A MORTGAGE LENDING STUDY OF
Including Racial Characteristics, Recent Cases, Developments,
and Research in Mortgage Lending and Insurance Discrimination
THE GREATER BALTIMORE COMMUNITY HOUSING RESOURCE BOARD, INC.
P. O. Box 66180, Baltimore, Maryland 21239-6180
October 14, 1997
TABLE OF CONTENTS
- I. Introduction
- II. Racial Characteristics of Mortgage Lending in Baltimore
- III. Cases and Research in Mortgage Lending Discrimination
- IV. Cases and Research in Insurance Discrimination
- V. Discussion and Recommendations
This report was prepared as a means of informing discussions about
mortgage lending and insurance. The first section of this report
gives the racial characteristics of home mortgage loans made in
Baltimore City, Maryland, during calendar 1996.
The next section contains reviews of recent discrimination cases,
interesting developments, and research conducted on racial discrimination
in the mortgage lending industry during 1996 and 1997. The references
of the resources are listed for further investigation. Following,
there are reviews of discrimination cases, developments, and research
done on discrimination in the provision of home insurance. In the
final section, there is a discussion of the findings of the cited
cases and studies. Recommendations follow.
II. RACIAL CHARACTERISTICS OF MORTGAGE LENDING IN BALTIMORE
The following data regarding racial characteristics of mortgage
lending in Baltimore City, Maryland, was obtained from the Federal
Financial Institutions Examination Council's Home Mortgage Disclosure
Act database. It covers all loan activity for calendar 1996. The
data presented on the following pages is subdivided by the amount
of the loan. The totals for Baltimore City are:
Denial Rate.......... 36.0%
Denial Rate.......... 30.7%
Denial Rate.......... 26.3%
III. CASES AND RESEARCH IN MORTGAGE LENDING DISCRIMINATION
1. Fleet Financial Group
Fleet Financial Group's mortgage subsidiary agreed to pay $4 million
to settle U. S. Justice Department allegations that it charged minority
home buyers higher interest rates and loan fees than it did whites.
In May, 1996, Fleet Financial Group agreed to establish a $3.8 million
settlement fund to compensate Black and Hispanic customers who obtained
mortgages in New York and New Jersey between August 1, 1993, and
June 1, 1994. An additional $200,000 was to be spent on community
outreach and education programs.
The U. S. Justice Department had sued Fleet for violations of the
Fair Housing Act and the Equal Credit Opportunity Act. Its investigation
had found that Fleet charged "overages" more often and
granted underages less often to minorities. The investigation established
that pricing disparities could not be explained by the borrowers'
loan qualifications or other non-racial factors. (National Fair
Housing Advocate, June, 1996:5).
2. Long Beach Mortgage Company
The U. S. Justice Department settled a lawsuit in September, 1996,
against Long Beach Mortgage Corporation with an agreement for $4
million to be paid to minorities and women who were overcharged
"overages" significantly higher than White applicants.
An African-American woman over 55 was almost four times more likely
to be charged 6 points (6 percent of the loan amount) in fees by
independent brokers selling loans to Long Beach than non-elderly
white male applicants. The $4 million settlement includes $3 million
for the 1,200 applicants and $1 million for educational programs
to inform the public.
In the case, a central-city broker may charge all applicants 4 points
on top of the posted rate, whereas a suburban broker might charge
everyone 3 points. While neither discriminates, the disparity in
rates is discriminatory. (Baltimore Sun, September 15, 1996:4L)
3. PHH Corporation
In October, 1996, the NAACP and the American Civil Liberties Union
(ACLU) filed a complaint with the Pennsylvania Human Relations Commission
that the PHH Corporation - which is based in Hunt Valley, Maryland
- has followed discriminatory lending practices. The suit said that
PHH unfairly denied loans to African-Americans and rejected loans
for properties in Philadelphia's predominantly black neighborhoods.
The complaint was filed after the ACLU conducted a study of lending
in the City. The study found that in 1994 PHH received 2.4% of the
loan applications for properties in mostly white neighborhoods,
compared to 0.04% for those in mostly black areas. In 1994, PHH
denied mortgages to 17.9% of African-Americans compared to 5% of
whites; in 1995, the denial rates were 6.7% and 3.7% respectively.
(Baltimore Sun, October 5, 1996:1C.
