect that if there were no differences in mortgage lending across race or ethnicity, the distribution of applications across each racial/ethnic group would be similar to the distribution of originations. However, the figure below shows that this does not happen. While 71 percent of the total applications received by all financial institutions were from whites, 83 percent of total originations were to whites. In comparison, 19 percent of the applications received by all financial institutions were from Native Americans, Asians or Native Hawaiian/Pacific Islanders (“other” in figure), but only 10 percent of originations went to them. Seven percent of applications were from African-Americans, while 5 percent of the total loans went to African-Americans. Comparing Distributions of Total Applications and Loans Across Race/Ethnicity (Rochester MSA, 2004) 100%
50%
0%
White
Black
Hispanic
Other
Applications
71%
7%
3%
19%
Loans
83%
5%
2%
10%
High Cost Lending Of the 27,795 1st lien, 1-4 family, non-manufactured housing loans originated in the Rochester MSA in 2004, 3661 or 13 percent were high cost. Borrowers with home purchase loans obtained high cost loans substantially less often than those with refinance loans, no matter what their race or ethnicity. Nine percent of all home purchase borrowers obtained high cost loans, compared to 16 percent of those with refinance loans. Other financial institutions originated high cost loans most frequently. While 13 percent of the total loans originated by all financial institutions were high cost loans, high cost loans made up: • • •
12 percent or 640 of the loans of the four banks with a history of subprime lending 1 percent or 49 of the loans of the four banks without a subprime lending history 18 percent or 2972 of the loans of the other financial institutions
No matter what the type of institution, African-Americans and Hispanics received high cost loans substantially more often than whites. Thirteen percent of the total loans made by all financial institutions in 2004 were high cost. In comparison, •
28 percent or 267 of the 1323 loans made to African-Americans were high cost
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• •
20 percent or 124 of the 632 loans made Hispanics were high cost 11 percent or 2584 of the 23,055 loans made to whites were high cost
African-American loan recipients received high cost loans from Rochester area financial institutions, on average, two and one-half times more frequently than white loan recipients, while Hispanic loan recipients obtained high cost loans 1.8 times more often than whites. African-Americans received high cost loans the most often across all institution types. Of the total loans made to African-Americans by: • • •
Other financial institutions, 38 percent were high cost The four banks with a history of subprime lending, 26 percent were high cost The four banks without a subprime lending history, 2 percent were high cost
The two groups of the top 8 banks made a similar number of loans to African-Americans in 2004—290 for those with a history of subprime lending and 281 for those without. However, 75 of the loans to Blacks by the banks with a history of subprime lending were high cost, while only 5 of the 281 originated by the banks without such a history were high cost. If there were no disparities in high cost lending across race/ethnicity, we would expect that, for each racial/ethnic group, the distribution of loans would be similar to the distribution of high cost loans. However, this is not what we found. No matter what the type of institution, whites obtained high cost loans less often than expected by the proportion of total originations they obtained. African-Americans, Hispanics and others obtained high cost loans more often than expected. For all financial institutions: • • • •
Non-Hispanic whites had 83 percent of the loans and 71 percent of the high cost loans African-Americans had 5 percent of the loans and 10 percent of the high cost loans Hispanics had 2 percent of the loans and 3 percent of the high cost loans People of other races/ethnicities had 10 percent of the loans and 16 percent of the high cost loans
Thus, whites were less likely than expected by the percentage of the total loans received to obtain a high cost loan. African-Americans were twice as likely than expected to obtain a high cost loan. Hispanics were 1.5 times more likely than expected to obtain a high cost loan. People of other races/ethnicities were 1.6 times more likely than expected to obtain a high cost loan. Income as an Explanation for High Cost Loan Disparities As we did with denial rate disparities, we attempted to explain high cost lending disparities by income. However, disparities across race/ethnicity in the percentage of loan recipients obtaining high cost loans remained for those with similar incomes. As seen by the figure below, no matter what the income level, African-Americans were at least twice as likely as whites to obtain high cost loans in 2004. In fact, at the second highest income Empire Justice Center
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level ($58,800 to $70,560),6 African-Americans were three times as likely as whites to get high cost loans. At this level, 37 percent of the loans to African-Americans were high cost, the highest rate for any group at any income level. Comparing High Cost Lending Rates Across Race/Ethnicity Within Similar Income Groups (Rochester MSA, 2004) 40% 30% 20% 10% 0%
All Income Levels
0 1 mean that minorities are denied at rates greater than whites.
Black/White Hispanic/White
Income as an Explanation for Denial Disparities Is the race/ethnicity of the applicant really just a surrogate indicator of applicant income? As African-Americans and Hispanics, on average, have lower incomes than whites, it makes sense that the apparent relationship between race and denial rates may really be a relationship between income and denial rates. If income is actually the reason that some applicants get denied more often than others, we would expect to see little or no relationship between race/ethnicity and denial rates for applicants with similar household incomes. As seen by the figure below of total loan denial rates, this expectation was not met. Within every income group, African-American and Hispanic applicants were denied substantially more frequently than white applicants. In fact, for applicants with incomes of at least $70,560 (120% or more of the HUD area median family income), African-Americans were denied over twice as frequently as whites—29 percent v. 13 percent.11
11
The income groupings are the same as those used by the Federal Financial Institutions Examination Council (FFIEC) for the HMDA data: $0 1 mean that minorities are denied at rates greater than whites.
