Mortgage

In line with critics, the CFPB missed the chance to name for discrimination in lending

Amid a national focus on redlining and other forms of racial inequality, the Bureau of Consumer Financial Protection has found persistent gaps in home loan denial rates by race and ethnicity, but does not suggest a pattern of discrimination.

The CFPB's most recent analysis of the Home Mortgage Disclosure Act of 2019 found that rejection rates have improved slightly across the population, but historical racial differences have not decreased. Black home buyers were denied loans almost three times that of non-Hispanic white home buyers last year, roughly the same gap as in 2018. The CFPB also found racial and ethnic gaps in interest rates and refinancing volumes.

However, the CFPB, which released the preliminary results in June, followed by further analysis in August, said the differences needed further investigation and left out any evidence of discrimination. Against the backdrop of national protests against racial justice issues, some observers say the agency is too shy. The office can now display more HMDA data than before.

Critics say the agency's cautious stance generally reflects how the Trump administration has undercut fair lending efforts. Some suggested that the CFPB wanted to avoid deeper analysis by claiming to release the information as soon as possible.

"It is unfortunate that so many people have waited to see what this data shows about how much of the persistent racial disparity can and cannot be explained by face-neutral credit standards, and which … standards contribute most to price disparity, and Denial Rates, ”said Diane Thompson, founder of the Consumer Rights Regulatory Engagement and Advocacy Project and former assistant director in the CFPB Office of Regulations.

The CFPB found that black and Hispanic borrowers had significantly higher rejection rates than non-Hispanic white and Asian borrowers over the past year. According to the 69-page report released by the CFPB in June, the rejection rates for conventional home loans in 2019 were 16% for blacks, 10.8% for Hispanics, 8.6% for Asians, and 6.1% for whites.

No conclusions, few recommendations

HMDA data is regularly used by bank auditors in regulatory and fair lending investigations. The 2019 data included information from 5,500 institutions that had taken out around 8.1 million loans, an increase of 26% from 2018, mainly due to refinancing due to low interest rates. The HMDA represents approximately 88% of the closed origins.

For the first time, the office has been able to analyze non-public credit score data – long considered key to solving the puzzle of lending differences – but the CFPB said more analysis and data is needed to reach conclusions.

"The office recognizes differences and cautions that, in and of themselves, a credit analysis does not provide enough information to suggest discrimination," said Warren Traiger, Buckley senior counsel, who analyzes HMDA data Financial institutions. "You suggest looking at the data, but you don't do it yourself."

The release of the consumer bureau's HMDA data over the past few years would create a mad mess for banks, mortgage lenders, lawyers, and policy experts to slice and dice the information to see if financial institutions individually for discriminating against minority borrowers be called. The financial regulators will use the data to forward potential redlining claims to the Department of Justice.

However, such remittances and other fair lending efforts were not a priority under the Trump administration and sparked a backlash from Democratic lawmakers. CFPB director Kathy Kraninger said the office is actively enforcing fair lending laws, but of the DOJ's 40 recommendations the CFPB has made since 2011 – up from 15 in 2014 – only one is during came to Kraninger's term of office.

However, some observers say that under HMDA, it is not the agency's duty to publicly report discrimination.

"It is not the job of the CFPB to prove discrimination, but to identify the differences and refer to the Department of Justice," said Maurice Jourdain-Earl, executive director of Compliance Tech, a software company specializing in fair products in McLean, Virginia. Lending. "Your job is to collect the HMDA data and make it available to the public."

However, Kraninger also seeks to limit the data lenders must provide under the HMDA.

The CFPB is on the verge of issuing a new rule to remove some, if not all of the 25 discretionary data fields released in 2015 under former CFPB director Richard Cordray. Dodd-Frank commissioned 14 additional data fields, including borrower age and creditworthiness, points and fees, prepayment penalties, and property value in addition to the nine data points collected when the HMDA was passed in 1975.

Although rejection rates for conventional systems fell a decade ago, the differences are nearly identical to those released by the Federal Reserve in 2013 after the Great Recession. The CFPB only provided a descriptive analysis of the HMDA data for 2019 while the Fed did a regression analysis. (Dodd-Frank transferred HMDA authority to the CFPB.)

"To tell a story, but they can't tell"

The CFPB even suggested that other companies analyze the data for them.

"The Bureau hopes to provide the public with a roadmap for the new HMDA data as researchers, government agencies, community groups, financial institutions and others may use this new data for various other purposes," it said in August.

Some observers say the CFPB missed the opportunity in the report to link racial disparities in mortgage denial rates to the nationwide focus on systemic racism following the assassination of George Floyd.

