Report documents mortgage discrimination in Twin Cities


Lenders discriminate. Housing is segregated. Communities of color are hit harder by the foreclosure crisis than anyone else. That’s the ugly face of racial discrimination in the Twin Cities revealed in a 54-page report released by the Institute on Race and Poverty at the University of Minnesota Law School.

People of color “continue to receive home loans on worse terms and at a higher cost than similarly situated white borrowers, according to “Communities in Crisis: Race and Mortgage Lending in the Twin Cities”. Higher incomes did not protect people of color from lending disparities, with high-income black, Latino and Asian applicants denied loans at higher rates than low-income white borrowers.

Very high income black, Hispanic and Asian applicants (applicants with incomes more than $157,000 per year) show denial rates higher than whites in the lowest-income category (less than $39,250 per year). The disparities are greatest for black borrowers. The denial rate for blacks with incomes above $157,000 was 25%, while it was just 11% for Whites making less than $39,250.

Prime and subprime: What they are, why they matter

“Prime loans are the standard home loans that have allowed high rates of homeownership and housing mobility in the United States. Subprime loans have higher interest rates than prime loans and often contain additional features and costs that are absent in prime loans. Subprime loan features can include prepayment penalties; adjustable rate mortgages where interest rates are adjusted periodically; interest only loans, where the borrower only pays for the interest on the principal of the loan; and balloon payment mortgages, where interest rates climb towards the end of the loan. …

“Segregated neighborhoods of color, neighborhoods where more than 50 percent of the residents are people of color, receive disproportionate numbers of subprime loans. …
Although not all subprime loans are predatory, most predatory loans are found in the subprime market.”

Borrowers of color, even if they have high incomes, “are more likely to receive subprime loans than in any white income group,” found the study, thereby increasing the amount that they pay for loans and their risk of foreclosure.

A few decades ago, homeowners typically looked to neighborhood banks for their mortgages. Then home lending practices changed. Mortgage brokers and automated underwriting meant less connection between lender and borrower. “Loan securitization,” based on sales of mortgages, spread and eventually became the basis of the current financial crisis. All of these factors made the mortgage market more complex, encouraged high risk lending, and encouraged high-risk, predatory lending.

Calling homeownership “the first step to building stability and wealth” for families, the study points out that discriminatory lending has “cost another generation of people of color the equal opportunity to join America’s middle class,” despite the 40-year-old fair housing legislation passed as a consequence of the civil rights movement.

This wealth can be leveraged in numerous ways including moving “up,” into better neighborhoods and homes, co-signing loans to ensure that one’s children become homeowners, and starting businesses.8 Racial discrimination has greatly reduced access for people of color and communities of color to these long-term wealth building benefits of home ownership.

Twin Cities: Pattern of discrimination

Discrimination in lending also has maintained and reinforced housing segregation across the country and in the Twin Cities. Twin Cities neighborhoods are highly segregated by race, and neighborhoods with higher non-white populations have less access to banks and higher percentage of subprime mortgages. Lenders tend to specialize, offering either prime or subprime loans. In the Twin Cities, bank branches are less likely to be located in minority communities, with a study by the National Community Reinvestment Coalition showing the metro area ranking last of 25 large metropolitan areas studied.

North Minneapolis shows the severity of the discrimination/subprime lending/foreclosure impact on a community. The IRD study found a foreclosure rate of two percent in Hennepin and Ramsey counties overall, but 12 percent for North Minneapolis, which it described as “the most segregated and lowest-income area in the Twin Cities.”

Banks made few prime loans in North Minneapolis, while subprime lenders dominated the market. Overall, 1.7 percent of home purchase loans were made in North Minneapolis, and 49 percent of these were subprime, compared to 14 percent subprime in the area as a whole.

For example, the region’s largest prime lender, Wells Fargo Bank, NA, made just 286 of its home purchase loans in North Minneapolis out of a regional total of 35,272. If North Minneapolis had received a proportionate amount of Well Fargo’s loans, it would have received more than twice as many loans—1.7 percent or a total of 616 loans.

On the other hand, TCF has made a disproportionately large share of loans in North Minneapolis. But even homeowners with “good” loans have been affected by the overwhelming number of foreclosures in the community, which have driven down home values and made neighborhoods less stable.

What happened to the laws?

The IRD study reviews the extensive list of laws prohibiting discrimination in housing and in lending, but finds that “The federal and state governments have not enforced fair lending laws, allowing lenders to engage in illegal discriminatory behavior with little threat of punishment.” The Bush administration rolled back enforcement, so that lenders have little fear of getting caught and, even if they are caught, pay small penalties. Private civil rights lawsuits have increased, but the expense of suing is high, and lawsuits drag on for years.

The IRD study recommends some steps to address the problem of racial discrimination in housing and lending, including calls to:

• work aggressively to end segregation;

• enforce existing laws, both federal anti-discrimination laws and Minnesota laws curbing predatory lending practices;

• strengthen the Community Reinvestment Act to “increase access to affordable, prime credit for people who live in segregated communities of color;”

• re-establish a regional Fair Housing Center to bolster enforcement of anti-discrimination laws.