A MORTGAGE LENDING STUDY OF BALTIMORE, MARYLAND

Including Racial Characteristics, Recent Cases, Developments, and Research in Mortgage Lending and Insurance Discrimination

TABLE OF CONTENTS

• I. Introduction
• II. Racial Characteristics of Mortgage Lending in Baltimore City
• III. Cases and Research in Mortgage Lending Discrimination
• IV. Cases and Research in Insurance Discrimination
• V. Discussion and Recommendations

I. INTRODUCTION

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 CITY

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:

Black

Originated..........5338
Denied...............2683
Withdrawn.......... 847
Totals............... 9818
Denial Rate.......... 36.0%

Hispanic

Originated.......... 79
Denied............... 28
Withdrawn.......... 11
Totals............... 127
Denial Rate.......... 30.7%

White

Originated.......... 4853
Denied............... 1273
Withdrawn.......... 642
Totals............... 7290
Denial Rate.......... 26.3%

III. CASES AND RESEARCH IN MORTGAGE LENDING DISCRIMINATION

A. Cases

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, 1997:4).

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, July, 1997:2).

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, July, 1997:2).

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).


B. Research

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 62;21:4881-4887).


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

A. Cases

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 Company

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 needed.

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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