WASHINGTON - Banks are far more likely to issue higher-priced loans to minorities than to white borrowers, but they are not necessarily discriminating along racial lines, according to a report from the Federal Reserve Board.
The agency also said it was contacting an unspecified number of lenders who have exhibited "relatively large pricing differences" between minorities and whites to examine their lending practices.
Over all the 50-page report, issued Tuesday, which examines 2004 Home Mortgage Disclosure Act data from more than 8,800 lenders, offered ammunition to both sides of the debate over whether financial institutions treat their minority and white customers equitably.
The report supported banks' claims that pricing discrepancies between borrowers were largely attributable to a range of risk factors, including income and credit scores. However, the Fed also said some lenders could be steering minorities into higher-priced loans.
"These patterns may stem, at least in part, from borrowers being steered to lenders or to loans that offer higher prices than the credit characteristics of these borrowers warrant," the Fed wrote.
Banks have long braced for the report and privately worried its findings would result in a spate of bad publicity, tighter regulation, and litigation. New York Attorney General Eliot Spitzer is already seeking to investigate the lending habits of banks in his state.
But the Fed warned that its findings are not conclusive, and that harsh criticism of institutions could lead to a credit crunch for low- and moderate-income consumers.
"The HMDA data are not, by themselves, a basis for definitive conclusions regarding whether a lender discriminates unlawfully against particular borrowers or takes unfair advantage of them," the report said. "It would be unfortunate if unwarranted accusations of illegal bias, stemming from improperly analyzed pricing differences, discouraged lenders from participating in this segment of the market."
The Fed said the rapid growth in subprime lending had expanded opportunity to millions of first-time homebuyers. Last year 19% of all home-loan originations were subprime, up from just 5% in 1994, the agency noted.
Regulators analyzed 28.1 million loan applications for the chreport. Roughly a third of them were for the purchase of residential homes; the rest were for refinancings or home improvement loans. The 25 largest lenders accounted for 55% of all the applications examined.
The Fed said minorities were generally 20% more likely to get higher-priced loans than whites, but that roughly two-thirds of that discrepancy could be explained by differences in income, loan amounts, and other differences between the two groups.
Only 2% of the 8,853 lenders that submitted data had a "statistically significant difference in the incidence of higher-priced loans … after accounting for factors included in the HMDA data" the Fed said. Some of those discrepancies could be explained by other factors not contained in the data, such as "credit history scores and loan-to-value ratios."
The report included an analysis of the eight largest subprime lenders by the Fed and the Credit Research Center. According to that analysis, credit-related factors helped explain some - but not all - of the pricing discrepancies.
"For some products the racial or ethnic differences were fully accounted for, whereas for other products, unexplained differences remained," according to the report.
The Fed said it will examine institutions with large pricing differences individually to determine if discrimination played a role in lending. The regulator said it had already contacted institutions with such differences, and that other agencies are also reviewing the data.
Also, the Fed said black and Hispanic borrowers were much more likely than white ones to get credit from institutions that offer higher-priced loans.
That pattern "may be benign and reflect a sorting of individuals into different market segments by their credit characteristics," the report said. "On the other hand, it may be symptomatic of a more serious issue."
The trend is potentially "troubling" and raises concerns that minority borrowers are being steered toward banks that charge more, the Fed said.
Industry and consumer group reaction to the report was mixed.
James Ballentine, the American Bankers Association's director of community development, said bankers will have to look at their own lending records and prepare for more scrutiny if their patterns show major discrepancies.
"I don't know if bankers will be breathing a sigh of relief, because each lender will have to digest this information for their own bank now," he said. "With this data come closer examinations by the regulators, because now they will have more meat to deal with each individual bank."
Reginald Brown, a partner in the Washington office of the law firm Wilmer Cutler Pickering Hale & Dorr LLP, said banks will be waiting to see what approach regulators take in examining the statistics.
"The big question now is what balance federal and state regulators will strike," he said. "Are they going to be coaches or cops?"
If regulators take the coaching approach, they would encourage banks to build on the advances in homeownership, he said. "A cop would focus on the small number of institutions that may have statistical issues and try to use enforcement actions to scare lenders straight."
Allen Fishbein, the director of housing and credit policy at the Consumer Federation of America, said the report would ultimately promote scrutiny "on the lesser known aspects of mortgage pricing, which I think is going to result in cleaning up some bad practices and establishing a fairer lending system down the road."
The report was the Fed's first industrywide look at how mortgage pricing breaks down along race lines, but its findings match analysis from other sources.
Figures from individual banks have been available since this past spring and have been scrutinized by community groups and others. A report published last month in The Charlotte Observer found that African Americans were four times as likely as whites to receive a loan with an interest rate of roughly 8% or higher from the nation's 25 largest lenders.
Still, the Fed's report could spur state regulators to push harder for details on how banks are lending locally. After the initial data became available, Mr. Spitzer sought credit scores and other key information from a handful of large lenders. The Office of the Comptroller of the Currency and The Clearing House Association LLC have each filed lawsuits charging that Mr. Spitzer was out of bounds for pursing the information from nationally chartered banks.
