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Examining Loan Bias Among Borrowers of Color

The Community Reinvestment Act (CRA) was passed in 1977 to fight explicitly racist redlining policies, and requires federal bank regulators—the Office of the Comptroller of the Currency, the Federal Reserve, and the Federal Deposit Insurance Corporation—to evaluate the performance of banks and thrifts to determine how well each meets “the credit needs of its entire community, including low- and moderate-income neighborhoods.” Independent mortgage banks and credit unions, or nonbanks, are not subject to the CRA.

Federal banking regulators are considering revisions to the CRA, and one issue they have raised is whether and how the regulations should explicitly take race into account, given the CRA’s genesis and purpose. Although current CRA regulations do not consider race, data collected under the Home Mortgage Disclosure Act (HMDA) include information about home mortgage borrowers’ race or ethnicity, allowing us to examine how well banks perform in lending to borrowers of color relative to the nonbanks not subject to the CRA. Based on an analysis of mortgage loans made to owner-occupant home purchasers, we find that banks substantially underperformed nonbanks in serving borrowers and neighborhoods of color.

This shortfall is partially due to banks making fewer Federal Housing Administration (FHA) loans, and government channels tend to lend more frequently to borrowers of color. The analysis shows banks make a lower proportion of their loans to neighborhoods and borrowers of color through both government and conventional lending channels.

Using 2018–19 HMDA data, we found that banks made a lower proportion of loans to borrowers of color—those who identify as Black, Hispanic, Asian, or another nonwhite race. Overall, banks made 23.2% of their owner-occupant home purchase mortgage loans to borrowers of color, compared with 31.3% for nonbanks.

This racial lending gap continues up the income ladder, while middle-income neighborhoods, banks lagged nonbanks by 8.3 percentage points. In upper-income neighborhoods, the gap between banks and nonbanks is 6.3 percentage points.

The gap is particularly strong in communities that are both LMI and neighborhoods predominantly of color: 22.2% of bank loans in LMI neighborhoods were made in neighborhoods of color, compared with 26.4% of nonbank loans in LMI neighborhoods of color.

Banks make fewer mortgage loans through government channels than nonbanks, which can partially explain the shortfalls. Overall, government channels are significantly skewed toward lending to borrowers of color, as government loans tend to allow for more risk layering—a wider combination of lower credit scores, higher debt-to-income ratios and higher loan-to-value ratios.

Within each government and conventional channel, banks make a disproportionately lower share of loans to neighborhoods and borrowers of color. We find that banks make 7.2 percent of their government loans and 5.2 percent of their conventional loans to neighborhoods of color, compared with 11.7 percent and 7.3 percent, respectively, for nonbanks.

 

The data on borrowers of color reveal similar patterns. In government channels, banks make 28.6% of their government loans to these borrowers; for nonbanks, the share is 37.8%.

In both government and conventional channels, banks make proportionally fewer loans to LMI neighborhoods of color and borrowers than nonbanks, largely because, within each channel, banks have a narrower credit box. Although bank and nonbank loans tend to have similar loan-to-value ratios, bank loans tend to have higher average credit scores and lower average debt-to-income ratios.

To read the full report, click here.

About Author: Demetria Lester

Demetria C. Lester is a reporter for DS News and MReport magazines with more than eight years of writing experience. She has served as content coordinator and copy editor for the Los Angeles Daily News and the Orange County Register, in addition to 11 other Southern California publications. A former editor-in-chief at Northlake College and staff writer at her alma mater, the University of Texas at Arlington, she has covered events such as the Byron Nelson and Pac-12 Conferences, progressing into her freelance work with the Dallas Wings and D Magazine. Currently located in Dallas, Texas, Lester is an avid jazz lover and likes to read. She can be reached at [email protected].
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