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Highlight Updates Pricing Based on Race, Not Risk

Despite industry claims that loans were priced based on each borrower’s credit fundamentals, data shows that the applicant’s race or the racial composition of the applicant’s neighborhood was a leading predictor for the cost of mortgage credit. According to a 2006 study, data submitted under the Home Mortgage Disclosure Act (HMDA) revealed that for purchase-money loans, 54.7% of African Americans and 46.1% of Latino whites received “higher-priced”296 loans, in contrast to only 17.2% of non-Latino whites who received such loans. Similarly, 49.3% of African-American and 33.8% of Latino white borrowers, but only 21.0% of non-Latino white borrowers, received higher-priced refinance loans.297

Controlling for the borrower-related factors in the HMDA data (such as property location, income, loan amount, time of year the loan was made, and presence of a co-applicant)298 accounted for only some of the difference in the incidence of higher-cost loans among certain racial and ethnic groups.299 Other studies found that African Americans and Latinos were disproportionately represented in the subprime market, even at upper income levels.300 High concentrations of subprime lending and racial disparities in subprime lending existed in all regions throughout the United States and in metropolitan areas of all sizes.301 The consistency of this data from study to study raises the very real question as to whether discrimination and steering accounted more for placement in the subprime market (and, hence, higher prices) than risk. The U.S. Department of Justice initiated a number of enforcement actions based on these disparities.302

It also appears that prime lenders often steered minority borrowers to subprime affiliates. One study found that the lending channel a borrower enters—prime or subprime—could have a large impact on the price paid for a home loan. For example, the study found that 75.9% of the loans made by Washington Mutual to African Americans were made through its subprime subsidiary, Long Beach Mortgage Co., and that, regardless of race, 90% of Long Beach borrowers received higher-cost home purchase loans. By contrast, Washington Mutual’s prime lender, Washington Mutual Bank, accounted for more than 80% of all Washington Mutual’s home purchase loans to whites, and less than 1% of the bank’s loans were higher cost.303

In another study of subprime lending in four cities in California, the authors reported that 25% of the surveyed homeowners took out loans from a subsidiary or affiliate of a financial institution, yet none were referred to the prime lender for lower-cost loans.304 A study conducted in 2015 examined HMDA data, public records, and credit scores related to higher-priced mortgage loans (made for both home purchase and refinancing purposes) from 2004–2007.305 The researchers found significant differences in the racial and ethnic composition of borrowers receiving higher-priced loans. These differences could not be explained by credit score, loan-to-value ratio, the presence of subordinate liens, and housing and debt expenses relative to income. Using a risk factor taking into account the ex post facto risk of foreclosures reduced those differences, though they remained significant. The study concluded that the substantial, marketwide racial and ethnic differences in the incidence of higher-priced mortgages arose because more African-American and Hispanic borrowers were using high-risk lenders, suggesting that steering may be the cause.306

Another cause for racial disparities was that brokers and other originators targeted borrowers perceived as vulnerable, including members of racial groups historically excluded from mainstream credit, on the belief that the borrowers were, in some sense, still a captive market.307 A 2014 paper found that data submitted under HMDA indicated that segregation had a significant negative impact on African Americans’ ability to receive conventional (lower-priced) mortgages in large segregated metropolitan areas.308

Data analysis also revealed other troubling disparities in price. There is some evidence that women were more likely to receive subprime mortgages, even when controlling for income.309 Older borrowers were also overrepresented in the subprime market.310 A study even found significant subprime refinance variation between regions. Borrowers on the West Coast and Northwest were half as likely to receive subprime refinance loans as borrowers in the Southwest or Great Plains, and there were also large variations among metropolitan statistical areas, with the highest subprime concentrations in the Southeast, Southwest, and Midwest regions.311


  • 296 {296} “Higher-priced,” as used in this section, refers to the definition used by the Home Mortgage Disclosure Act, in effect when these studies were conducted. That definition was: a first-lien mortgage in which the loan’s annual percentage rate (APR) exceeded the yield on a Treasury security with a comparable period of maturity by three percentage points and by five percentage points for a loan secured by a junior lien. 12 C.F.R. § 203.4(a)(12), added by 67 Fed. Reg. 7222, 7238 (Feb. 15, 2002). Reporting of data for higher-priced mortgages began in 2004. 67 Fed. Reg. 7222, 7222 (Feb. 15, 2002). The definition has since changed. For a discussion of HMDA and its scope and requirements, see National Consumer Law Center, Credit Discrimination § 4.4.5 (7th ed. 2018), updated at

  • 297 {297} Robert B. Avery, Kenneth P. Brevoort, Glenn B. Canner, Higher-Priced Home Lending and the 2005 HMDA Data, Fed. Reserve Bull. A123 (Sept. 8, 2006), available at

  • 298 {298} Even if these factors were not directly used in loan underwriting or pricing, they were proxies for at least some of the factors that are considered. Id.

  • 299 {299} Id.

