Who Really Gets Home Loans? Year Ten
Mortgage Lending to African-American and Latino Borrowers in 5 California Communities in 2002
November 2003
California Reinvestment Committee
474 Valencia Street, Suite 110
San Francisco, California 94103
(415) 864-3980
www.calreinvest.org
Kevin Stein conducted the analysis and drafting of this report
Rita Laila Johal assisted with the research
CRC is a nonprofit membership organization of more than two hundred (200) nonprofit organizations and public agencies across the state of California. We work with community-based organizations to promote the economic revitalization of California’s low-income communities and communities of color. CRC promotes increased access to credit for affordable housing and community economic development, and to financial services for these communities. CRC promotes community reinvestment through negotiation with and regular monitoring of major California financial institutions, as well as through the provision of technical assistance to local communities in California.
EXECUTIVE SUMMARY
Who Really Gets Home Loans? Year Ten investigates whether California’s largest banks and mortgage companies are fairly meeting the credit needs of traditionally underserved homebuyers and homeowners in the state. This report looks at home purchase lending by banks in California, and explores the relationship between race and the cost of credit. In analyzing home lending patterns for the state’s top lenders, the California Reinvestment Committee (“CRC”) finds that four key trends emerge:
1. There is Unequal Access to Home Purchase Loans. African American and Latino households are not receiving their fair share of home purchase loans;
2. People of Color Pay More for Home Loans. African American and Latino borrowers are more likely than white borrowers to have an expensive home loan.
3. A Two-Tier System of Credit Exists Within Large Financial Corporations. Companies that own both a bank and a higher cost subprime lender are not lending equally to borrowers of color.
4. The Cost to Borrowers of Subprime Lending is High. Subprime borrowers may have loans with extremely high interest rates and excessive fees. In 2002, some subprime home loans carried Annual Percentage Rates (APR) over 20%, while most bank customers received loans with APRs at 7% or lower.
Key Findings
CRC analyzed 2002 Home Mortgage Disclosure Act (HMDA) data for thirteen of the largest California banks and bank-affiliated mortgage lenders, looking at lending patterns in Fresno, Los Angeles, Oakland, Sacramento, and San Diego.
1. Unequal Access to Home Purchase Loans
Lender performance was reviewed based on CRC’s Equality Benchmark, which compares home loan activity to the proportion of African American and Latino households in each of the five cities analyzed. Lenders earned Equality Benchmark points for taking applications from, or originating home purchase loans to, African American and Latino households in proportion to the representation of these groups in each city.
Analysis of home lending patterns in the year 2002 shows that major bank lenders are failing to serve African American and Latino households in California:
· No Bank Met the Needs of African American and Latino Home Loan Applicants. The “best” lender, National City, had only six Equality Benchmark points out of a possible twenty points for a 30% success rate.
· Two Banks Were Especially Noteworthy for Their Poor Performance. Washington Mutual and Countrywide, two of the largest lenders in the state, received no Equality Benchmark points, meaning they failed to take in applications and lend proportionally to African Americans and Latinos in every instance.
· Five Banks Did Worse Than Last Year. Bank of America, Chase Manhattan, U.S. Bank, Washington Mutual and World Savings each scored fewer Equality Benchmark points than last year.
· Los Angeles Saw the Greatest Inequities. Banks in Los Angeles met the Equality Benchmark less than 6% of the time. San Diego fared only slightly better, with lenders achieving the Equality Benchmark under 8% of the time.
· Banks Ignore African Americans. Lenders consistently failed to serve African Americans. In all five cities combined, the thirteen banks met the Equality Benchmark a mere 2.3% of the time. No lender met the Equality Benchmark for outreach or lending to African Americans in Oakland or San Diego.
2. African American and Latino Borrowers Pay More for Home Loans
A new dimension has been added to the battle for equal access to credit in California. For years, communities of color struggled to access loans to buy homes. Now, traditionally underserved communities are being flooded with loan opportunities, but it is for high cost, subprime credit that they can ill afford and often do not deserve. Subprime loans can come with Annual Percentage Rates (APR) of 20%, or higher.