Black/White Hispanic/White
Distribution of Originations Versus Distribution of High Cost Loans One of the most revealing ways to examine disparities in lending across race/ethnicity is to compare the distribution of loans and high cost loans to whites, African-Americans and Hispanics. If there were little disparity in high cost lending, we would expect that, for each racial/ethnic group, the distribution of loans would be similar to the distribution of high cost loans. For example, if African-Americans obtained 10 percent of the originations, then they should have about 10 percent of the high cost loans, as well. Empire Justice Center
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Using the two figures below, we can compare the distribution of lending and the distribution of high cost loans across race/ethnicity for each of the top 8 banks. They indicate that our expectation is not met. For all financial institutions: • • • •
Non-Hispanic whites had 83 percent of the loans and 71 percent of the high cost loans African-Americans had 5 percent of the loans and 10 percent of the high cost loans Hispanics had 2 percent of the loans and 3 percent of the high cost loans People of other races/ethnicities had 10 percent of the loans and 16 percent of the high cost loans
Thus, whites were less likely than expected by the percentage of the total loans received to obtain a high cost loan. African-Americans were twice as likely than expected to obtain a high cost loan. Hispanics were 1.5 times more likely than expected to obtain a high cost loan. People of other races/ethnicities were 1.6 times more likely than expected to obtain a high cost loan. No matter what the type of institution, whites obtained high cost loans less often than expected by the proportion of total originations they obtained. African-Americans, Hispanics and others obtained high cost loans more often than expected. The differences between the distribution of originations and the distribution of high cost loans were the smallest, however, for the four banks without a recent history of subprime lending.
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Comparing the Distribution of Total Originations Across Race by Type of Lender (Rochester MSA, 2004) 100% % of total loans to...
80% 60% 40% 20% 0%
All Institutions
Top 8 Subprime
Top 8 Prime
Other Institutions
Black
5%
5%
5%
4%
Hispanic
2%
2%
3%
2%
Other
10%
11%
5%
11%
White
83%
81%
87%
82%
Comparing the Distribution of High Cost Loans Across Race by Type of Lender (Rochester MSA, 2004)
% of high cost loans to...
100% 80% 60% 40% 20% 0%
All Institutions
Top 8 Subprime
Top 8 Prime
Other Institutions
10%
12%
10%
10%
3%
5%
4%
3%
Other
16%
15%
6%
17%
White
71%
69%
82%
71%
Black Hispanic
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If we compare the distribution of loans to the distribution of high cost loans across race/ethnicity for the different groups of lenders, we see that (for comparisons among the individual top 8 banks see Table 2 in Appendix B): Of the 5142 loans and 640 high cost loans originated by the four banks with a subprime lending history: • • • •
African-Americans received 5 percent of the loans and 12 percent of the high cost loans Hispanics received 2 percent of the loans and 5 percent of the high cost loans Other applicants received 11 percent of the loans and 15 percent of the high cost loans Non-Hispanic whites received 81 percent of the loans and 69 percent of the high cost loans
Of the 5633 loans and 49 high cost loans originated by the four banks without a subprime lending history: • • • •
African-Americans received 5 percent of the loans and 10 percent of the high cost loans Hispanics received 3 percent of the loans and 4 percent of the high cost loans Other applicants received 5 percent of the loans and 6 percent of the high cost loans Non-Hispanic whites received 87 percent of the loans and 82 percent of the high cost loans
Of the 17020 loans and 2972 high cost loans originated by other financial institutions: • • • •
African-Americans received 4 percent of the loans and 10 percent of the high cost loans Hispanics received 2 percent of the loans and 3 percent of the high cost loans Other applicants received 11 percent of the loans and 17 percent of the high cost loans Non-Hispanic whites received 82 percent of the loans and 71 percent of the high cost loans
We may also conclude that: •
Financial institutions other than the Rochester area’s top 8 banks (and their affiliates) originated 61 percent of the mortgages and 81 percent of the high cost loans.
•
The four banks with no recent history of subprime lending made less than 50 high cost loans, despite making more loans than those with a history of subprime lending.
