Discriminatory Lending Practices: Still An Issue
Sharon L. Secor
April 25, 2008
While minorities, women, and those at the lower end of the socio-economic scale have made significant progress in the area of fair access to credit, the fact does remain that discriminatory lending practices are still an issue. As the sub-prime mortgage and lending fiasco unraveled, some disturbing patterns in lending became apparent, such as the steering of certain segments of the population into more costly sub-prime loans, although they were qualified for less pricey prime loans. Federal politicians are considering action in light of recent statistics and one well-known lender is facing a class action lawsuit alleging such practices on a wide scale.
Disappointing Statistics
MarketWatch.com , in an April 15, 2008, article concerning a recent study on equal access to credit authored by Ethan Cohen-Cole, a financial economist for the Federal Reserve Bank of Boston, shared some unsettling statistics about credit opportunities made available to those who have traditionally suffered discrimination when seeking loans and other types of credit. Evidently, although significant progress has been made in this area, there is still work to be done to ensure that all Americans have equal access to credit.
According to the article, these groups continue to experience discriminatory lending practices, such as being steered towards riskier and more expensive sub-prime mortgages, despite economic parity with those in the prime mortgage market, and higher interest rates for automobile loans and credit cards. Statistics cited include data from Center for Responsible Lending, in Durham, N.C., that demonstrated "52% of home-purchase loans to African-American families and 41% to Hispanics and Latinos were sub-prime or high-cost in 2006" and from the Consumer Federation of America indicating that "African-Americans pay on average a 7.5% rate on auto loans compared with 6% for other Americans."
Congress Requests In-Depth Study
With more information of this type coming to light, particularly as the details of the mortgage and lending fiasco make it into the realm of public knowledge, members of Congress have taken notice and are seeking to take action to address the problem. According to an April 16, 2008, article published on OriginatorTimes.com , House Financial Service Committee Chairman Barney Frank has requested an in-depth study concerning, among other issues, "the current state of the federal enforcement of the Equal Credit Opportunity Act (ECOA), the Home Mortgage Disclosure Act (HMDA) and the Fair Housing Act (FHA), and other related fair lending laws."
Frank made his request to the Government Accountability Office via a letter that was signed by 15 members of the committee that he chairs. Mortgage lending, small business lending and unsecured lending, such as credit cards, were of concern to the committee members. With access to credit being such an important part of achieving affluence in America today, discriminatory lending practices have a significant impact on the ability of an individual to succeed financially, even at the most basic levels.
Borrowers Taking Action
While the federal government studies the issue, some borrowers are taking more concrete action. According to a recent news report published on CNN.com , Two Lehman Brothers Holdings Inc. mortgage units -- Lehman Brothers Bank FSB and BNC Mortgage Inc. – are being sued. In what is intended to be a class action lawsuit, it is alleged that the two mortgage units "improperly established a discretionary pricing policy that authorized an unchecked, subjective surcharge of additional points and fees to an otherwise objective risk-based financing rate."
This well known lender is far from the only one to fall under suspicion for steering certain borrowers into more expensive and riskier sub-prime loans, despite those individuals potentially being qualified for loans within the prime market – loans that would have had significantly better rates and terms, but less profitable for the lender. As has been seen as the sub-prime mortgage and lending fiasco unravels, many lenders were far more aggressive in pitching their sub-prime loans to minorities and women than to other categories of borrower.
Could You Be A Victim Of Discriminatory Lending Practices?
Even blatant credit discrimination can be difficult to identify for people who do not have enough financial experience to know how the system is supposed to work and are not familiar with standard lending practices. Discriminatory lending practices still flourish because many people´s experience of credit is limited to their own mortgage or credit cards, rather than seeing broad spectrum data on the cost of credit and the degree to which credit is accessible to certain populations or in specific areas or regions. Becoming informed about standard lending practices and knowing what to expect from a lender is one of the best protections an individual has against being victimized in this fashion.
There are certain signs to watch out for. If a lender makes unusually stringent qualification demands, despite your good credit score and history, and offers terms that include high points and fees, that should raise a red flag. Poor customer service and expensive and time consuming application processes can also indicate the potential for discriminatory lending practices. A reputable, legitimate lender is going to be eager for you to understand the process and have all questions answered to your satisfaction, as that increases the chance of the repayment of the loan being successful for both of you. Higher than the norm application fees should always draw suspicion, not only for discriminatory lending, but also for fraud potentials.
