Bankers say race is not a factor in lending, but advocates say credit ratings are “inherently biased.”
DALLAS – Watch the full story Sunday on WFAA News at 10 a.m.
When it comes to giving home loans, the law says lenders are supposed to be color blind.
Black, white, Hispanic – if you can pay off the loan, you can’t be treated any differently.
But Jennifer Baker doesn’t believe that’s how it really works.
âI think when people think of this side of downtown Dallas – ‘it’s low income,’ or ‘people who don’t want to work, don’t want to pay their bills.’ It’s not the case.”
Baker owns a home south of Interstate 30, where the majority of the population is black and Hispanic.
She is also a nurse and has been a client of the same bank since 1999. But over the years Baker says her bank has made it difficult, if not impossible, to get credit, so she has had to go elsewhere when she needed help. ‘a loan of $ 89,000.
âI can’t go into my bank and ask them for money,â she said. I reimburse everyone, no problem, but they are the only ones who don’t trust me.
As we reported – repeatedly – in our âBanking Below 30â survey, Dallas banks make relatively few loans in low-income and minority neighborhoods south of I-30.
Some people say it’s just smart business. On social media, people responded to our series of reports like this: “Why should banks be forced to lend money to people who cannot pay them back?” “Banks only lend to people who qualify.” “The banks will lend to the Green Martians if they are likely to be repaid.”
But the reality is that the loan is more than just a business. It is also a question of race. We have calculated new numbers and we find that blacks and Hispanics are denied home loans at much higher rates than whites – even though they have similar repayment capacity.
To analyze mortgage rejection rates from banks and mortgage companies, we collaborated with the nonprofit association Reinvestment Fund, which emphasizes the promotion of economic justice.
We started by looking at the refusal rates for all applicants in Dallas in 2019 and 2020. While this type of public data does not include all of the factors a lender considers, we found that white people are being refused. mortgage loans 5.8% of the time, Blacks 16.1%, and Hispanics 13.8%.
This means that in Dallas, if you are black, you are three times more likely to be refused a loan.
âIt’s an insult to the hard working American people who get up and go to work,â Baker said.
So what if we take a look at the numbers again, but this time instead of looking at everyone in Dallas, we’re just looking at applicants who have enough savings for a down payment of 10% or more. – and enough income to pay off their debts with 57% or more of their salary remaining.
Among these most qualified applicants, we found that whites are denied loans 4.3% of the time, blacks 12.1%, and Hispanics 5.8%. So even when they are more skilled, blacks are still three times more likely to be refused than whites.
And here’s an even more interesting result: the refusal rate of less financially qualified whites is 12.2%. So if you are more skilled and black, you will be treated the same as a less skilled and white person.
Others came to a similar conclusion when looking at mortgages nationwide. August 25, an analysis by investigative journalists from The Markup found that – looking at borrowers with similar qualifications – lenders were 80% more likely to reject black applicants, 40% more likely to reject Latino applicants, 50% more likely to reject Asians / Pacific Islanders and 70% more likely to reject Native Americans.
Do you have questions about this story? Join the reporter David Schechter on Twitter on Sunday where he will respond.
The thing that is missing in this picture is the credit score. This data is not public, so we cannot factor it into what we do. But critics say that’s what’s holding back otherwise qualified black borrowers.
âThe credit score has become, in many ways, an indicator of race,â said Jeremie Greer, co-founder of the nonprofit group. Liberation in a generation. He recently testified in Congress for credit rating reform.
âWhat the research shows with black households is that the higher the income, the more debt you have,â he said. “And a real driver of this debt for middle-income blacks is student loan debt.”
Student debt isn’t the only factor in credit score, but Greer says it’s a critical factor. This is what he is talking about.
Brookings Research shows that, on average, four years after graduation, black graduates are $ 53,000 in debt, while white students are $ 28,000 in debt.