4. Capitol Federal Savings
In April, 1997, Capitol Federal Savings - the largest lender in
Kansas City, Missouri - settled a lawsuit brought by Legal Aid of
Western Missouri by paying $50,000 in damages and also by making
many changes in its mortgage lending and personnel policies. Testers
had found consistently that whites were offered better terms, loan
products, and qualification assistance than African-Americans.
The tests were conducted after Legal Aid studies of recent Home
Mortgage Disclosure Act (HMDA) data found disparate rates of denial
between racial groups. (National Fair Housing Advocate, June,
5. First National Bank of Gordon
In a June, 1997, settlement with the U. S. Justice Department, a
northwestern Nebraska bank will pay $275,000 in damages and waive
loan costs to Native American living on the Pine Ridge Reservation
in South Dakota.
The Office of the Comptroller of the Currency found that the bank
charged its Native American customers much higher interest rates
than its other customers. (National Fair Housing Advocate,
6. Blackpipe State Bank
A 1994 settlement against the Blackpipe State Bank created a $125,000
compensation fund after it was found that loan officers refused
to make secured loans if the collateral being used was located on
a Native American reservation. (National Fair Housing Advocate,
7. Albank Federal Savings Bank
To settle a U. S. Justice Department suit, Albank Federal Savings
Bank will provide $55 million in mortgages at 1.5 percentage rates
less than prevailing (worth $9 million), $700,000 to a home ownership
counseling program, and advertise mortgages in the affected areas.
The bank had refused to grant mortgages in various cities with substantial
minority populations in Connecticut and New York; the federal Office
of Thrift Supervision found documents with "explicit instructions
in writing not to make loans in these areas." (Washington Post,
August 16, 1997:E6).
1. HUD to Allow Lenders to "Self-Test"
Under the Economic Growth and Regulatory Paperwork Act of 1996,
HUD proposed a new rule in March, 1997, that would allow lenders
to conduct "self-tests" regarding adherence to the Fair
Housing Act and Equal Credit Opportunity Act regulations, and then
perform appropriate corrective actions. The tests' results would
be privileged unless no action was taken to correct discrimination.
HUD's announced intent was to encourage lenders to police themselves
at the pre-application stage of mortgage lending. (Federal Register
2. ACORN Study Finds Loans Decline to Minorities
A HMDA study by ACORN released in September, 1997, found that home
lending to African-Americans increased 3.1% in 1996, but the number
of conventional loans to the group declined by 850 or 1.5%. In the
same period, conventional loans to whites increased 19%.
The study attributed the cause to the automated underwriting methods
and increased reliance upon computerized credit-scoring systems.
(Washington Post, September 10, 1997:D10).
3. 1996 HMDA Data Shows Higher Minority Rejection Rates
1996 data released in August, 1997, by the Federal Financial Institutions
Examination Council showed that African-American and Hispanic mortgage
loan applicants had rejection rates twice that of white applicants.
Some 48.8% of African-American applications were rejected in 1996,
34.4% of Hispanics, and 50.2% of Native Americans. The 1996 White
rejection rate was 24.4%.
A statement from the Center for Community Change charged that while
some lenders were improving their lending programs to serve minorities,
the industry as a whole was not doing well. (National Fair Housing
Advocate, September, 1997:3).
IV. CASES AND RESEARCH IN INSURANCE DISCRIMINATION
1. State Farm General Insurance Company
In July, 1996, State Farm settled a complaint of insurance redlining
filed by the Toledo Fair Housing Center and the National Fair Housing
Alliance (NFHA). State Farm will pay $100,000 to the organizations,
and $1 million in a first-time home buyers program.
The suit was filed after it was found that State Farm's underwriting
policies denied equal insurance coverage to residents in neighborhoods
with high minority populations in Toledo and other U. S. cities.
HUD mediated the settlement talks. NFHA also prompted HUD to investigate
Allstate and Nationwide's redlining of minority-dominant neighborhoods.
(National Fair Housing Advocate, July, 1996:1).
2. Nationwide Insurance Company
During 1996-1997, the Nationwide Insurance Company - the sixth largest
property and casualty insurer in the U. S. - has been sued several
times by its own agents for its discriminatory practices:
In January, 1997, a Nationwide Insurance Company agent filed a lawsuit
alleging that the Company was guilty of illegal redlining practices,
and that he was fired in retaliation when he reported the lawbreaking
to state officials. According to the agent, Nationwide's underwriters
stated that they did not want any "Detroit business."