Prime lending refers to lending for borrowers with good credit profiles. Subprime lending refers to lending that is targeted to credit-impaired borrowers and which often includes higher interest rates, up front loan costs, and fees. California has witnessed an explosion in subprime lending, from an estimated $18 billion in 1998, to over $62 billion in 2002.
As subprime lending disproportionately impacts borrowers and communities of color, CRC views this as a civil rights, fair lending, and economic justice issue. The amount you pay for a loan should not vary depending on where you live or what you look like.
CRC compared the home lending patterns of thirteen bank lenders to that of the largest thirteen subprime lenders in the state. Subprime lenders were much more likely than bank lenders to accept home loan applications from, and make home loans to, African Americans and Latinos. These large disparities suggest that banks are far less successful in reaching out and lending to underserved households.
· African Americans Not Served. Higher cost subprime lenders did more of their business with African American households than did conventional bank lenders in all 5 survey cities. In Oakland, the thirteen subprime lenders took in 44% of their home loan applications from African Americans, compared to 23.2% of home loan applications of the thirteen bank lenders coming from African Americans.
· Latinos Not Served. Subprime lenders took a greater percentage of applications from, and made a greater percentage of loans to, Latino borrowers than did their prime counterparts in each of the five survey cities. In San Diego, 22.1% of subprime loan applications came from Latino households, compared to 11.9% for bank and bank-affiliated prime lenders.
3. A Two-Tier System of Credit Exists Within Financial Corporations
CRC examined the lending records of 6 large financial corporations that own BOTH a low cost prime lender AND a high cost subprime lender: Citibank, Countrywide, H&R Block, HSBC, National City, and Washington Mutual.
In analyzing the lending patterns of these companies, CRC found a two-tier system of credit exists within large financial services corporations, with subprime mortgage companies focusing more on African Americans and Latinos than their bank affiliates.
· Subprime For African Americans. In each city, subprime applications were twice as likely to come from African American loan seekers as prime applications were. In Los Angeles, 14% of all subprime applications came from African American loan seekers, compared to 5.2% for their bank affiliates.
· Subprime For Latinos. Subprime lenders also received a greater percentage of applications from Latino borrowers than did their prime affiliates in all five cities. In San Diego, 24.9% of subprime applications were from Latinos, compared to 12% for prime affiliates.
· At Countrywide and Washington Mutual, Race Disparities. Countrywide and Washington Mutual both did less outreach and lending to African Americans and Latinos, as a percentage of their business, than their subprime lenders did, in each of the 5 survey cities.
4. The Cost of Subprime Lending is High
The cost difference between a prime and subprime loan can be substantial. In 2002, the average interest rate on a 30-year fixed mortgage was 6.54% and average points paid by the consumer were .6%, according to Freddie Mac, one of the Government Sponsored Enterprises (GSEs).
· In contrast, in 2002, several subprime lenders originated loans in California with Annual Percentage Rates (APRs) that exceeded 15%, including: Citifinancial Services, Option One Mortgage, Household Finance, Beneficial, Washington Mutual Finance, and Wells Fargo Financial.
· Citicorp Trust Bank, FSB originated mortgage loans in California with APRs exceeding 20% in 2001, the last year for which data is available
Recommendations
In light of these disturbing findings, CRC recommends the following:
· Meet the Equality Benchmark. Financial institutions must set serious lending goals to ensure that lending performance mirrors the racial and income demographics of this diverse state. Lenders should comply with CRC’s Fair Lending Principles (see Appendix VII).
· Expand branch presence. Meaningful access to low cost products depends on branch access and presence. HSBC has six branches serving upper income clients in California, while at the same time it has 177 subprime Household Finance and Beneficial branches that will offer higher cost products to California’s diverse population. No bank should have fewer bank branches in California than its subprime affiliate.
· Offer best loan products. Financial institutions must make their best and lowest cost loan products available to all qualified applicants through all lending channels, including the bank, prime lending unit, or subprime affiliate. Many applicants for subprime loans can qualify for lower cost prime loans. Banks must ensure that these borrowers receive the prime loans they deserve. Given the overrepresentation of people of color in the subprime market, the failure to offer the best and lowest cost products to all home loan applicants has fair lending implications.
