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Minorities More Likely To Be Denied Refinancing

Loans

First Posted: 12/01/09 05:12 AM ET Updated: 05/25/11 03:15 PM ET

First, minorities were disproportionately steered by lenders into subprime loans. Now there's news that they're disproportionately being denied when they apply for refinancing.

New federal data shows that last year blacks were nearly twice as likely to be denied when applying to refinance a home mortgage as whites. About 61 percent of refinance applications from black borrowers were denied, an eight percent increase from 2007. Less than a third of whites were denied.

About half of all refinance applications from Hispanic borrowers were denied, a slight increase from last year. Whites, on the other hand, saw their denial rates drop two percent, federal data gleaned from lenders under the Home Mortgage Disclosure Act shows.

A big part of the reason for the disparity lies in credit scores, said Hilary O. Shelton, Senior Vice President for Advocacy and Policy for the National Association for the Advancement of Colored People.

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"African Americans disproportionally score lower [when it comes to credit scores]," Shelton said. He added that he had seen studies that found widely different credit scores among white and black borrowers despite similar backgrounds and income levels.

"That's why we refer to credit scores as a black box," he said.

The Wall Street Journal reported that the gap "may partly reflect the larger proportion of minority borrowers who got subprime loans during the housing boom and ended up in homes whose values have crashed."

The data was released Wednesday. Collected from more than 8,000 mortgage lenders nationwide, it was analyzed by economists at the Federal Reserve. In their report, the economists address the disparity in denial rates:

"Both previous research and experience...show that unexplained differences...in denial rates
among racial or ethnic groups often stem, at least in part, from credit-related factors...such as measures of credit history (including credit scores), loan-to-value and debt-to-income ratios, and differences in choice of loan products," the analysts wrote.

Or, it could be due to outright discrimination.

"Differences...may also be due to discriminatory treatment of minorities or other actions by lenders, including marketing practices," the analysts noted.

The data also shows that more than half of black borrowers last year were given loans insured by the Federal Housing Administration, double the rate for white borrowers. With lenders pulling back and making fewer loans, FHA-backed loans skyrocketed.

FHA-insured loans provide lenders with protection against losses arising from homeowner defaults. Accordingly, the lenders "bear less risk because FHA will pay a claim to the lender in the event of a homeowner's default," according to the agency's Web site. They're typically given to borrowers with less-than-stellar credit.

"This suggests more than anything that the market constricted more when it came to people of color," said John Taylor, president and chief executive of the National Community Reinvestment Coalition. "We don't want to create a system where the government serves one class of people, and the market serves everyone else."

Shelton said that while the rise in FHA loans given to black borrowers was a "concern," the NAACP was thankful for the program.

"Private banking institutions are not backing loans to African Americans," he said. "Thank God for FHA. Otherwise, we'd have a lot more African Americans being turned down for loans."

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