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The Color of Money

Follow-ups and reaction

Blacks turned down for home loans
from S&Ls twice as often as whites

By Bill Dedman, The Atlanta Journal-Constitution

Published January 22, 1989, Page A1

Copyright 1989, The Atlanta Journal-Constitution

Blacks are rejected more than twice as often as whites when they apply for home loans at America's savings and loans, according to government records of $1 trillion in loan applications analyzed by The Atlanta Journal-Constitution.

The records of 10 million applications from every savings and loan in the country reveal a lending gap so pervasive and so wide that in much of the country high-income blacks are rejected at the same rate as low-income whites.

The loan records suggest that redlining -- refusing to lend in an area because of race -- has persisted and may have grown worse in the 1980s as federal regulators decreased enforcement of fair-lending laws.

In integrated neighborhoods, the rejection patterns appear to penalize both white and black homebuyers. Homebuyers of any race in upper-income areas that are at least 25 percent minority were rejected at the same rate as homebuyers in poor white neighborhoods.

The rejection rates were derived from a national analysis of loan applications by race, sex and marital status. The Journal-Constitution sorted computerized summaries of 10 million loan applications submitted from 1983 to mid-1988 at the nation's 3,100 savings and loan associations and mutual savings banks. Those institutions make 50 percent of America's home loans.

The raw statistics were obtained through a Freedom of Information Act request to the Federal Home Loan Bank Board, which regulates savings and loans. In settling a civil rights suit 10 years ago, the board agreed to collect and analyze the numbers. Each year since, it has diligently collected the numbers and stored them in a computer. But it has never analyzed them.

Loan statistics do not by themselves prove discrimination, since they reveal nothing about the debt burdens or credit histories of applicants.

But Home Loan Bank Board regulations say statistical disparities should be examined for clues to illegal discrimination.

"On the face of it, it looks like what you have there is a great big red flag," said Jerauld C. Kluckman, director of compliance programs for the Bank Board.

For example, the records show that blacks, besides being rejected more than twice as often as whites, withdraw applications 21 percent more often and receive no decision on loan applications 23 percent more often.

Counting these other factors, 50 percent of blacks who fill out loan applications receive loans, compared with 65 percent of whites.

"I can't argue with the numbers. Clearly we've got a problem, and the powers that be have got to agree on a way to deal with it," said Richard Tucker, director of the Bank Board's Office of Community Investment. "It's been a bad time. The question is now what are we going to do with this data while we struggle with our other responsibilities for safety and soundness."

Among other results of the study:

The nationwide rejection rate for loan applicants of all incomes was 11.1 percent for whites, 12.2 percent for Asians, 16.5 percent for American Indians, 18.2 percent for Hispanics, and 23.7 percent for blacks.

The black-white disparity in rejection rates was widest in the Plains (30.9 percent black vs. 12.6 percent white) and the Midwest (29.6 percent vs. 12.2 percent), even though blacks in the two regions have the nation's highest incomes relative to whites. The gap was slightly narrower in the South (24.1 percent vs. 10.2 percent), where blacks have the lowest incomes relative to whites. The disparity was less in the West (25.1 percent vs. 14.4 percent) and the Northeast (13.4 percent vs. 9.1 percent).

Throughout the country, high-income blacks were rejected more often than low-income whites in 85 of the 100 largest metro areas in at least one of the past five years. In 35 of the 100 areas, high-income blacks were rejected more often than low-income whites in at least three of the five years.

The disparities appear to have increased substantially when compared with a more limited federal study of 17 cities in 1974 using data from both banks and savings and loans. The black-white gap has roughly doubled in 13 of the 17 cities: Atlanta, Baltimore, Bridgeport, Conn.; Buffalo, N.Y.; Chicago; Cleveland; Galveston-Texas City, Texas; Jackson, Miss.; Jersey City, N.J.; Memphis, Tenn.; Tampa-St. Petersburg, Fla.; Topeka, Kan.; and Washington. The gap narrowed in Montgomery, Ala.; San Antonio, Texas; San Diego, Calif.; and Tucson, Ariz.

Race is a much better predictor of a loan application's success than sex or marital status, although male and married applicants do fare somewhat better than others. Applications submitted by women were rejected 13 percent more often than applications with at least one male applicant. Unmarried applicants were rejected 22 percent more often than marrieds, and separated applicants were rejected 31 percent more often than marrieds.

The rankings of cities do not appear to be controlled by city size, minority population, or the gap between black and white incomes.

`Don't Have a Good Answer'

Industry officials said they were surprised by the racial disparities.

"Perhaps we need to have our research department do a little research on that and see if we can't come up with some reasons," said Barney R. Beeksma of Oak Harbor, Wash., chairman of the U.S. League of Savings Institutions, an industry trade association. "When you look at 23.7 percent rejected for blacks and 11.1 percent for whites, you're dealing with a number twice as large. That's troubling.