Income as an Explanation for High Cost Loan Disparities As we did with denial rate disparities, we attempted to explain high cost lending disparities by income. Risk-based pricing models posit that the price or interest rate of the loan is dependent upon risk. An individual’s income is one important component in determining the risk that a borrower may default. Therefore, if risk-based pricing rather than race/ethnicity is actually the Empire Justice Center
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reason that some applicants get high cost loans more often than others, we would expect to see substantial relationships between race/ethnicity and high cost loan rates for applicants with similar household incomes or with similar chances of defaulting. However, as seen by the figure below, differences in high cost loan rates across race/ethnicity remained substantial within similar income categories. No matter what the income level, African-Americans were at least twice as likely as whites to obtain high cost loans in 2004. In fact, at the second highest income level ($58,800 to $70,560), African-Americans were three times as likely as whites to get high cost loans. At this level, 37 percent of the loans to African-Americans were high cost, the highest rate for any group at any income level. The disparities between the percentages of white and Hispanic loan recipients getting high cost loans were not as large at certain income levels as for all incomes. Nor were they as large as the disparities between whites and African-Americans. These remaining high cost lending disparities suggest that, at the least, further investigation needs to be done to assure there are no fair lending violations. Comparing High Cost Lending Rates Across Race/Ethnicity Within Similar Income Groups (Rochester MSA, 2004) 40% 30% 20% 10% 0%
All Income Levels
0
Barbara van Kerkhove, Ph. D Principal Researcher and Author Empire Justice Center
January 2006 This research was supported by a generous grant from the City of Rochester.
Empire Justice is the only statewide, multi-issue, multi-strategy non-profit law firm focused on changing the “systems” within which poor and low income families live. With a focus on poverty law, Empire Justice undertakes research and training, acts as an informational clearinghouse, and provides litigation backup to local legal services programs and community based organizations. As an advocacy organization, we engage in legislative and administrative advocacy on behalf of those impacted by poverty and discrimination. As a non-profit law firm, we provide legal assistance to those in need and undertake impact litigation in order to protect and defend the rights of disenfranchised New Yorkers. Empire Justice Vision To be a statewide leader working to achieve social and economic justice for people in New York State who are poor, disabled or disenfranchised. Empire Justice Mission Empire Justice protects and strengthens the legal rights of those who are poor, disabled or disenfranchised through: systems change advocacy, training and support to other advocates and organizations, and high quality legal representation in civil matters. Board of Directors Rene Reixach, Esq. (Chair)
Tom Maligno, Esq.
Keith St. John, Esq. (Treasurer)
Barbara Finkelstein, Esq.
Amy L. Christensen, Esq. (Secretary)
James C. Moore, Esq.
James W. Lytle, Esq.
Lauren Breen, Esq.
JoAnn Smith Empire Justice Center Anne Erickson, President/CEO
Bryan Hetherington, Chief Counsel
One West Main Street, Suite 200 Rochester, NY 14614 (585) 454-4060 119 Washington Avenue 80 No. Broadway Albany, NY 12210 White Plains, NY 10603 (518) 462-6831 (914) 422-4329
There’s No Place Like Home: Access to Home Mortgages in the Rochester Area in 2004 was researched and written by Barbara van Kerkhove, Ph.D. in consultation with Ruhi Maker, Esq. Barbara van Kerkhove has worked with the Community Reinvestment Act (CRA) Project since April of 2001. In this capacity Ms. van Kerkhove analyzes mortgage lending and small business lending data for the Rochester metropolitan area. Such analyses include marketshare comparisons of the area’s top lenders and mapping their lending patterns. Her most recent analysis looked at lending patterns of HUD-designated subprime lenders. Ms. van Kerkhove provides support to the Greater Rochester Community Reinvestment Coalition (GRCRC) and maintains the City of Rochester-sponsored Housing Choice website (www.housingchoice.org ). She received her Ph.D. in Political Science from the University at Albany, SUNY in 2001. Ruhi Maker is an attorney with expertise in community reinvestment issues, including predatory lending, CRA and fair lending. Prior to Empire Justice Center, Ms. Maker worked as an attorney with the Monroe County Legal Assistance Corporation (MCLAC) in Rochester from 1989 to 1995 representing low-income tenants and working with the Community Development Block Grant Coalition on affordable housing issues in the City of Rochester. In 1994, she co-convened the GRCRC and now spends the majority of her time on community reinvestment issues. Ms. Maker has worked on an ongoing basis with non-profit organizations and area banks to develop strategies to address lack of lending to minorities. She participated in the committee that developed the Fair Housing Action Plan for the County of Monroe. Currently, she serves on the steering committee of New Yorkers for Responsible Lending. In 2004, Ms. Maker completed her three-year appointment to the Federal Reserve Board’s Consumer Advisory Council. She obtained her law degree in 1979 from the London School of Economics (University of London). The Greater Rochester Community Reinvestment Coalition (GRCRC) was convened in 1993 to generate discussion about lending patterns in Rochester. GRCRC has a membership of more than 30 locally based, not-for profit organizations and individuals. Using raw data made available through the Home Mortgage Disclosure Act (HMDA), the Coalition has released seven separate analyses of home mortgage, small business and subprime lending data for the Rochester area. GRCRC has used the analyses to identify strengths and weaknesses in lending patterns and to generate ongoing discussion with the banks that are monitored: Bank of America, JPMorgan Chase, Citigroup, Canandaigua National Bank, M&T Bank, HSBC and Charter One. The Coalition also submits comments, based on this data, to the appropriate State and Federal regulators who have oversight of the banks. Acknowledgements: Without ongoing support from the City of Rochester, this research as well as monitoring of mortgage lending and CRA compliance of Rochester’s top banks, would not be possible. Michelle Peterson and the rest of the Empire Justice Center design team were instrumental in the format and design of the report. Copyright © January 2006 Empire Justice Center Visit us online at: www.empirejustice.org
