How biased mortgage lending keeps people of color away from their dream home

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The new four-bedroom home in Charlotte, North Carolina was the personal American dream of Crystal Marie and the Eskias McDaniels, the reason they moved there from expensive Los Angeles.

A lush long lawn, 2,700 square feet of living space, a gleaming kitchen, and an adjoining pool and play area for their son Nazret. For only $ 375,000.

Pre-qualifying for a mortgage was an easy task: they had high credit ratings, made roughly six figures, and accumulated more than they needed to make a down payment.

But two days before they were due to sign, in August 2019, a loan officer called Crystal Marie with bad news: the deal was not going to close.

“It seemed like the algorithm was rejecting it,” she said, “and then there was a person who could step in and decide whether to ignore it or not.”


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She was told she was inadequate because she was a contractor and not a full-time employee, even though her colleagues were contractors too. And they had a mortgage.

Krystal Marie’s colleagues are white. She and Eskias are black.

“I think it would be naive for someone like me not to consider that race played a role in this process,” she said.

Algorithmic bias

While technology has made it easier for anyone to apply for a home loan, such innovations have not completely eliminated it. obstacle for many borrowers: bias.

The long-standing discrimination faced by people of color in obtaining mortgages can be replicated in programmed lending, a technology that advocates say is designed to prevent bias.

Investigation To Markup found that lenders in 2019 were more likely to deny home loans to people of color than to whites with similar financial characteristics – even as the investigators monitored new available financial factors that the mortgage industry has said in the past could explain. racial inequality in lending.


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By holding 17 different factors in a sophisticated statistical analysis of over 2 million common home-purchase mortgage applications submitted to the government, they found that, compared to their white counterparts, lenders were:

● 80% more likely to reject black candidates.

● 70% more likely to reject a Native American nomination.

● 50% more likely to reject nominations from the Asia-Pacific region.

● 40% more likely to reject Latinos.

These are national rates.

The American Bankers Association, the Mortgage Bankers Association, the Community Housing Lenders Association, and the National Credit Unions Association have criticized this analysis.

In written submissions, the ABA and MBA rejected The Markup’s findings because they did not include credit ratings or government loans, which are mortgages guaranteed by the Federal Housing Administration, the Department of Veterans Affairs, and others.

According to The Markup article, government loans have different approval thresholds, which attract people to the market who would otherwise be ineligible but tend to cost more buyers. Even the Federal Reserve and the Bureau of Consumer Financial Protection, the agency that publishes mortgage data, separate conventional and government loans in their research on loan inequality.


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The nonprofit news organization says it was impossible for it to include credit ratings in its analysis because the CFPB is removing them from the public release of the data – in part due to lobbying by the mortgage industry, citing borrower privacy.

While home loan decisions are formally made by loan officers at each institution, they are mostly made by software, much of which is sanctioned by a couple of quasi-government agencies.

Rules set by Freddie Mac and Fannie Mae

Freddie Mac and Fannie Mae were founded by the federal government to stimulate home ownership and now buy about half of all mortgages in America. As a result, they essentially set the rules from the very beginning of the mortgage approval process.

They require lenders to use a special credit rating algorithm, “classic FICO”, to determine if an applicant meets the minimum threshold that must be considered for a regular mortgage, which is currently 620 points.


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Launched over 15 years ago based on 1990s data, Classic FICO is widely considered harmful to people of color because it rewards traditional credit, which they have less access to than white Americans. It, among other things, does not account for timely payments for rent, utilities, and cell phone bills, but will downgrade people’s assessments if they delay paying those bills and are hounded by debt collectors. Unlike later models, Classic FICO also punishes people for past medical debt after it has been paid.

However, Fannie and Freddie have resisted a flood of requests from lawyers, mortgage and housing companies, and Congress since 2014 to authorize the new model. They did not answer questions about why.

The approval process also requires a green light from Fannie or Freddie’s automatic underwriting software. Even their regulator, the Federal Housing Finance Agency, is not sure exactly how they decide, but some of the factors that companies say their programs take into account can affect people differently depending on their race or ethnicity, like the researchers found out.

For example, traditional banks are less likely than payday loan sellers to open branches in areas populated mostly by people of color. Payday lenders do not report timely payments, so they can only damage the loan.

History of bias

Colored people faced decades higher obstacles than whites when it comes to obtaining a home loan, with even creditworthy borrowers being denied a higher rate or unfairly charged higher interest rates.


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Berkeley study found that both personal and online lenders turned down a total of 1.3 million creditworthy black and Hispanic applicants between 2008 and 2015. According to the researchers, the applicants “would have been accepted if the applicant did not belong to these minority groups”. This is because when they used the income and credit scores of the declined applications but removed the race IDs, the mortgage application was accepted.

The president of a trading group representing real estate appraisers recently acknowledged that racial bias is widespread in the property value industry and said he has launched new programs to combat bias.

“If the data you enter is based on historical discrimination,” said Araceli Panameño, director of Latin American affairs at the Responsible Lending Center, “then you are essentially reinforcing discrimination on the other side.”

Fannie said in written statements that its software analyzes applications “without regard to race,” and Fannie and Freddie said their algorithms are regularly assessed for compliance with fair credit laws both internally and by FHFA and the Housing and Urban Development Department. … HUD said it asked the couple to make changes as a result, but did not disclose details.

Many large lenders also launch candidates through their institutions’ own underwriting software. How these programs work remains a mystery; they are also proprietary.

Should the system be configured?

Some proponents of fair lending have begun to question whether the value system in mortgage lending should be changed.

“As an industry, we need to think about which alternatives are less discriminatory, even if they are a valid predictor of risk,” said David Sanchez, a former FHFA policy analyst who currently leads research and development at the nonprofit National Community Stabilization. Trust. “Because if we let risk drive all of our decisions, we are in the same place we are now when it comes to racial equality in this country.”

The lender to Crystal Marie and Eskias McDaniels denied that race had anything to do with their denial. In an email, Lori Wildrick, vice president of communications at CreditDepot, stated that the company follows the law and expects every applicant to be treated “fairly and equitably”.

The couple refused to give up after the loan officer told them the mortgage had failed and enlisted the backing of their real estate agent. Krystal Marie’s employer sent several letters for her.

At around 8 pm on the eve of the original closing date, Crystal Marie received an email from the lender: “You are cleared to close.” She still doesn’t understand how she got to yes, but she feels relief and joy.

“It means so much to me as a black man,” said Crystal Marie, who said her family was descended from slaves in neighboring South Carolina, “to have property in a place where you were property not many generations ago.

“It means so much.”

This was reported by The Markup, and the story and data were released by the Associated Press. Christopher Brooks of CBS News provided the coverage.

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