A lot of debt leads to a drop in your credit rating. So, are black students better off at accumulating student loans?
a analysis of the Urban Institute shows that the homeownership rate for a black graduate is 30%, which is significantly lower than that of white graduates, and even slightly lower than white dropouts.
So you have a student loan gap, a homeownership gap – and what about a credit score gap? There is that too.
The Urban Institute analyzed federal data and found that one-third of blacks didn’t even have a credit score – also known as a FICO score – due to a lack of credit history. Another third have a credit score below 620, in the âpoorâ to âfairâ range. Fourteen percent have a fair to good score. 50% white.
Looking at it differently, in Dallas, FICO scores in white neighborhoods are, on average, 156 points higher than in black neighborhoods.
âCredit ratings reflect current economic circumstances, but do not cause them,â said Francis Creighton, President and CEO of the Consumer Data Industry Association, which represents the major credit reporting companies.
âPeople of color face a wealth gap every time they try to access financial services,â he said. âAfter generations of financial and other discrimination, many families of color have not had the opportunity to create the kind of intergenerational wealth that many white families have.
âOur industry is committed to financial inclusion, jobs and housing,â he said.
Bias in loans
Greer said credit scores are “inherently biased” because “they give more credit to things that are readily available to many white households.”
âIf you have a mortgage, you will probably have a better credit rating,â he said. âIf you have high student loans – which a lot of black and brown communities have – you’re going to have a lower credit score. So there are things that oppose black or brown communities that make the system in which they determine credit score inherently biased against black and brown people.
Credit scores aren’t the only indicator of default risk, but they’ve always been the key metric, said Ben Strube, who runs an independent mortgage company in Dallas.
Open strube Mortgage on assignment after quitting his job at a major bank. He was disillusioned with the focus on people with good credit and neglecting borrowers with lower credit scores who might still qualify for a loan, but were less profitable and took longer.
“The big banks [are] sort out wealthy clients, âhe said. âThe big banks offer wealth management services. They offer CD, check and savings accounts. They want you for the life of your loan. So if you have a FICO score of 620, do you have any money to invest with them? Probably not.”
âBanks meet their obligation to treat all applicants fairly by ensuring that they apply the underwriting criteria neutrally to each applicant, regardless of race. American Bankers Association said in a statement to WFAA. â… Many banks offer programs such as down payment assistance, grants to subsidize closing costs, and interest rate adjustments for low-income families. “
The ABA also pointed out that it has successfully lobbied for ways to reduce barriers to homeownership for minorities, such as removing strict caps on the income an applicant uses to pay off debt. . It also supports credit rating reforms.
Credit rating reforms
Currently, rent and utility information is only reported to the credit bureaus when you miss a payment. But these are big expenses for many families, and Greer says they should also get credit when paying those bills on time.
âLandlords consistently get their on-time payments reported to the credit bureaus, while tenants – who have disproportionate incomes – don’t,â Greer said.
The idea is gaining ground.
On August 11, the Federal National Mortgage Association, known as Fannie Mae, announced that he would start using the rent payments on time to mark potential borrowers looking for government guaranteed home loans.
This is only the first step, say the experts.
A more extensive solution is the The Credit Access and Inclusion Act, currently pending in Congress. This would expand what could be counted in a credit score to help an estimated 45 million low-income borrowers have better access to credit.
Major credit bureaus support the use of so-called “alternative data” in calculating credit scores to more accurately reflect the creditworthiness of more people – including many minorities with traditional low scores .
“On-time payments for rent, phone bills and utilities are indicators that a consumer is able to manage their credit responsibly, even if the person is credit invisible or has a poor credit history.” Said Creighton, head of CDIA. âOur data has the power to uplift people. Racism and discrimination are against everything we stand for. It is illegal, and it is wrong. The use of credit reports in loans contributes to a fairer and fairer lending system.
Jennifer Baker, who has an excellent credit rating and is currently working on her masters, said she is making all the right choices to move forward. But she will also graduate with $ 30,000 in student debt.
“We deserve equal opportunities,” she said. “Our money spends the same.”