Table of Contents Introduction
1
Executive Summary
1
How 2004 Compares to 2003 Total Lending Home Purchase Lending Refinance Lending Conclusion: Outreach to minorities in low-volume v. high-volume years Lending in 2004 Applications Denials Originations High Cost Lending How the Rochester Area Compares to the Nation Overview Main Report Mortgage Lending in the Rochester Area How 2004 Compares to 2003 Changes in Total Lending Changes in Home Purchase Lending Changes in Refinance Lending Conclusion: Outreach to minorities in low volume v. high volume years A Focus on Lending in 2004 Applications Denials Distribution of Originations High Cost Lending Distributions of Originations Versus Distributions of High Cost Loans Comparing Rochester to the Nation
3 3 3 3 4 4 4 4 5 6 8 9 11 11 12 12 14 17 19 20 20 21 28 31 34 38
Appendix A: A Closer Look at Rochester’s Top 8 Banks Applications Denials High Cost Loans Lending by Rochester Area Top 8 Banks in Detail Applications Denials High Cost Loans Distribution of Originations Versus Distribution of High Cost Loans
42 42 42 42 43 43 43 48 52
Appendix B: Tables Table 1: Comparing Applications and Disposition by Race/Ethnicity, 2003-2004 Table 2: Disposition of Applications by Race/Ethnicity – AFI, Top 8 Banks, 2004 Table 3: Denial and High Cost Loan Disparities and Distribution of Applications And Lending by Race/Ethnicity-AFI, Top 8 Banks, 2004
56 57 58
There's No Place Like Home: Access to Home Mortgages in the Rochester Area in 2004 INTRODUCTION HMDA 2004—New Opportunities for Comparison The Empire Justice Center annually analyzes mortgage lending data for the Rochester Metropolitan Statistical Area (MSA).1 The 2004 Home Mortgage Disclosure Act (HMDA)2 lending data for the first time provides a new opportunity to analyze mortgage applications, originations and denials. The release of this new HMDA data includes, for each loan: • • •
the pricing of the loan and whether the loan’s Annual Percentage Rate (APR) exceeds the Treasury yield threshold (3% for 1st lien mortgages, 5% for subordinate liens) and, if so, how far above the applicable Treasury yield the loan’s APR is; better race/ethnicity data;3 and whether or not the loan is a federal Home Owners Equity Protection Act (HOEPA) loan.
In March, the Empire Justice Center requested the 2004 HMDA data from the area’s top banks4 and began examining their denial rates and the proportion of the loans that exceeded the APR threshold (and were high cost) by race and ethnicity. When we obtained the complete dataset from the Federal Financial Institutions Examination Council, we were able to compare the lending of the top institutions to other groups of institutions. EXECUTIVE SUMMARY As there was so much more information in the data from 2004, the Empire Justice Center focused on one area of analysis—lending and high cost lending to minorities, namely AfricanAmericans and Hispanics, and how they compare to lending to non-Hispanic whites. We examined applications, denial rates, originations and high cost loans for all applicants and African-American, Hispanic and non-Hispanic white applicants. We looked at total lending, home purchase lending and refinance lending for all financial institutions lending in the Rochester MSA, for the area’s top 8 banks and their affiliates, and for financial institutions other than the top 8 banks and their affiliates. These other financial institutions mainly consist of institutions that do not have Community Reinvestment Act (CRA) obligations in the Rochester area: depositories without a local branch presence, non-banks and 1
The Rochester MSA includes the following counties: Monroe (where the City of Rochester is), Livingston, Ontario, Orleans and Wayne. As of 2004, Genesee County is no longer considered part of the MSA. 2 For a definition of this and other lending-related terms, see Key Terms box on p. 2. 3 In the past, a large percentage of loans were recorded as race not available/applicable, thus skewing analysis of race ethnicity data. Lenders are now required to request this information for every applicant, even for phone and internet applicants. In the event the applicant refuses, the loan officer must enter the information to the best of his or her ability on the basis of observation. 4 The Rochester area’s top 8 banks based upon deposit marketshare are: Bank of America, Canandaigua National Bank, Chase, Citibank, Citizens Bank, HSBC, KeyBank and M&T Bank. Empire Justice Center
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credit unions. However, smaller depositories with a branch presence and CRA obligations in the Rochester area also are included in the “other financial institutions” category. We divided the area’s top 8 banks into those that had a history or tradition of subprime lending and those that did not have such a tradition. Our reasoning for this was that banks that had a history of subprime lending, through a Key Terms current or a past affiliate, would display AFI (All Financial Institutions): AFI include every HMDA-reporting different lending patterns than those financial institution in the market. Often an institution lending in a without such a history or tradition. particular category (for instance, low and moderate income census Banks with a history of subprime lending are more likely than banks without such a history to have mortgage products that fit higher-risk applicants. Historically subprime banks also may have a larger number of higher-risk applicants walking in their doors than historically prime banks. For example, they may have offices in traditionally underserved areas, work with mortgage brokers with a tradition of serving higher-risk applicants, and/or be seen in underserved communities to more likely approve loans. In determining whether a bank had a history or tradition of subprime lending, we looked at the Department of Housing and Urban Development (HUD) Subprime List to see if the bank had an affiliate or had acquired an affiliate that was recently on the HUD Subprime List.5 The banks with such affiliates are Chase, Citigroup, HSBC, and Key. These banks are considered the “four banks with a history of subprime lending” or, in the charts, the “Top 8 Subprime.” The banks that recently have had no affiliates on the HUD Subprime List are Bank of America, Canandaigua NB, Charter One, and M&T. These banks are considered the “four banks without a history of subprime lending” or, in the charts, the “Top 8 Prime.”