"As for people being discriminated against because they're black or minority, I've never heard of that. They must be getting a higher percentage of unqualified applicants. Or many of those applications from blacks may be coming out of very depressed neighborhoods.

"On the other hand, most people who can't qualify don't even apply or they're weeded out by a Realtor because they don't have the income. You're dealing here with people who think they can get a loan, who are willing to pay an application fee. I admit I probably don't have a good answer for that."

Credit discrimination has gained more public attention in the past year with the release of several studies of lending patterns.

A Journal-Constitution study published last May showed that banks and savings and loans in metro Atlanta made five times as many loans per 1,000 households in middle-income white areas as in black areas of the same income.

This month a draft of a study by the Federal Reserve Bank of Boston was published, suggesting that lenders in that city have a "racial bias."

Because each of those studies was based on loans made, with only estimates of loan demand, this new nationwide study adds a missing piece to the redlining puzzle: actual application data.

Redlining and other forms of credit discrimination have several adverse effects.

Without equal access to credit, community leaders say they watch their neighborhoods slide. When people cannot borrow money to buy or fix up houses, property values stagnate or decline.

Credit discrimination also perpetuates differences in income and wealth between the races from generation to generation. Homeownership is the main way that American families accumulate and hold wealth. Americans borrow against their homes for education, for vacations, for emergencies, for retirement. For most parents, a home is the most valuable part of the estate they will leave to their children.

Weakened Regulatory System

Civil rights activists point to several indicators that the Reagan administration has weakened the regulatory system built up in the 1960s and '70s to stop redlining.

Bank regulators reduced the number of examiner hours devoted to consumer regulations, including fair-lending laws, by 74 percent from 1981 to 1984; the Justice Department's Civil Rights Division has reduced the number of attorneys and staff dealing with credit cases; the Department of Housing and Urban Development quit collecting data on the location of FHA loans.

Although the bank regulatory agencies have reported declines in lender compliance with technical aspects of the Equal Credit Opportunity Act, they have not referred a case of credit discrimination to the Justice Department for prosecution since 1978.

In the 1980s, regulators have had something of an alibi, the ongoing crisis regarding the safety and soundness of banking institutions, particularly savings and loans.

"I regret to report that, as a result of this situation, we did not allocate sufficient resources to the enforcement of . . . consumer-related issues," M. Danny Wall, chairman of the Bank Board, testified in March to the Senate Banking, Housing and Urban Affairs Committee. "The Bank Board has recently increased its activity in the area . . . after a long lull. There is still much work to be done."

Last year Congress considered measures to strengthen the Community Reinvestment Act, known as the anti-redlining law because it places upon financial institutions an "affirmative obligation" to serve the credit needs of all segments of their communities. The House Banking, Finance and Urban Affairs Committee approved the bill, but in the Senate it was tied to a measure expanding the power of banks to issue securities; that measure languished.

Congressional advocates for neighborhood reinvestment say the findings on loan rejection rates increase the pressure for reform.

"We will call on the Justice Department as well as the Federal Home Loan Bank Board to pursue these results with the full force of the law," said Rep. Joseph P. Kennedy II, the Boston Democrat and a member of the House Banking Committee. "And we will ask the other bank regulators to collect and analyze similar information as well."

Two Data Systems Shut Down

Two bank regulatory agencies, other than the Bank Board, did collect such data from 1978 to 1981, but gave it up when the court order requiring it expired.

The entire bank regulatory system was sued in 1976 by 10 civil rights and housing groups, who accused the regulators of willful failure to enforce the 1968 Fair Housing Act and the 1974 Equal Credit Opportunity Act.

To settle the suits, three of the agencies signed agreements to improve enforcement, including collection of data on the race, sex and marital status of applicants. The court orders said the government agreed to collect data, "not only to settle the lawsuit, but also to further its existing commitment to effective enforcement of its non-discrimination policies."

Two of the agreements expired after three years. As soon as their settlements ended, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. shut down their data system. The bank agencies argued that data didn't prove anything, and collecting it placed an unnecessary and costly burden on financial institutions.

The settlement with the Federal Home Loan Bank Board included no time limit. It agreed, in perpetuity, to "develop and implement a system for the collation and analysis" of the lending data. It developed the system and it stores the information in a computer, but it doesn't analyze it.

Instead of studying national totals, all the regulatory agencies say they study application logs at individual lending institutions during compliance examinations. Those can be spotty, however. The Office of the Comptroller examines only 35 to 50 banks a year on fair-lending issues -- out of 4,500, meaning a bank could go 128 years without such an exam.

"This is not something we feel very good about," said Leonora S. Cross, the office's director of communications.

Any fair-lending enforcement at all will look like a big change up in Oak Harbor, Wash., home of Mr. Beeksma, chairman of the savings and loan league and a lender with 30 years in the business.

"To my knowledge, the Equal Credit Opportunity Act statistics have never been anything more than a collection of data," Mr. Beeksma said. "I've never heard of an examiner coming in and saying, `You're rejecting more blacks than whites. You're doing this wrong."'


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