· Community Reinvestment Act (CRA) beyond bank branches. Financial institutions should not be allowed to circumvent the CRA, taking profits, but making no investment, in California communities. Countrywide Bank and Chase Manhattan both propose to provide banking services out of retail branch outlets in California, but have no reinvestment plans for the state. CRA-covered lenders are more likely to make credit available in underserved communities, and to help revitalize these neighborhoods.
· Protective Legislation. The cities of Oakland and Los Angeles have passed anti predatory lending ordinances designed to protect residents from unscrupulous lending practices in the subprime market. Each also contains a requirement that borrowers have access to home loan counseling services before signing complex home loan documents. These efforts help to ensure that borrowers have access to credit that can help them build and preserve wealth, not strip it. Industry inspired initiatives by Congress, bank regulators, and credit rating agencies threaten to undermine these local efforts to preserve homeownership and promote fair lending.
HOME PURCHASE LENDING: THE EQUALITY BENCHMARK
The Importance of Home Purchase Lending
Homeownership comes with numerous benefits for both household and community, including: stability of place that allows families to grow and prosper; pride of ownership that leads to community involvement and neighborhoods with a strong quality of life; and tax savings and fixed housing costs which can provide immediate financial benefit. Decent and affordable housing is a critical element of any vibrant neighborhood.
Yet perhaps the greatest benefit of all is the ability of home ownership to create accumulated assets and equity, which can then be translated into funds for education, starting a small business, retirement savings, or even a downpayment for housing and wealth-building for the next generation. Home ownership remains the primary source of wealth for most Americans and as such its importance cannot be understated.
Equality Benchmark Methodology: Who Really Gets Home Loans?
To assess lender performance in providing equal access to credit to all communities, the California Reinvestment Committee has developed the “Equality Benchmark.” The benchmark is designed to compare an institution’s record of lending against the estimated household demand for such loans in the communities in which the bank does business.
Lenders should make credit available to African American and Latino households in proportion to their presence in California communities. This report looks exclusively at African American and Latino home loan applicants as they have historically been the most underserved by mainstream financial institutions.
The percentage of African American and Latino households in each city is compared to the percentage of applications taken from, and originations made to, these groups by each of the thirteen lenders analyzed. One (1) point was given to a lender each time the lender met or exceeded the Equality Benchmark. For more on the Equality Benchmark, see the methodology section of this report, beginning on p. 26, after the Recommendations section.
Appendix I contains charts that reveal the performance of the thirteen bank lenders compared to the Equality Benchmark for outreach and lending to African Americans and Latinos in five (5) California cities.
Key Findings
California’s bank lenders failed to serve African American and Latino households in the state. This is shown in low outreach efforts and origination rates, as measured against CRC’s Equality Benchmark. The findings are disturbing:
EQUALITY BENCHMARK SCORING
BANK LENDERSLender / Score / Total Points Achievable
National City / 6 / 20
World Savings / 4 / 20
Bank of America / 4 / 20
Wells Fargo / 4 / 20
California Bank & Trust / 3 / 20
Indymac Bank, FSB / 3 / 20
US Bank / 2 / 20
Bank of the West / 2 / 20
Citibank / 2 / 20
Chase Manhattan / 1 / 20
Union Bank of California / 1 / 20
Countrywide Bank and Home Lns / 0 / 20
Washington Mutual / 0 / 20
· Each of the bank lenders analyzed failed the Equality Benchmark for outreach and lending to African American and Latino homebuyers. National City led all lenders, but with only six (6) Equality Benchmark points out of a possible twenty (20) points available to each lender, or a 30% success rate. Each bank lender would have received an “F” grade under the Equality Benchmark analysis.
· Two banks were noteworthy for their poor performance. Countrywide and Washington Mutual, two of the largest lenders in the state and nation, received no (0) points. Countrywide and Washington Mutual failed to conduct outreach and to lend proportionally in every instance to those wishing to purchase homes.
· Five banks performed worse in 2002 than in 2001, taking a step backward in efforts to provide equal access to credit:
o Bank of America earned 2 fewer points this year than last;
o Chase Manhattan earned 1 less point;