tracts) is measured against the lending of AFI for that same category. Also called “all institutions” in graphs.
HMDA: The federal Home Mortgage Disclosure Act requires lenders to publicly disclose information about the income, race, ethnicity and geographic area of the recipients of home mortgage loans. Information about applications and denials is also required. HOEPA (Home Ownership and Equity Protection Act): This act, passed in 1994, creates a special class of regulated loans that are made at high rates or with excessive costs and fees. These loans are subject to special disclosure requirements and lenders are prohibited from imposing certain terms that are deemed abusive. HUD (Department of Housing and Urban Development): HUD is a governmental organization that aims to increase homeownership, support community development, and increase access to affordable housing. MSA (Metropolitan Statistical Area): HMDA data is organized into Metropolitan Statistical Areas. The Rochester MSA includes Monroe, Livingston, Wayne, Orleans and Ontario Counties. Up through 2003, it also included Genesee County. OFI (Other Financial Institutions): OFI include every financial institution other than those included in the table. If the table represents lending by the top 8 banks, OFI will be lending all lenders but the top 8 banks. Also called “other institutions” in graphs. Origination: A mortgage loan made by a lender and secured by some amount of the mortagee’s or borrower’s real property. Subprime Loans: Loans are split up into two categories, prime and subprime. Subprime loans are meant to accommodate those who carry greater risk for the lender, and typically have higher interest rates than prime loans. Top 8 Banks: The top 8 depositories in the Rochester MSA based upon dollar amount of deposits. In order of deposit marketshare they are: HSBC, JPMorgan Chase, M&T, Citizens, Canandaigua NB, Bank of America, Citibank, and Keybank. Top 8 Subprime: Four of the top 8 banks with a recent history of having or acquiring affiliates which have been on the HUD Subprime List. These banks are: Chase, Citibank, Keybank and HSBC. Top 8 Prime: Four of the top 8 banks without a recent history of having or acquiring affiliates which have been on the HUD Subprime List. These banks are: Bank of America, Canandaigua NB, Citizens and M&T.
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HUD Subprime and Manufactured Home Lender Lists can be found at: http://www.huduser.org/datasets/manu.html Empire Justice Center
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Following is a summary of our findings, which are described in more detail in the report. How 2004 Compares to 2003 Compared to 2003, the Rochester MSA in 2004 saw: • • • •
Significantly fewer mortgage loan applications overall One-third fewer mortgage originations A greater number of denials A substantially higher overall denial rate
Total Lending Total applications and originations were down for all applicants and non-Hispanic whites. However, total applications from, and loans to, African-Americans were up. Home Purchase Lending There were substantial declines in total lending and refinance lending between 2003 and 2004. However, home purchase lending for owner-occupied, 1-4 family units remained relatively stable. There was little change in the number of home purchase applications received by all financial institutions. Most denial rates increased slightly and most originations declined slightly. • • •
Home purchase lending to non-Hispanic whites decreased somewhat between 2003 and 2004. Home purchase applications from African-Americans increased by 20 percent and originations to African-Americans increased by 17 percent. For Hispanics, home purchase applications increased by 8 percent, while the number of originations remained stable.
Refinance Lending The vast majority of the decline in lending between 2003 and 2004 is due to the decline in refinance mortgage lending (1-4 family units). • • •
Refinance applications declined by 30 percent to 39,731. Refinance originations declined by 55 percent to 14,282. The refinance denial rate jumped to 30 percent, an increase of eight points.
The total number of refinance denials declined between 2003 and 2004. However, they increased for African-American and Hispanic applicants and remained stable for white applicants. Refinance denial rates, however, increased for all groups, particularly for whites. Still, nonHispanic whites had the lowest denial rate in 2004. One in four whites were denied a refinance loan in 2004. One in two African-Americans and over one in three Hispanics were denied a refinance loan.
