Study after study has confirmed that minority applicants are denied mortgages at a higher rate than white applicants.
Some have speculated that lenders prefer members of their own race in making mortgages.
In a new survey, former Federal Reserve Board adviser Raphael Bostic claims to have debunked that belief.
“We showed that bank underwriting standards are consistent across lenders and are not influenced by the lender’s ethnic background,” said Bostic, an economist at the University of Southern California Lusk Center.
“But the results did show that minorities steer their applications to same-ethnicity banks. Consequently, loan rejection rates at minority-owned banks are higher than those of white-owned banks,” he said.
The study compared lending patterns of 75 black- and Asian-owned banks with those of white-owned banks in the same areas. The small number of Latino- and Native American-owned banks precluded their consideration, Bostic said.
He suggests that banks develop alternative underwriting models for different ethnic groups because signals of good credit quality can vary among populations.
“A smaller down payment is not always a red flag for lower-income applicants,” Bostic said. “They often make sacrifices to stay in the home, curtailing spending so they can make the house payment. In fact, low-income borrowers prepay less frequently and don’t refinance as often, providing steady streams of income for banks.”
Like many community development activists, Bostic also suggested creating more government programs to help marginal borrowers improve their credit quality through financial counseling and money management classes aimed at high school students.
“We need to break the cycle of poor credit in low-income, minority neighborhoods,” Bostic said.
Bank notes: William McCormick resigned last week from the board of Chicago-based Bank One Corp. The former chairman and chief executive of CMS Energy Corp. joined the board of the former NBD Bancorp in 1985 and was elected to the bank’s successor boards of First Chicago NBD, then Bank One. McCormick resigned from CMS Energy in May. Bank One now has 11 directors.
The U.S. Supreme Court decided last week not to review the class-action status granted to U.S. retailers that are suing Visa and MasterCard, meaning a U.S. district court judge in New York could hear the case in the next six to eight months, according to the American Bankers Association. The merchants are challenging the card companies’ policy of requiring merchants who accept their credit cards to also accept their debit cards.