Study: Racial disparities with subprime mortgages
By Brigitte Yuille • Bankrate.com

African Americans and Latinos are getting charged for more expensive mortgage loans than white borrowers, even when they have equal credit histories, according to a new report.

A nonprofit organization dedicated to eliminating abusive financial practices examined 50,000 mortgages and discovered that the two minority groups were almost a third more likely to pay more for a loan.

The statistics
According to the report by the Center for Responsible Lending, "African-American borrowers with prepayment penalties on their subprime home loans were 6 percent to 34 percent more likely to receive a higher-rate loan than if they had been white borrowers with similar qualifications."

The news was even worse for Latino borrowers, who were "29 percent to 142 percent more likely to receive a higher-rate loan than if they had been non-Latino and white."

In both cases, the numbers varied depending on the type of interest rate (fixed or adjustable) and the purpose (refinance or purchase) of the loan.

Prepayment penalties in particular were a problem for African Americans.

These require a borrower to pay a penalty if he or she pays off the mortgage loan early. The penalty might be a percentage of the outstanding balance or a certain number of months of interest. They are associated with subprime loans because credit-impaired borrowers are considered a risk.

Prepayment penalties punish subprime borrowers who improve their credit ratings and attempt to refinance to get a lower cost for their loans.

Predatory lenders, who feed on the subprime market through abusive lending practices, trap these borrowers into the bad loans with excessive prepayment penalties.

Subprime lender practices
Researchers believe that the prepayment penalty disparity among African Americans is associated with yield-spread premiums. Yield-spread premiums are described as monetary incentives for mortgage brokers to increase rates on subprime loans.

"Many borrowers don't know brokers are charging yield-spread premiums," says Debbie Gruenstein Bocian, senior researcher for the Center for Responsible Lending.

James Ballentine, director of Grassroots and Community Outreach for the American Bankers Association, defends the lenders.

"I don't think the practice of a lender telling a broker to 'go out and find me high-price loans' is prevalent in this industry," he says.

Hilary Shelton, director of the Washington bureau of the National Association for the Advancement of Colored People, believes the disparities are occurring because the rules for home lending are strict for borrowers but loose for lenders. He says one progressive step would be to give lenders less leeway in how much they can charge on a loan.

"Discretionary pricing leads to discriminatory pricing," he says.

Latino civil rights organizations say that this discrimination affects the large wave of first-time and first-generation Latino home buyers who are showing up in the housing market.

Prime target
"If you go through Spanish-language newspapers, the advertisements are entirely from the subprime market and for alternative mortgage products," says Janis Bowdler, spokeswoman for the National Council of La Raza.

"It may be the case that new immigrants are not being adequately served by lower cost lenders," says Bocian.

Researchers say the study is the first of its kind because the analysis supplemented the 2004 Home Mortgage Disclosure Act, or HMDA, data with information from the LoanPerformance subprime asset-backed securities database. The database tracks 70 different attributes, such as loan-to-value ratios, credit scores, default, delinquency, prepayments and general characteristics of the loans, says Bob Visini, spokesman for LoanPerformance. The HMDA data include information pertaining to the race and ethnicity of the borrower.

Researchers from the Center for Responsible Lending claim that the organization's review proves that the disparities are associated with predatory lending abuses. They say lenders have attributed the disparity to shaky credit histories, which would justify the charges.

However, bankers say the researchers can't really tell without the actual loan files, and those files can only be accessed by a bank regulatory agency.

"Banks share the goals of making mortgages affordable for all segments of society and actively seek to eradicate any practices that could lead to discrimination against any groups," says Fritz Elmendorf, vice president of communications for the Consumer Bankers Association.

Civil rights groups say the study is long overdue, and they intend to increase support of congressional measures that crack down on predatory lending.

To-do list
Researchers and advocates say minority consumers can do the following to avoid falling victim to predatory lenders:

The release of the study comes as the Federal Reserve prepares for a series of public hearings on the home equity lending market. The hearings are expected to be held to discuss whether current regulatory and legislative rules are sufficient.