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Conclusion: Outreach to minorities in low-volume v. high-volume years Total lending and home purchase and refinance lending in the Rochester area declined between 2003 and 2004. Residents submitted fewer applications and lenders made fewer loans. However, it looks like lenders are “casting a wider net” to African-Americans and Hispanics. Total lending and home purchase and refinance applications were up for African-Americans and Hispanics. Moreover, total originations and home purchase originations were up for African-Americans. As a result of these changes, African-Americans and Hispanics were able to capture higher proportions of total, home purchase and refinance applications and originations in 2004 than in 2003. The refinance origination and application figures, however, also show something troubling. Changes in refinance lending appear to be driven, in large part, by decreases in applications from, and loans to, whites. During “big” refinance years such as 2003, lenders may do less to reach out to minorities. This apparent lack of outreach to minorities during high volume years may be due to loan origination staff being overwhelmed by the inundation of applications. As banks consolidate community lending departments into their overall mortgage lending areas, there will be even fewer staff persons able to conduct outreach to traditionally underserved communities during high-volume years. Lending in 2004 Applications Of the 56,886 1st lien 1-4 family mortgage applications submitted to financial institutions in 2004, 40 percent were to the area’s top 8 banks and their affiliates, and • • •
71 percent were from non-Hispanic whites 7 percent were from African-Americans 3 percent were from Hispanics
While only 26 percent of white applicants submitted applications to the area’s top 8 lenders with a history of subprime lending, 39 percent of African-American applicants and 30 percent of Hispanic applicants did so. Denials Of the 56,886 applications submitted in the Rochester area in 2004, 13,355 or 24 percent were denied. The four banks with a history of subprime lending had an average denial rate of 34 percent. That was twice the 16 percent denial rate of the banks without a history of subprime lending. Other financial institutions had an average denial rate of 21 percent. Refinance loan applicants were denied three times as often as home purchase loan applicants— 30 percent v. 9 percent. Empire Justice Center
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No matter what the loan purpose, African-American and Hispanic applicants were denied more frequently than white applicants. For all loan types, African-American applicants were denied twice as often as whites, while Hispanic applicants were denied 1.6 times (or 60 percent) more often. African-American and Hispanic home purchase loan applicants were denied loans at twice the rate of non-Hispanic whites. Almost 1 in 2 African-American refinance loan applicants were denied loans, while only 1 in 4 non-Hispanic white refinance loan applicants were denied. Income as an Explanation for Denial Disparities Is the race/ethnicity of the applicant really just a surrogate indicator of applicant income? As African-Americans and Hispanics, on average, have lower incomes than whites, it makes sense that the apparent relationship between race and denial rates is really a relationship between income and denial rates. However, we found denial disparities across race for applicants with similar incomes, particularly for total lending denial rates. Within every income group, African-American and Hispanic applicants were denied substantially more frequently than white applicants. In fact, for applicants with incomes of at least $70,560 (120% or more of the HUD area median family income), African-Americans were denied over twice as frequently as whites—29 percent v. 13 percent. Income did a slightly better job at explaining denial disparities across race/ethnicity for home purchase lending than for total lending. At three of the five income levels African-American home purchase loan applicants were denied at least twice as often as non-Hispanic white applicants. Denial disparities between whites and African-Americans were less stark for applicants at the lowest income level (household incomes of less than $29,400) and at the second highest income level ($58,800 to $70,560). In fact, African-American applicants at the second highest income level were denied at the same rate as white applicants (five percent). Originations Of the almost 28,000 loans originated by all financial institutions in the Rochester area in 2004: • • • •
83 percent went to whites 5 percent went to African-Americans 2 percent went to Hispanics 10 percent went to others
There was little difference across type of lender in the proportions of their originations going to African-American and to Hispanics. Each type of lender made between 4 and 5 percent of its loans to African-Americans and between 2 and 3 percent of its loans to Hispanics.