It is unfortunate that at this late date we still have equality issues to manage. In today´s society, access to credit is what ensures the most basic things in life for most people – a home to live in, a vehicle to drive, money to send the children to college. Discriminatory lending practices can have a serious financial impact on those that are affected by such policies, making enforcement of the laws we already have to address this important matter essential.
Disappointing Statistics
MarketWatch.com , in an April 15, 2008, article concerning a recent study on equal access to credit authored by Ethan Cohen-Cole, a financial economist for the Federal Reserve Bank of Boston, shared some unsettling statistics about credit opportunities made available to those who have traditionally suffered discrimination when seeking loans and other types of credit. Evidently, although significant progress has been made in this area, there is still work to be done to ensure that all Americans have equal access to credit.
According to the article, these groups continue to experience discriminatory lending practices, such as being steered towards riskier and more expensive sub-prime mortgages, despite economic parity with those in the prime mortgage market, and higher interest rates for automobile loans and credit cards. Statistics cited include data from Center for Responsible Lending, in Durham, N.C., that demonstrated "52% of home-purchase loans to African-American families and 41% to Hispanics and Latinos were sub-prime or high-cost in 2006" and from the Consumer Federation of America indicating that "African-Americans pay on average a 7.5% rate on auto loans compared with 6% for other Americans."
Congress Requests In-Depth Study
With more information of this type coming to light, particularly as the details of the mortgage and lending fiasco make it into the realm of public knowledge, members of Congress have taken notice and are seeking to take action to address the problem. According to an April 16, 2008, article published on OriginatorTimes.com , House Financial Service Committee Chairman Barney Frank has requested an in-depth study concerning, among other issues, "the current state of the federal enforcement of the Equal Credit Opportunity Act (ECOA), the Home Mortgage Disclosure Act (HMDA) and the Fair Housing Act (FHA), and other related fair lending laws."
Frank made his request to the Government Accountability Office via a letter that was signed by 15 members of the committee that he chairs. Mortgage lending, small business lending and unsecured lending, such as credit cards, were of concern to the committee members. With access to credit being such an important part of achieving affluence in America today, discriminatory lending practices have a significant impact on the ability of an individual to succeed financially, even at the most basic levels.
Borrowers Taking Action
While the federal government studies the issue, some borrowers are taking more concrete action. According to a recent news report published on CNN.com , Two Lehman Brothers Holdings Inc. mortgage units -- Lehman Brothers Bank FSB and BNC Mortgage Inc. – are being sued. In what is intended to be a class action lawsuit, it is alleged that the two mortgage units "improperly established a discretionary pricing policy that authorized an unchecked, subjective surcharge of additional points and fees to an otherwise objective risk-based financing rate."
This well known lender is far from the only one to fall under suspicion for steering certain borrowers into more expensive and riskier sub-prime loans, despite those individuals potentially being qualified for loans within the prime market – loans that would have had significantly better rates and terms, but less profitable for the lender. As has been seen as the sub-prime mortgage and lending fiasco unravels, many lenders were far more aggressive in pitching their sub-prime loans to minorities and women than to other categories of borrower.
Could You Be A Victim Of Discriminatory Lending Practices?
Even blatant credit discrimination can be difficult to identify for people who do not have enough financial experience to know how the system is supposed to work and are not familiar with standard lending practices. Discriminatory lending practices still flourish because many people´s experience of credit is limited to their own mortgage or credit cards, rather than seeing broad spectrum data on the cost of credit and the degree to which credit is accessible to certain populations or in specific areas or regions. Becoming informed about standard lending practices and knowing what to expect from a lender is one of the best protections an individual has against being victimized in this fashion.
There are certain signs to watch out for. If a lender makes unusually stringent qualification demands, despite your good credit score and history, and offers terms that include high points and fees, that should raise a red flag. Poor customer service and expensive and time consuming application processes can also indicate the potential for discriminatory lending practices. A reputable, legitimate lender is going to be eager for you to understand the process and have all questions answered to your satisfaction, as that increases the chance of the repayment of the loan being successful for both of you. Higher than the norm application fees should always draw suspicion, not only for discriminatory lending, but also for fraud potentials.
It is unfortunate that at this late date we still have equality issues to manage. In today´s society, access to credit is what ensures the most basic things in life for most people – a home to live in, a vehicle to drive, money to send the children to college. Discriminatory lending practices can have a serious financial impact on those that are affected by such policies, making enforcement of the laws we already have to address this important matter essential.
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