With legal action and underwriting studies difficult and costly, many fair-housing activists say the best way to pinpoint the lenders that might be practicing bias is through ”testing.”
Traditionally, testing has been done to target bias in real estate sales or rentals. Matched pairs of testers, usually one black and one white, go to a real estate agent or apartment manager and note differences in treatment and housing choices offered.
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The same can be done with lending institutions, though there are complications. First, loan applications require a borrower to swear information supplied is accurate, so testers might themselves be vulnerable to legal action. Second, a loan officer might very well suspect a test if two applicants` economic data were alike enough to be comparable.
Despite pressure from its own consumer advisory council and others to do testing, the Federal Reserve has rejected the idea, citing the deception involved and the complexity of loan decisions.
But the U.S. Department of Housing and Urban Development has set aside funds to support a pilot program of testing by fair housing groups in three cities, Philadelphia, St. Louis and a third city whose identity will remain a secret until the program is completed.
Debby Goldberg, neighborhood reinvestment specialist with the Center for Community Change in Washington and a member of the Fed`s consumer advisory council, said the problems with testing can be overcome by employing it during the pre-application process.
That wouldn`t address the issue of whether underwriting standards were being misused, but it could suggest whether minorities and whites are being treated differently by loan officers.
”Civil rights folks suspect that discriminatory behavior happens before the application gets filed,” she said.
One survey released earlier this year involving paired minority and white shoppers who visited 50 bank branches in non-minority, middle-income neighborhoods found that subtle forms of racial discrimination did exist in the pre-application process.
The survey, done in an unidentified major market by Barry Leeds & Associates, a New York-based financial market research firm, showed blacks had to wait longer than whites for service, didn`t feel they received full explanation of mortgage choices to the same extent as whites, and generally expressed less satisfaction with the whole process.
And pilot pre-application tests done in Chicago and Louisville suggest that minorities are subtly discouraged from applying for loans in various ways and that whites are encouraged by getting hints and tips on framing an application that aren`t provided to minorities.
In the Louisville program, for instance, black testers were told a bank didn`t do loan interviews and were sent to a bank`s mortgage company; whites at the same bank were told they were in the right place and were given information about conventional loans.
With one lender, white testers were told they were likely to qualify for a loan within a matter of minutes, whereas black testers submitting similar information were told the loan officer could not give any such indication without a long, complicated process or making out a full application with payment.
That`s exactly the kind of thing that can infuriate minority borrowers and those who work with them.
Discrimination ”is so subtle, and the reasons so contrived, that unless they`re very proficient in knowing what to look for, individuals don`t always know they`ve been discriminated against,” said LaVena Norris, an African-American real estate broker who has been in the industry in Chicago for 23 years.
Testing, maintained Norris, will finally prove the discrimination the figures seem to imply. ”They`ll find it`s true. It`s not going to undo the problem, but they`ll find that it`s there.”