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We would expect that if there were no differences in mortgage lending across race or ethnicity, the distribution of applications across each racial/ethnic group would be similar to the distribution of originations. However, the figure below shows that this does not happen. While 71 percent of the total applications received by all financial institutions were from whites, 83 percent of total originations were to whites. In comparison, 19 percent of the applications received by all financial institutions were from Native Americans, Asians or Native Hawaiian/Pacific Islanders (“other” in figure), but only 10 percent of originations went to them. Seven percent of applications were from African-Americans, while 5 percent of the total loans went to African-Americans. Comparing Distributions of Total Applications and Loans Across Race/Ethnicity (Rochester MSA, 2004) 100%
50%
0%
White
Black
Hispanic
Other
Applications
71%
7%
3%
19%
Loans
83%
5%
2%
10%
High Cost Lending Of the 27,795 1st lien, 1-4 family, non-manufactured housing loans originated in the Rochester MSA in 2004, 3661 or 13 percent were high cost. Borrowers with home purchase loans obtained high cost loans substantially less often than those with refinance loans, no matter what their race or ethnicity. Nine percent of all home purchase borrowers obtained high cost loans, compared to 16 percent of those with refinance loans. Other financial institutions originated high cost loans most frequently. While 13 percent of the total loans originated by all financial institutions were high cost loans, high cost loans made up: • • •
12 percent or 640 of the loans of the four banks with a history of subprime lending 1 percent or 49 of the loans of the four banks without a subprime lending history 18 percent or 2972 of the loans of the other financial institutions
No matter what the type of institution, African-Americans and Hispanics received high cost loans substantially more often than whites. Thirteen percent of the total loans made by all financial institutions in 2004 were high cost. In comparison, •
28 percent or 267 of the 1323 loans made to African-Americans were high cost
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• •
20 percent or 124 of the 632 loans made Hispanics were high cost 11 percent or 2584 of the 23,055 loans made to whites were high cost
African-American loan recipients received high cost loans from Rochester area financial institutions, on average, two and one-half times more frequently than white loan recipients, while Hispanic loan recipients obtained high cost loans 1.8 times more often than whites. African-Americans received high cost loans the most often across all institution types. Of the total loans made to African-Americans by: • • •
Other financial institutions, 38 percent were high cost The four banks with a history of subprime lending, 26 percent were high cost The four banks without a subprime lending history, 2 percent were high cost
The two groups of the top 8 banks made a similar number of loans to African-Americans in 2004—290 for those with a history of subprime lending and 281 for those without. However, 75 of the loans to Blacks by the banks with a history of subprime lending were high cost, while only 5 of the 281 originated by the banks without such a history were high cost. If there were no disparities in high cost lending across race/ethnicity, we would expect that, for each racial/ethnic group, the distribution of loans would be similar to the distribution of high cost loans. However, this is not what we found. No matter what the type of institution, whites obtained high cost loans less often than expected by the proportion of total originations they obtained. African-Americans, Hispanics and others obtained high cost loans more often than expected. For all financial institutions: • • • •
Non-Hispanic whites had 83 percent of the loans and 71 percent of the high cost loans African-Americans had 5 percent of the loans and 10 percent of the high cost loans Hispanics had 2 percent of the loans and 3 percent of the high cost loans People of other races/ethnicities had 10 percent of the loans and 16 percent of the high cost loans
Thus, whites were less likely than expected by the percentage of the total loans received to obtain a high cost loan. African-Americans were twice as likely than expected to obtain a high cost loan. Hispanics were 1.5 times more likely than expected to obtain a high cost loan. People of other races/ethnicities were 1.6 times more likely than expected to obtain a high cost loan. Income as an Explanation for High Cost Loan Disparities As we did with denial rate disparities, we attempted to explain high cost lending disparities by income. However, disparities across race/ethnicity in the percentage of loan recipients obtaining high cost loans remained for those with similar incomes. As seen by the figure below, no matter what the income level, African-Americans were at least twice as likely as whites to obtain high cost loans in 2004. In fact, at the second highest income Empire Justice Center
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level ($58,800 to $70,560),6 African-Americans were three times as likely as whites to get high cost loans. At this level, 37 percent of the loans to African-Americans were high cost, the highest rate for any group at any income level. Comparing High Cost Lending Rates Across Race/Ethnicity Within Similar Income Groups (Rochester MSA, 2004) 40% 30% 20% 10% 0%
All Income Levels
0 1 mean that minorities are denied at rates greater than whites.
Black/White Hispanic/White
Income as an Explanation for Denial Disparities Is the race/ethnicity of the applicant really just a surrogate indicator of applicant income? As African-Americans and Hispanics, on average, have lower incomes than whites, it makes sense that the apparent relationship between race and denial rates may really be a relationship between income and denial rates. If income is actually the reason that some applicants get denied more often than others, we would expect to see little or no relationship between race/ethnicity and denial rates for applicants with similar household incomes. As seen by the figure below of total loan denial rates, this expectation was not met. Within every income group, African-American and Hispanic applicants were denied substantially more frequently than white applicants. In fact, for applicants with incomes of at least $70,560 (120% or more of the HUD area median family income), African-Americans were denied over twice as frequently as whites—29 percent v. 13 percent.11
11
The income groupings are the same as those used by the Federal Financial Institutions Examination Council (FFIEC) for the HMDA data: $0 1 mean that minorities are denied at rates greater than whites.
