Study: Minorities Pay Higher Rates for Mortgages

African Americans and Hispanics are more likely to pay higher rates for subprime mortgages than white borrowers, even with similar qualifications and risk factors, a new study showed on Wednesday.

The Center for Responsible Lending said its study found that for certain types of subprime loans, minorities were up to 34 percent more likely to receive a higher interest rate loan than whites even after controlling for factors such as income, credit history and property location.

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The center said mortgage industry incentives known as yield spread premiums are partly to blame because they encourage mortgage brokers to steer minority borrowers into higher cost loans when they could qualify for less expensive loans.

The results contrast with a Federal Reserve Board staff study last year which failed to find clear evidence of broad racial discrimination in mortgage lending. The Fed study of some 28.1 million loan applications in 2004 found that while non-whites paid higher mortgage rates, the gap narrowed when variables such as loan amount, borrower income and credit scores were taken into account.

The Center for Responsible Lending said its study focused on 50,000 loans in the subprime category of higher-risk borrowers. It supplemented the same 2004 federal data with loan-specific information provided by LoanPerformance, a San Francisco-based mortgage securitization data and analytics firm.

The center's researchers said this showed that African-Americans were significantly more likely to be steered into loans containing penalties for early repayment, comprising more than 60 percent of loans examined.

"This study shows that steering takes place even within the subprime mortgage market," said Hilary Shelton, Washington director for the National Association for the Advancement of Colored People. "In other words, racial and ethnic minority borrowers are not only steered into subprime home loans, they are steered in to the most expensive subprime loans when they could qualify for financing that could cost significantly less."

Debbie Bocian, a senior researcher for the center, said unscrupulous mortgage brokers are receiving kickbacks from mortgage lenders in the form of yield-spread preimiums, to promote such higher-rate loans. She said measures should be taken to guarantee that brokers and lenders charge the same rates to borrowers with the same qualifications.

The study could spark renewed lobbying efforts for legislation to improve home loan disclosure data and pricing practices. One bill proposed in the House Financial Services Committee by Democratic Reps. Barney Frank of Massachusetts and Brad Miller and Mel Watt of North Carolina would require disclosures of yield spread premiums, among other data, to borrowers.

New York Attorney General Eliot Spitzer also is trying to get federally chartered banks in his state to disclose more information about home loans.

Douglas Duncan, chief economist for the Mortgage Bankers Association, questioned the study's methodology, saying that lenders take into account much more than credit scores and borrower incomes in pricing loans.

"They didn't build a model which equalizes all risk factors," Duncan said.

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