(National Fair Housing Advocate, February, 1997:1).
In February, 1997, an insurance agent with Nationwide filed a lawsuit
that the Company redlined the predominantly-Black neighborhoods
in the western part of Louisville, Kentucky. The agent filed the
lawsuit after Nationwide managers attempted to retaliate because
of his questioning of the discriminatory practices. He was seeking
almost $5 million in lost future earnings and $100 million in punitive
damages (National Fair Housing Advocate, February, 1997:1).
In March, 1997, Nationwide agreed with the U. S. Justice Department
to invest $13.2 million in 10 cities - including Baltimore and Richmond,
Virginia - to provide down payments and closing costs to minority
home buyers and to change its underwriting policies to make insurance
more accessible to households residing in predominantly minority
neighborhoods. Nationwide had refused to insure homes over 50 years
old and worth less than $50,000. The settlement was criticized as
too lenient by Philadelphia insurance agents and the NFHA because
it did not give relief to the victims of discrimination. (National
Fair Housing Advocate, April, 1997:5).
3. State Farm Insurance Company and Allstate Insurance
On July 8, 1997, the Fair Housing Council of Greater Washington
filed a lawsuit against four insurance companies alleging that they
failed to provide reasonably priced property and liability insurance
to group homes that house mentally-retarded adults or recovering
alcoholics and drug addicts. Also named in the lawsuit were the
Republic Insurance Group and Grange Mutual Casualty Company.
The suit - alleging violations of the Fair Housing Act and the Americans
with Disabilities Act - cited three cases where the insurer refused
to write standard property and liability insurance when they discovered
that the properties were being utilized as group homes for people
with disabilities. (Washington Post, July 9, 1997:D11).
B. Research and Developments
1. Study of Redlining Published
In August, 1997, the Urban Institute Press published Insurance
Redlining: Divestment, Reinvestment, and the Evolving Role of Financial
Institutions by Gregory D. Squires, a nationally-known expert
in this field. The book contains data from the insurance industry,
state and federal agencies, and private Fair Housing groups, as
well as synopses of relevant studies from various authors.
The book's findings include: (a) losses on policies in inner city
neighborhoods are about equal to losses in affluent suburban areas,
(b) African-American and Hispanic home buyers do not receive the
same level of service as whites.
2. Court Finds Fair Housing Act Applies
In February, 1997, Federal District Judge Fernando Gaitan, Jr.,
ruled that Section 804(b) of the Fair Housing Act does cover the
underwriting of homeowners insurance. The ruling was in a discrimination
lawsuit filed by 12 African-American residents of Kansas City, Missouri,
against 22 insurance companies doing business in Missouri. (National
Fair Housing Advocate, March, 1997:6).
V. DISCUSSION AND RECOMMENDATIONS
It is hoped that this information will be utilized to improve the
existent deplorable situation. The many cases and studies documented
in this report indicate that African-American and Hispanic households
face much discrimination in the mortgage lending and insurance processes.
While some of the cases involved adjudication of complexities in
the applicable laws and regulations, most cases were simply very
blatant discrimination via a deliberate action or actions (e.g.,
redlining). In many of the cases, it was a private and/or nonprofit
organization that was compelled to identify the discriminating entity
and to act.
First, it is recommended that resources be increased to support
private and nonprofit efforts to identify and eradicate discriminatory
practices in mortgage lending and insurance. It is apparent that
nonprofits have a critical role in uncovering and correcting discrimination.
This effort must be strengthened.
Second, it is recommended that the various federal and state agencies
with jurisdiction over the mortgage lending and insurance industries
improve their efforts to eradicate discrimination. In 1997, nine
years after the enactment of the 1988 Fair Housing Amendments Act,
it is inexcusable for legal corporations doing regular business
with the public that is regulated by the government to continue
to discriminate either by design, omission, or action. The primary
responsibility for eliminating discriminatory practices in these
areas is government, and this report indicates more diligence is
FOR MORE INFORMATION
For more information about Fair Housing, please contact the GBCHRB
at 410-929-7640 or E-Mail us.
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