As policymakers and consumer advocates seeks ways to narrow the racial gap in homeownership, a new report suggests nonbanks are doing a better job of lending to minorities than banks in the largest state.
The findings by the Greenlining Institute, a nonprofit based in Oakland, Calif., show the eight largest nonbank mortgage lenders in California lent more of their respective portfolios to Black and Hispanic homebuyers than top bank lenders in the state.
Independent mortgage bankers say the main reason for the difference in lending to minorities is that nonbanks are focused solely on mortgage lending rather than selling a wide array of products to the same customers.
“We are in business to make loans, so if a borrower qualifies for a loan, we’ll make it,” said Scott Olson, executive director of Community Home Lenders Association, a trade group of independent mortgage bankers. “Banks are in business to make profits based on a wide range of products. Making a small profit on a loan may not help them in their business plan because they want to cross-sell them insurance and securities and a lot of other products.”
Greenlining analyzed loans made by the top 15 mortgage lenders in six metropolitan regions in California: Sacramento, San Francisco, Oakland, Fresno, Los Angeles and San Diego. The analysis of 2019 Home Mortgage Disclosure Act data found that Black, Latino and Native American borrowers received far fewer loans overall than white borrowers. Loans to Black, Latino and Native American borrowers totaled 97,420, compared with 157,696 for white borrowers.
But when comparing the top eight nonbanks, Greenlining found that just over 18% of their mortgage portfolios on average were made up of loans to Latino borrowers. That figure was just over 8% for the top seven banks. On average, just over 3% of the nonbanks' portfolios were loans to Black borrowers, compared with 1.1% for the average of the bank portfolios.
"In several regional markets, non-bank lenders make twice as many home purchase loans to low-income borrowers as mainstream banks," the report said.
The new data comes as some expect access to homeownership may attract more attention from the incoming Biden administration. A national focus on racial inequality has heightened the focus on anti-redlining just as regulators take on a sweeping overhaul of the Community Reinvestment Act.
Community and advocacy groups have long wanted to include nonbanks under the CRA. The Greenlining data suggests there is evidence to bolster the case that regulators should focus more attention on nonbanks including the types of loan products they originate and outreach being made to low and moderate-income communities.
"In California, nine of the top 15 home purchase lenders are unregulated non-bank lenders that do not offer traditional banking services, operate largely online, and are not subject to the Community Reinvestment Act, so their lending is not regularly assessed to determine whether they meet the credit and borrowing needs of the communities where they operate," the report said.
Nonbanks account for 90% of so-called nonconventional lending backed by the Federal Housing Administration and the U.S. Department of Veterans Affairs. Nonbanks also originate about half of all conventional loans backed by Fannie Mae and Freddie Mac.
Rawan Elhalaby, Greenlining’s senior economic equity program manager and author of
“Banks say they can’t afford to make the riskier loans,” Elhalaby said. “They complain that they are more regulated than nonbanks and can’t afford to make concessions that nonbanks do.”
Banks pulled back from FHA lending after the financial crisis out of fear that if a borrower defaulted, the bank could be sued by the Justice Department under the False Claims Act. Before the financial crisis, about 50% of loans insured by the FHA were originated by depository institutions, but that number is
"Nonbanks seem to be taking more share from the banks each year," said Jim Coffrini, president and CEO of Sierra Pacific Mortgage in Folsom, Calif.
While some banks have closed branches in minority neighborhoods, nonbanks have increased marketing to low- and moderate-income communities.
“Many products coming from traditional banks are inaccessible because branches don’t exist in these communities, and people of color are not making relationships with bankers or loan officers,” Elhalaby said. “Across the board, people of color are largely underrepresented in home lending.”
Of the 15 top lenders in California, all eight nonbanks topped the list in lending to both Latino and Black borrowers, though lending to Black borrowers was significantly lower overall compared with their percentage of the population.
New American Funding in Tustin, Calif., topped the list in lending to minorities with 28% of its loan volume in California last year going to Latino borrowers and 4% to Black borrowers. Freedom Mortgage, a large nonbank lender and servicer in Mount Laurel, N.J., made 21% of its loans in California to Latinos and 4% to Blacks. Other top nonbank lenders in the state included Finance of America Mortgage, in Horsham, Pa.; United Wholesale Mortgage, in Pontiac, Mich., which does business as United Shore Financial; and Caliber Home Loans, in Coppell, Tex.
Among banks, Flagstar Bank in Troy, Mich., topped the list in lending to minorities with 12% of its loans in California going to Latinos and 2% to Blacks. The other six banks — MUFG Union Bank, JPMorgan Chase, Wells Fargo, U.S. Bank, Bank of America and Citibank — each originated just 1% of their loan portfolios to Blacks and 10% or less to Latinos in California.
The housing market is one of the few positive standouts of the economy, while other sectors that have taken a beating from the coronavirus pandemic, but some signs point to trouble ahead. More than 5 million borrowers have requested forbearance from paying their mortgage.
Housing inventories were already running low heading into the pandemic in March. Low mortgage rates and skyrocketing demand for homes caused the Mortgage Bankers Association to project a record $3.14 trillion in lending volume this year.
Greenlining is advocating that banks increase their branch presence in rural communities and provide more funding for broadband deployment in underserved areas. The group also wants more funding be made to nonprofits to support homeownership counselors for first-time homebuyers.
Congress would have to pass legislation to add nonbanks to the Community Reinvestment Act. The Office of the Comptroller of the Currency overhauled enforcement of the law for its banks in a rule finalized in May, but other bank regulators have declined to support the OCC plan. A recent draft reform outline by the Federal Reserve suggests that the agencies' CRA policy but could get
But Olson said adding nonbanks to the CRA regime wouldn’t make sense.
“Nonbanks are leading the way in making mortgage loans to underserved and minority borrowers,” Olson said. “CRA stands for Community Reinvestment Act," which means "banks and other depositories that take funds from a community through deposits should reinvest in those communities. Independent mortgage banks by contrast don't take deposits out of communities.”
