Are Nonbank Mortgage Lenders Good for Minority Borrowers?

Are Nonbank Mortgage Lenders Good for Minority Borrowers?
Written by Publishing Team

Loan Officer in a Mortgage Company He asks a black loan applicant questions about family debt, but later invites a less creditworthy white borrower to fill out an application with “no credit standing inquiry or debt.” He then introduces the same white home buyer through the loan application, pre-approval process, and follow up with personal emails. The black borrower does not receive any additional offers of assistance nor emails from the lender.

This asymmetric treatment was performed in Seattle, Washington, and was part of a study in which testers with white and black names, credit profiles, and similar assets named a random sample of mortgage companies, including mortgage traffic, who were seeking loans, according to the complaint. It was introduced in October by the National Alliance for Community Reinvestment, a Washington, DC-based fair housing organization.

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Ironically, in 2019, the South Carolina-based mortgage movement held a three-hour training session with NCRC principals on how to comply with civil rights laws intended to ensure that women and minorities receive fair treatment when buying a home. Two years later, the NCRC will test the movement on the material.

“It made it all the more egregious that we trained a subset of the staff several years ago,” said Brad Blauer, NCRC general counsel.

Independent mortgage firm Fairway was also tasked with offering fewer lending options to black borrowers and encouraging less in a second complaint to the Department of Housing and Urban Development (HUD). The testers sought loans from the lender in Madison, Wisconsin, in Charlotte, North Carolina.

NCRC regularly conducts these “matching pair tests,” and last year gained national attention for one that demonstrated alleged discriminatory lending linked to the Paycheck Protection Program, through which loans have been made to small businesses affected by the COVID-19 pandemic. That study sent the testers to secure loans from 17 banks in the Washington, DC, area.

Non-bank mortgage lenders are now the main source of credit for minority borrowers, although loan advocates say the loans they make cost more than those offered by banks.

This time around, the NCRC has highlighted two companies that are part of a growing sector of the economy that is increasingly gaining market share over banks, which are still chafing at their losses due to the financial crisis. In 2009, independent (non-bank) mortgage lenders created 25% of loans, according to the Mortgage Bankers Association. And they made up 59% in 2019, according to The Wall Street Journal, and 68.1% in 2020. These financial institutions are now the main source of credit for minority borrowers, although advocates of minority home buyers say the loans they make cost more than those offered by banks.

The absence of oversight over how mortgage lenders provide credit to underserved homebuyers is raising concerns among these advocates. They worry that individual mortgage lenders may discriminate against minority borrowers, even if non-bank institutions as a whole are lending more to these homebuyers than traditional banks. They also say independent mortgage lenders offer loans at a higher cost than traditional banks for similarly qualified black and Latino borrowers to their white counterparts.

If HUD determines that investigations into mortgage and independent highway traffic are warranted, complaints can be resolved through the mediation process. Alternatively, lenders may be fined if they are found to be in violation of the Fair Housing Act. “Fairway Independent Mortgage [Corporation] He disagrees with the allegations in the complaint, and plans to defend himself vigorously,” a company representative who wrote in an email said that the company had not been contacted by HUD. The mortgage movement did not respond to repeated requests for comment.

The so-called shadow banks, unlike banks, do not accept deposits or offer checking and savings accounts. Many companies, such as the mortgage movement, are privately owned companies. But some are backed by private equity, and with the refinancing boom last year, they are increasingly going public. They don’t have the same capital requirements as traditional banks – so they are likely to be more vulnerable in a deteriorating housing market.

Also different from banks, these financial institutions are not covered by the Community Reinvestment Act. Enacted in 1977, the CRA is a key tool used by regulators and activists to induce banks to meet the credit needs of low- and middle-income neighborhoods among the communities they serve. When those banks try to merge or open new branches, a low CRA score can make this process more difficult.

Recently, there has been a movement to increase scrutiny of the lending activity of nonbank financial institutions as the nation grapples with its history of redefining minority neighborhoods and the current gap in white and black home ownership rates, which are now at a 50-year high. The homeownership rate for white Americans in the last quarter of last year was 74.5%. For Black Americans, the rate was 44.1%, Latinos 49.1%, and Asian and Pacific Islanders 59.5%. “Home ownership is one of the most powerful ways to transfer wealth from one generation to the next, and the fact that there is little possibility for sustainable loans in the black community is exacerbating the [the gap between white and Black homeownership]’ says Blower.

In California, the mortgage movement rejected black borrowers at more than twice the rate it rejected white borrowers for loans in 2019 and 2020.