"They suggest there is a story to tell, but they can't tell it," said Jason Richardson, director of research and evaluation for the National Community Reinvestment Coalition. “Essentially, they find differences in rejection rates and discrepancies in interest rates that they can't explain, and they even say that the CFPB needs to do some deeper statistical analysis to explain them, but they won't do that deeper analysis . ”

Others say regulators could more appropriately eliminate racial disparities by focusing more holistically on the mortgage market rather than highlighting conventional loans backed by Fannie Mae and Freddie Mac.

The CFPB's data includes both conventional and unconventional loans. Jourdain-Earl, however, wondered why the CFPB appeared to be focused on conventional loan denial rates when approximately 53% of black borrowers were receiving loans from the Federal Housing Administration or the Department of Veterans Affairs.

"The real story here is if you limit the conversation to conventional loans, you are excluding half of the loans that were given to black and brown people who mostly received unconventional government loans," he said.

While the rejection rates are the focus in the HMDA data, he notes that often due to redlining, many minorities do not even apply for home loans when no credit is available.

"In census areas with people of color, there are fewer applications and fewer loans," said Jourdain-Earl.

Credit score debate

Observers also said they were disappointed with how the CFPB used new data contained in this year's HMDA report.

For years the Fed, along with banks and mortgage lenders, claimed that racial differences were due to factors other than discrimination, such as: Such as credit scores, debt-to-income ratios, or property values ​​- data that was either not collected or publicly available.

No credit scores were recorded in the HMDA data prior to 2018, but the scores were added according to a Cordray era rule that went into effect that year.

While experts have been waiting for the credit score data in particular, the CFPB has downplayed its importance.

"While credit scores are important, they are not the only factors used in lenders' underwriting and pricing decisions," the CFPB said in the 282-page report released in August. "The analysis of denial decisions when writing mortgages should not be based solely on a bivariate analysis that only examines the relationship between the decision to subscribe and a single credit risk factor."

Instead, the bureau suggests that a "multivariate statistical regression" analysis be needed to examine the relationship between credit scores and a borrower's credit characteristics.

Many HMDA experts had expected the CFPB to do its own deep dive as the 2019 data included new and revised creditworthiness data points that experts said should help reduce the lingering disparities in lending over decades to explain. Instead, the office asked for more data and analysis.

"Such analysis would require additional information, some of which is not available in HMDA data, and further, more complex analysis may be required that is beyond the scope of this introductory article on HMDA data for 2019," the office said.

Some experts were surprised that the CFPB claimed that such analysis was "outside the scope" of its reporting agency, given that the agency has sole control over HMDA data.

"They drive home the point that credit scores alone don't explain rejection rates, but the data shows that whites are still less likely to be rejected than blacks despite having the same credit score," said Traiger, Buckley's senior counsel. "While the CFPB is doing its utmost not to place analysis in the context of social justice issues that have been on everyone's agenda since the murder of George Floyd, we expect lawyers and law enforcement agencies to address these differences. "

Minorities pay higher interest rates

The bureau's analysis found that black and Hispanic borrowers paid around 25 basis points more than non-Hispanic white borrowers on conventional home loans due to higher interest rates. For conventional loans, black homebuyers paid a median interest rate of 4.375%, compared with 4.25% for Hispanic borrowers and 4.125% for white borrowers, while Asians had the lowest median rate at 3.99%.

For the FHA, the interest rates are slightly lower, but borrowers pay more upfront and annual mortgage insurance premiums over the life of the loan, which can increase the interest rate by as much as 1.75%.

"This is a different impact, resulting in lower overall wealth and a growing wealth gap between black and white homeowners," said Richardson. “Justifying this by saying that black buyers already have fewer assets, which translates into lower credit scores and less money to buy their interest rates, does not solve the underlying problem that plagues this system. This hurts all homeowners, reduces tax revenues for local communities, and perpetuates the growing racial gap and wealth. "

Despite record lows, the CFPB also found, according to an analysis of the NCRC's data, that the proportion of refinancing volume to low- and middle-income borrowers fell from 30% in 2018 to 24% in 2019.

The proportion of refinancing loans for black borrowers fell from 6.2% in 2018 to 5.3% in the previous year, according to the CFPB, while the proportion of Hispanic borrowers fell from 6.8% to 6.2%. In contrast, the share of Asian borrowers in refinancing activity increased from 3.7% in the previous year to 5.4% in 2019. The share of non-Hispanic white borrowers in refinancing lending also decreased slightly to 61% last year, after 63.3% in 2018.

"It is particularly worrying because the lower interest rates, which have fueled a massive surge in refinancing activity, are primarily benefiting white and Asian middle- and higher-income homeowners," added Richardson.

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