Fair Access to Credit Abstract
Discrimination in the mortgage market continues to be a cause of concern even though laws1 that directly or indirectly advance the goal of equal and fair access to housing credit have been in place for forty years. The focus of attention has shifted over time as the nature of discrimination has changed: from explicit Federal Housing Administration policies that disadvantaged minority and integrated communities in the 1950s and 1960s, to bank redlining in the 1970s and 1980s, to more subtle—sometimes unintended—forms of disparate treatment in the 1990s. Until recently, most fair lending “best practices” guidance was designed to boost the number of loan applications from low-income and minority communities and borrowers, provide equal effort to qualify all applicants, and reduce denial rate disparities among similarly qualified applicants.
The Federal Reserve Bank of Boston’s widely circulated 1993 guide, Closing the Gap, described how three distinct levels within a financial institution shared responsibility for combating possible discriminatory lending practices: the board of directors, as the governing body of the institution; the managers responsible for the decision-making
and supervision necessary to carry out the organization’s business plan; and its loan production staff, including originators, processors and underwriters. Now the steps involved in marketing, originating, underwriting, funding, selling, and servicing loans have been uncoupled; they are often performed by entirely separate entities, and so the responsibility for combating discrimination cuts across multiple components of a complex mortgage delivery system. Though the various components of this system are subject to numerous laws and regulations, the regulatory framework has not kept pace with the substantial changes that have occurred in the industry.
A number of factors contributed to the revolution in mortgage finance, including: deregulation of the banking industry; increasing use of automated underwriting; credit scoring and risk-based pricing; lender consolidation and specialization; the development of new, high-risk products; the increasing role of mortgage brokers; and an expanded and sophisticated secondary market. The mortgage market is more competitive today and, in many respects, more efficient as a result of these innovations. Increased access to credit by previously underserved consumers and communities has resulted in record high levels of homeownership among minorities and low income groups. The gains, however, have come largely as the result of subprime lending by organizations
operating outside the scrutiny of the established bank regulatory system. Research continues to show that borrower race and neighborhood racial composition affect access to prime credit, and this remains a fair lending concern. Attention has shifted to the terms, pricing and tactics by which previously underserved markets are now
gaining access to credit. The growth in subprime lending coupled with the increased complexity of product offerings has raised both fair lending and responsible lending concerns. With the recent spike in subprimefor eclosures nationwide, it has become apparent that many borrowers obtained loans that they did not understand, or that were not suitable for their needs.
In light of these new market realities, the Massachusetts Fair Lending Coordinating Committee and its member organizations have renewed their efforts to ensure equal access to responsible mortgage products for all qualified borrowers, with the goal of expanding sustainable homeownership opportunities for Massachusetts residents.3
The Coordinating Committee is composed of representatives from the Massachusetts Bankers Association; the Massachusetts Community and Banking Council; the Massachusetts Credit Union League; the Massachusetts Mortgage Association; and the Massachusetts Mortgage Bankers Association. Some participants, including state and federally regulated depository institutions with CRA obligations in the Commonwealth, have had comprehensive fair lending programs in place for more than a decade. The level of “self-regulation” varies widely, however, and what is appropriate and feasible for one size or type of lender may not be appropriate for another. Also, some measures apply specifically to the loan “salesmen” (whether they are inhouse originators, correspondents, or mortgage brokers), while others apply to the entities that evaluate and underwrite the requests or to those who fund the loans.
The Coordinating Committee recognizes that efforts to promote fair lending, if they are to succeed, must take into account changes in the marketplace. This report has been designed to do that, but even as it was being prepared for release, new lending standards and federal and state regulations were being proposed. It is likely
that some of the practices that contributed to the current disarray in the mortgage market—with its disparate impact on communities of color—will be curtailed by government regulation. In any event, the proactive strategies detailed here can help lenders improve their ability to provide prudent, sustainable and fair lending to
residents of the Commonwealth.
The remainder of the report is organized as follows:
- Section 2 briefly describes the high velocity changes that have reshaped the mortgage market over the past fifteen years, explaining why the first generation of fair lending “best practices” have not had the intended result.
- Sections 3, 4, and 4 address the three specific topics—second look procedures, matched pair testing, and mortgage broker oversight—and describe various strategies and activities that are accepted, or emerging, best practices. Also included are examples of lender initiatives, guidance for establishing such programs, and associated pitfalls.
- And finally, Section 6 illustrates why it is essential that these three initiatives be part of a comprehensive fair lending strategy.