Study finds minorities paid more for loans

February 28, 2008By Binyamin Appelbaum
An annual report on mortgage lending in Massachusetts finds that black and Latino borrowers were disproportionately the recipients of loans with high interest rates in 2006. Perhaps the more interesting question is what the 2007 report will show.

The lending industry has changed dramatically since 2006. Lending at high interest rates has all but dried up. The five companies that made the most subprime, or high-rate, loans in Massachusetts in 2006 all have suspended lending, including New Century Financial Corp. and Fremont Investment & Loan.

The question is whether other institutions are now making loans to people formerly served by the subprime industry, or whether some neighborhoods risk a return to the underserved days of redlining.

"We're hoping that some of the responsible lenders step forward and replace them in an aggressive way," said Tom Callahan, a board member of the Massachusetts Community & Banking Council, which issued the report. "All banks - big, medium, and small - should be really licking their chops here."

The report does not just underscore the racial pattern of high-rate mortgage lending. It also underscores just how pervasive subprime lending became.

One in every five home-purchase loans in Massachusetts in 2006 carried a high interest rate. And, the report found at least one high-rate loan was made in every community in Massachusetts.

This is the 14th annual report for the council authored by Jim Campen, a researcher at the University of Massachusetts at Boston. It is titled "Changing Patterns," but it reports very little change: Blacks, and to a lesser extent Latinos, remained largely unable in 2006 to borrow money at the same interest rate as whites.

Just 26 percent of black applicants for a home-purchase loan got an interest rate near the market average. About a quarter were rejected and the rest got loans with high interest rates. By contrast, 64 percent of white applicants got loans with market rates.

The report found that companies specializing in lending at high interest rates continued to concentrate their lending in minority neighborhoods.

And it found fresh evidence of a particularly striking pattern: The study reports that 53 percent of black borrowers in the Boston area making at least $98,000 a year got mortgage loans with high interest rates, compared with 13 percent of white borrowers.

A high interest rate is defined as a rate about two percentage points, or more, above the prevailing market rate.

The study estimates that the average recipient of a high-rate loan actually was four percentage points above the market rate - an average rate of 10.44 percent compared to an average market rate of 6.5 percent. On a $325,000 loan, that's a difference of about $900 a month.
Campen's study is based on data that lenders report to the federal government under the Home Mortgage Disclosure Act. The federal government releases raw data for the previous year in late summer. Data for 2007 will be released later this year.

The federal data do not include significant information about a borrower's financial circumstances, such as savings, debts, and credit history. The lending industry argues that makes it impossible to conclude that disparities are the result of discrimination by lenders, rather than economic circumstances. Major industry trade groups oppose reporting that data, calling it an unnecessary burden.

Kathy Schreck, a past chair of the Massachusetts Mortgage Bankers Association and a board member of the council that issued the report, said she supported further inquiry.

"It's very important for lenders and for regulators to look at the trends and see why minorities are getting higher-priced loans," said Schreck, also a regional sales manager for Mortgage Network Inc., one of the largest mortgage lenders based in Massachusetts. "I want to know why."