America’s housing market is racist. Congress could easily help fix it if they wanted to.

A sign showing that a house has been sold.
  • Black borrowers are 80% more likely to be denied a mortgage than white borrowers.
  • The Fair Lending for All Act would establish a new federal office to ensure discrimination in lending is not happening.
  • The bill would help end discriminatory practices by clarifying that discrimination based on zip code or census tract is prohibited under ECOA.
  • This is an opinion column. The thoughts expressed are those of the author.
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In 2020, Black borrowers were 80% more likely to be denied a mortgage than white borrowers. While this statistic is jarring, it is hardly surprising to those of us familiar with the US mortgage industry. A holistic look at America’s housing market shows that it disadvantages people of color in some startling and systemic ways that are not always obvious at the loan level.

The Fair Lending for All Act aims to change that. Introduced by Congressman Al Green, a Democrat from Texas, the bill clarifies the language of the Equal Credit Opportunity Act (ECOA) to better address systemic discrimination in mortgage lending. At the same time, it establishes a new bureau within the Consumer Financial Protection Bureau (CFPB) to test whether lenders are following federal guidelines as set out in the Home Mortgage Disclosure Act (HMDA) and ECOA. While seemingly obscure and legalistic, the Fair Lending for All Act will go a long way to making mortgage lending fairer and ending racial disparities in home ownership.

Disparate impact

Historically, Black homeowners have had to contend with systemic racism in the mortgage industry, contributing to lower levels and slower growth in homeownership among Black Americans. Through redlining – a process in which real estate agents and mortgage lenders steer Black renters and buyers into specific communities, contributing to de facto segregation – “agencies deemed Black communities too risky for federal home loan assistance, regardless of the income, wealth, or education of the inhabitants, or the quality or location of its housing stack,” Jim Carr, a former senior vice president of the Fannie Mae foundation, wrote last month.

According to Carr, this drastically slowed the rate of homeownership among Black Americans. The Black homeownership rate has increased only 4% over the past five decades. Meanwhile, the gap in homeownership between white and Black Americans was 5% lower in 1920 than it was in 2020.

This problem is then compounded by further economic inequalities Black Americans face. A recent study from the McKinsey Global Institute found that Black Americans make on average 30% less than white Americans. A disproportionate number of Black Americans have student loan debt, representing 13.4% of the population but nearly a quarter of all student loan debt incurred in 2019. Black borrowers also inherit less and receive fewer financial gifts from family members than do white Americans.

Debt-to-income and loan-to-value ratios have been higher for Black and Latino Americans. Data from the Federal Reserve shows that the median Black family has less than 15% the wealth of the median white family. What this means in practical terms is that Black and Latino borrowers have a higher amount of debt relative to their income. They, in turn, must borrow more on their homes, having less of a down payment to put towards the purchase.

Many lenders and underwriters will argue that there is no inherent racism here. If you qualify, you qualify, and if you don’t, you don’t. But in my own experience in the mortgage industry over the past decade, this kind of discrimination is not always apparent, even to the folks being discriminated against.

There are three types of discrimination which ECOA forbids: overt discrimination, comparative discrimination, and disparate impact. Overt discrimination is when a lender blatantly treats an applicant differently based on a protected characteristic, such as race or sex. Comparative discrimination results from “differences in treatment that are not fully explained by legitimate nondiscriminatory factors,” according to the Federal Reserve. The last type of discrimination, disparate impact, “occurs when a lender applies a racially (or otherwise) neutral policy or practice equally to all credit applicants but the policy or practice disproportionately excludes or burdens certain persons on a prohibited basis.”

If someone says “we don’t lend to Black people” or “unmarried women are charged a hire origination fee,” that’s overt discrimination. Other types of discrimination are not always so apparent. Some financial institutions may have policies which take into consideration a borrower’s census tract or zip code, which, due to racist practices like redlining, can have a discriminatory effect. This is one of the practices the Fair Lending for All Act hopes to curtail, making it clear that it is unlawful to discriminate based on census tract or zip code.

This clarification is welcome, as it will help loan officers and underwriters better understand the law. It will also require lenders to assess and even change policies which are currently leading to discrimination within the mortgage industry, whether unintentional or not. In doing so, it will make lending fairer to those who have been historically locked out of equal access to credit.

Giving Black homeowners a chance

A lot of the discrimination currently keeping Americans of color from equally accessing credit comes from seemingly race-neutral policies that are applied evenly but have a disparate impact. Loan officers make commissions based on the loan amount, and originating a smaller loan on a less-expensive house may not be as enticing as lending on a bigger loan in a more expensive neighborhood. I certainly heard “it’s not worth the work” several times in my mortgage career, though never in relation to an applicant’s race.

Still, given the income and wealth disparities previously discussed, the possibility for comparative discrimination is obvious but would only be apparent to someone looking at the totality of a loan officer’s or company’s production. As such, lenders “on the ground” may well not see that what they’re doing is discrimination, and borrowers who are covertly or comparatively discriminated against – and certainly those experiencing disparate impact – may not realize it, either.

That does not mean the results are not just as pernicious. In fact, these practices are making it harder to close the racial wealth gap. Last month, I was horrified but not surprised by the story of a Black woman in Indiana who discovered her home value doubled when she had a white friend stand in as the homeowner. Earlier this year, a study of house prices in Chicago’s Black and Latino neighborhoods showed there was a gap of $324,000 in the values of those homes between comparable properties in white neighborhoods. While this may seem astronomically high, the same sociologists who looked at Chicago’s study found last year that this is a national problem, with the gap being $245,000 nationwide. This, in turn, costs minority sellers hundreds of thousands in equity, which has a considerable impact on the racial wealth gap.

Minority buyers are also disadvantaged. The pandemic has exasperated gentrification, with home prices skyrocketing in even once-affordable communities. Carrying higher debt-to-income ratios (thus limiting the amount they can borrow) puts them at a disadvantage in bidding wars. On the other hand, borrowers with generational wealth and less debt might be able to either put more money towards the down payment, thus decreasing the LTV, or be able to borrow more because of a lower DTI. But again, minority borrowers are disadvantaged compared to their white counterparts. A Brookings Institute study last year found that “the net worth of a typical white family is nearly ten times greater than that of a Black family…” In a booming seller’s market, this disparity in wealth can leave minority borrowers unable to compete for housing.

These realities make ensuring lending is fair and unbiased a top priority for the federal government and lenders alike. An agency tasked with looking at the problem from a bird’s eye view – and therefore able to get a fuller picture of the situation – is needed. For these reasons, I am so encouraged by the Fair Lending for All Act. This bill establishes within the CFPB an Office of Fair Lending Testing. Charged with ensuring these disparities disappear, the Office of Fair Lending Testing would utilize what essentially amounts to “secret shoppers” to assess whether lenders are complying with ECOA and all other applicable antidiscrimination laws.

In doing so, CFPB can better assess individual loan officers’ and appraisers’ intentions, weeding out the ones who are overtly discriminating and addressing the companies which allow this. It can also correct behaviors which are leading to comparative discrimination or disparate impact, helping companies to develop best practices which ensure a fair lending process for all Americans.

Ending the racial income and wealth gap is an intergenerational project, and one we must start today. The Fair Lending for All Act can help Black and Latino Americans better secure a slice of the American dream that white people have already largely had access to. Congress must not pass up this opportunity to repair a broken rung on our nation’s housing ladder.

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