In early November, New York Gov. Cathy Hochhol signed legislation that expanded the state’s version of the CRA to include non-bank mortgage lenders. Illinois and Massachusetts have already subjected non-bank mortgage lenders to anti-return red-line requirements imposed by the CRA.

“We hope to lobby for the creation of California Management Consulting,” said Rawan Al-Halabi, senior program director at the Greenlining Institute, an Oakland-based advocacy group. (Expanding the Federal Community Reinvestment Act would require a Congressional version.) In addition, an initiative led by the US Department of Justice, announced in October, promises to expand the department’s analyzes on potential re-planning by both non-bank and non-bank mortgage lenders.

Do these lenders’ records make the case for CRA supervision? It seems so. The complaints are not based on the behavior of a single loan officer. It also comes from analyzing the lending data. In the case of the mortgage movement, two separate analyzes, including one by Capital & Main, have raised red flags about the company’s treatment of minority borrowers.

In California, Migration Mortgage’s second-largest market, the company declined loans to black borrowers at more than twice the rate it rejected white borrowers for loans in 2019 and 2020. Meanwhile, peer lenders in the state denied loans to black borrowers at about one and a half times rate of white borrowers over the same time period. Capital & Main’s analysis, based on Mortgage Disclosure Act data, does not take into account the credit profile of California borrowers or the types of loans they have sought.

Because the mortgage movement is not subject to CRA review, its performance in low-, middle-income and minority communities—and that of hundreds of independent mortgage lenders overseen by the California Department of Financial Protection and Innovation—remains largely understudied in the state.

Mortgage Action has provided a list of mortgage companies with the worst lending disparities, according to an investigation by The Markup last August. Mortgage financers were 110% more likely to reject black and Latino applicants than similarly qualified white applicants. (A company spokesperson told The Markup that its analysis did not take into account borrowers’ credit score, information not publicly available.)

In 2017, 23% of non-bank loans secured by the government for low-income borrowers were classified as high-cost, compared to 10% of bank loans and only 3% of credit union loans.

However, as a group, independent mortgage companies are increasingly lending to minority, low and middle income borrowers in California and nationwide. They made up two-thirds of loans to minority homebuyers in 2019, according to the Mortgage Banks Association, an industry lobby group. They are responsible for another development that may have increased access to credit for minority borrowers. Fintech lenders like Detroit-based Rocket Mortgage have automated the delivery of financial services, pushing banks and non-banks alike to offer exclusive online borrowing options. Removing the loan officer from the equation has reduced discrimination in lending although it has not eliminated it, according to a 2019 study at the University of California, Berkeley.

To Karan Cole, Senior Research Associate in the Center for Housing Finance Policy at the Urban Institute in DC, Independent mortgage lenders are expanding credit to low-income and minority borrowers, and more rules in an already highly regulated sector will increase costs. “It could be argued that mortgage lending has been very tight over the past 10 years after the Great Recession, and non-banks have actually made more credit available than they would have otherwise,” he said.

But can a rapidly growing industry increasingly accountable to Wall Street be trusted to put the needs of underserved borrowers first?

Advocates are concerned about whether individual mortgage lenders consistently lend to low- and middle-income homebuyers, and whether they are offering borrowers the best loan product available. Studies by the National Center for Disability Metrics found that loans from non-bank financial institutions were more expensive than bank loans across loan types. In fact, 23% of government-insured non-bank loans to low-income borrowers were rated as high-cost in 2017, compared to 10% of bank loans and just 3% of credit union loans. “There are reverse red lines, and they are just as bad,” Blower says.

There is also concern about how borrowers are treated. Al-Halabi says some companies target homebuyers with marketing materials only in Spanish to provide loan contracts in English.

As director of New Economics for Women (NEW), a Los Angeles nonprofit, Rosie Papazian has worked with CRA-regulated banks to provide financing to predominantly Latino first-time homebuyers on the East Side of Los Angeles for nine years. Even one day, she says, the affordable South Los Angeles area was out of reach for many of them. She said in November that most of her clients were finding homes in the East, in Riverside County or San Bernardino County, or “maybe buying cottages versus single-family homes.”

Papazian, who left Neo last month to work as a community lending officer at a bank, sees the allure of mortgage lenders over banks for her former clients. According to Papazian, non-bank lenders often have more relaxed qualification guidelines and promise shorter collateral grants. This speed can be attractive to borrowers facing the highly competitive real estate market in Southern California. But these borrowers may pay dearly in high interest rates over the life of the loan and initial costs. “The next thing you know,” she said, “they’re paying $11,000 in fees to the lender.” When they secure a bank loan with NEW, she said, “They’ll probably close after five days, but they’ll still close and they’ll save a lot of money.”

Copyright 2021 Capital & Main

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