Racial Disparities Found in Home Lending Data

WASHINGTON — Black and Hispanic mortgage borrowers had lower credit scores and higher default rates than Asian and non-Hispanic white borrowers, according to analysis released Wednesday by the Federal Reserve Board.

The Fed's paper, which analyzed Home Mortgage Disclosure Act data from 2012, was the first time regulators compared such data to borrowers' credit scores. The findings showed significant disparities among minority borrowers tracing back to 2006. The analysis also found that minorities were more likely to receive higher-priced mortgages, based partly on credit scores and geography.

"Delinquency is highly correlated with credit score, local area house price declines, and higher-priced loan status, but substantive differences in delinquency rates across racial and ethnic groups remain after accounting for these variables," says the paper, which was prepared by Neil Bhutta and Glenn Canner of the Fed's division of research and statistics.

For example, the Fed found that more than 20% of black and Hispanic borrowers who received a home-purchase loan in 2006 were delinquent by 60 days or more within two years. That was significantly higher than the 7% delinquency rate for white borrowers and the 6% rate for Asian borrowers, the Fed said.

The Fed also compared credit scores by race to the new mortgage requirements instituted by the Consumer Financial Protection Bureau, which are set to take effect Jan. 10. Under the CFPB's Qualified Mortgage rule, a borrower must have a debt-to-income ratio of no more than 43%. Based on the Fed's research, it said minority and lower-income borrowers who applied for a loan in 2010 "were more likely" to exceed that threshold.

"That said, most home-purchase loans in 2010 with PTI ratios above 43% were government backed; under the current regulations, such loans could still be qualified mortgages despite exceeding the threshold," the report said.

The Fed also noted that credit scores and delinquency rates have improved across the board since the recent economic downturn. Overall, credit scores of applicants who received a mortgage in 2010 were much higher than those in 2006. Delinquency rates also dropped in 2010 from loans made in 2006.

"Declines in credit scores and their subsequent recovery through 2012 for those who became delinquent on the mortgages they took out in 2006 are very similar across racial and ethnic groups. Credit score recovery occurs only over a long period of time, on average, perhaps reflecting the severity of the financial stress faced by delinquent mortgage borrowers," the report said. "Indeed, we also find that the majority of those who became delinquent on their mortgages were late on at least one nonmortgage account, such as credit cards or automobile loans. The rate of multiple delinquencies is largely invariant across demographic groups."

However, the delinquency rate for home-purchase loans backed by the Federal Housing Administration and the Department of Veterans Affairs in 2010 were "significantly higher" than conventional loans that same year, totaling 5%; though the Fed added it was an improvement from 2006.

The Fed's analysis was a supplement to the raw HMDA data released earlier in the day by all banking regulators. That information showed that FHA loans continued to dominate the mortgage market, representing 27% of first-lien loans in 2012. Still, FHA's market share has been falling, dropping from 31% in 2011 after a peak of 37% in 2009.

Mortgage originations were also up 38% to 9.8 million in 2012 largely because of a 54% increase in refinanced mortgages, the analysis said. Home purchase loans had a "modest" growth rate of 13% in 2012 compared with a year earlier. Of the home-purchase loans, the Fed noted that high-income, non-Hispanic white and Asian borrowers had "significantly larger gains." Refinance loans were spread more evenly across racial groups.

The Fed also noted that higher-priced loans "remained subdued," representing about 3% of all loans and down from the 28% peak in 2006. As with historical trends, black and Hispanic borrowers were more likely to have a higher-priced loan compared to non-Hispanic white borrowers; and Asian borrowers less likely. Denial rates were also "significantly higher" for black and Hispanic applicants than other classes but the Fed cautioned not to read into the data as potential fair lending violations.

"The HMDA data do not provide sufficient information to determine the extent to which the differences in higher-priced lending and denials reflect illegal discrimination," the report says.