Black/White Hispanic/White
Distribution of Originations Versus Distribution of High Cost Loans One of the most revealing ways to examine disparities in lending across race/ethnicity is to compare the distribution of loans and high cost loans to whites, African-Americans and Hispanics. If there were little disparity in high cost lending, we would expect that, for each racial/ethnic group, the distribution of loans would be similar to the distribution of high cost loans. For example, if African-Americans obtained 10 percent of the originations, then they should have about 10 percent of the high cost loans, as well. Empire Justice Center
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Using the two figures below, we can compare the distribution of lending and the distribution of high cost loans across race/ethnicity for each of the top 8 banks. They indicate that our expectation is not met. For all financial institutions: • • • •
Non-Hispanic whites had 83 percent of the loans and 71 percent of the high cost loans African-Americans had 5 percent of the loans and 10 percent of the high cost loans Hispanics had 2 percent of the loans and 3 percent of the high cost loans People of other races/ethnicities had 10 percent of the loans and 16 percent of the high cost loans
Thus, whites were less likely than expected by the percentage of the total loans received to obtain a high cost loan. African-Americans were twice as likely than expected to obtain a high cost loan. Hispanics were 1.5 times more likely than expected to obtain a high cost loan. People of other races/ethnicities were 1.6 times more likely than expected to obtain a high cost loan. No matter what the type of institution, whites obtained high cost loans less often than expected by the proportion of total originations they obtained. African-Americans, Hispanics and others obtained high cost loans more often than expected. The differences between the distribution of originations and the distribution of high cost loans were the smallest, however, for the four banks without a recent history of subprime lending.
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Comparing the Distribution of Total Originations Across Race by Type of Lender (Rochester MSA, 2004) 100% % of total loans to...
80% 60% 40% 20% 0%
All Institutions
Top 8 Subprime
Top 8 Prime
Other Institutions
Black
5%
5%
5%
4%
Hispanic
2%
2%
3%
2%
Other
10%
11%
5%
11%
White
83%
81%
87%
82%
Comparing the Distribution of High Cost Loans Across Race by Type of Lender (Rochester MSA, 2004)
% of high cost loans to...
100% 80% 60% 40% 20% 0%
All Institutions
Top 8 Subprime
Top 8 Prime
Other Institutions
10%
12%
10%
10%
3%
5%
4%
3%
Other
16%
15%
6%
17%
White
71%
69%
82%
71%
Black Hispanic
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If we compare the distribution of loans to the distribution of high cost loans across race/ethnicity for the different groups of lenders, we see that (for comparisons among the individual top 8 banks see Table 2 in Appendix B): Of the 5142 loans and 640 high cost loans originated by the four banks with a subprime lending history: • • • •
African-Americans received 5 percent of the loans and 12 percent of the high cost loans Hispanics received 2 percent of the loans and 5 percent of the high cost loans Other applicants received 11 percent of the loans and 15 percent of the high cost loans Non-Hispanic whites received 81 percent of the loans and 69 percent of the high cost loans
Of the 5633 loans and 49 high cost loans originated by the four banks without a subprime lending history: • • • •
African-Americans received 5 percent of the loans and 10 percent of the high cost loans Hispanics received 3 percent of the loans and 4 percent of the high cost loans Other applicants received 5 percent of the loans and 6 percent of the high cost loans Non-Hispanic whites received 87 percent of the loans and 82 percent of the high cost loans
Of the 17020 loans and 2972 high cost loans originated by other financial institutions: • • • •
African-Americans received 4 percent of the loans and 10 percent of the high cost loans Hispanics received 2 percent of the loans and 3 percent of the high cost loans Other applicants received 11 percent of the loans and 17 percent of the high cost loans Non-Hispanic whites received 82 percent of the loans and 71 percent of the high cost loans
We may also conclude that: •
Financial institutions other than the Rochester area’s top 8 banks (and their affiliates) originated 61 percent of the mortgages and 81 percent of the high cost loans.
•
The four banks with no recent history of subprime lending made less than 50 high cost loans, despite making more loans than those with a history of subprime lending.
Income as an Explanation for High Cost Loan Disparities As we did with denial rate disparities, we attempted to explain high cost lending disparities by income. Risk-based pricing models posit that the price or interest rate of the loan is dependent upon risk. An individual’s income is one important component in determining the risk that a borrower may default. Therefore, if risk-based pricing rather than race/ethnicity is actually the Empire Justice Center
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reason that some applicants get high cost loans more often than others, we would expect to see substantial relationships between race/ethnicity and high cost loan rates for applicants with similar household incomes or with similar chances of defaulting. However, as seen by the figure below, differences in high cost loan rates across race/ethnicity remained substantial within similar income categories. No matter what the income level, African-Americans were at least twice as likely as whites to obtain high cost loans in 2004. In fact, at the second highest income level ($58,800 to $70,560), African-Americans were three times as likely as whites to get high cost loans. At this level, 37 percent of the loans to African-Americans were high cost, the highest rate for any group at any income level. The disparities between the percentages of white and Hispanic loan recipients getting high cost loans were not as large at certain income levels as for all incomes. Nor were they as large as the disparities between whites and African-Americans. These remaining high cost lending disparities suggest that, at the least, further investigation needs to be done to assure there are no fair lending violations. Comparing High Cost Lending Rates Across Race/Ethnicity Within Similar Income Groups (Rochester MSA, 2004) 40% 30% 20% 10% 0%
All Income Levels
0