    Another study that combined the HMDA data with underwriting information from a large, proprietary subprime loan dataset found that African Americans and Latinos were almost a third more likely to get a high-priced loan than white borrowers with the same credit scores. See Debbie Gruenstein Bocian, Keith S. Ernst, & Wei Li, Ctr. for Responsible Lending, Unfair Lending: The Effect of Race and Ethnicity on the Price of Subprime Mortgages (May 31, 2006), available at

  • 300 {300} Robert G. Schwemm & Jeffrey L. Taren, Discretionary Pricing, Mortgage Discrimination, and the Fair Housing Act, 45 Harv. C.R.–C.L. L. Rev. 375, 389–390 (2010); Cheryl L. Wade, How Predatory Mortgage Lending Changed African American Communities and Families, 35 Hamline L. Rev. 437, 440 (2012); Robert B. Avery, Glenn B. Canner, & Robert E. Cook, Fed. Reserve Bd., New Information Reported Under HMDA and Its Application in Fair Lending Enforcement (Summer 2005), available at; Debbie Gruenstein Bocian, Wei Li & Carolina Reid, Ctr. for Responsible Lending, Lost Ground, 2011: Disparities in Mortgage Lending and Foreclosures 18–23 (Nov. 2011), available at; Paul Calem, Kevin Gillen, & Susan Wachter, Univ. of Pa., Wharton Sch., Zell/Lurie Real Estate Ctr., Working Paper No. 404, The Neighborhood Distribution of Subprime Mortgage Lending 14 (2002); Jim Campen, et al., Paying More for the American Dream: A Multi-State Analysis of Higher Cost Home Purchase Lending (Mar. 2007); Ira Goldstein, Reinvestment Fund, Predatory Lending: An Approach to Identify and Understand Predatory Lending (2002); Ira Goldstein & Dan Urevick-Ackelsberg, The Reinvestment Fund, Subprime Lending, Mortgage Foreclosures and Race: How Far Have We Come and How Far Have We to Go? 4–6 (2008); Debbie Gruenstein & Christopher E. Herbert, Abt Associates, Inc., Analyzing Trends in Subprime Organizations and Foreclosures: A Case Study of the Boston Metro Area, at i (2000); Daniel Immergluck & Marti Wiles, Woodstock Inst., Two Steps Back: The Dual Mortgage Market, Predatory Lending, and the Undoing of Community Development (2004); Raul Hinojosa Ojeda, Albert Jacquez, & Paule Cruz Takash, William C. Velasquez Inst., The End of the American Dream for Blacks and Latinos 15–16 (June 2009); Dep’t of Hous. & Urban Dev., Unequal Burden: Income and Racial Disparities in Subprime Lending in America (2000); Ken Zimmerman, Elvin Wyly, & Hilary Botein, Inst. for Social Justice, Predatory Lending in New Jersey: The Rising Threat to Low-Income Homeowners 5–6 (2002).

  • 301 {301} See, e.g., Cal. Reinvestment Coalition, et al., Paying More for the American Dream: A Multi-State Analysis of Higher Cost Home Purchase Lending (Mar. 2007), available at; Calvin Bradford, Ctr. for Cmty. Change, Risk or Race? Racial Disparities and the Subprime Refinance Market 6–7 (2002); Nat’l Cmty. Reinvestment Coalition, Fair Lending Helps Community Prosperity: An Analysis of Fair lending Disparities in the New Orleans Metro Area (Apr. 2007); Kevin Stein, Cal. Reinvestment Coalition, Who Really Gets Higher-Cost Home Loans? Home Loan Disparities By Income, Race and Ethnicity of Borrowers and Neighborhoods in 14 California Communities in 2005 (Dec. 2006).

  • 302 {302} For example, the Department of Justice filed and settled enforcement actions against the two largest residential home mortgage originators, Wells Fargo Bank and Countrywide Financial Corp., in which it alleged that each company engaged in a pattern or practice of discrimination against qualified African-American and Hispanic borrowers in its mortgage lending from 2004 through 2008. U.S. Dep’t of Justice, Press Release, Justice Department Reaches Settlement with Wells Fargo Resulting in More Than $175 Million in Relief for Homeowners to Resolve Fair Lending Claims (July 12, 2012), available at (settlement provided $184.3 million in compensation for wholesale borrowers who were steered into subprime mortgages or who paid higher fees and rates than white borrowers because of their race or national origin); U.S. Dep’t of Justice, Press Release, Justice Department Reaches $335 Million Settlement to Resolve Allegations of Lending Discrimination by Countrywide Financial Corporation (Dec. 12, 2011), available at (settlement provided $335 million in compensation for victims of Countrywide’s discrimination). See also National Consumer Law Center, Credit Discrimination § 12.4 (7th ed. 2018), updated at

  • 303 {303} See Cal. Reinvestment Coalition, et al., Paying More for the American Dream: A Multi-State Analysis of Higher Cost Home Purchase Lending (Mar. 2007), available at

  • 304 {304} Kevin Stein & Margaret Libby, Cal. Reinvestment Comm., Stolen Wealth: Inequities in California’s Subprime Mortgage Market 41, 47, 50 (2001).

  • 305 {305} Patrick Bayer, Fernando Ferriera & Stephen L. Ross, Economic Research Initiatives at Duke (ERID), Working Paper No. 206, What Drives Racial and Ethnic Differences in High Cost Mortgage? The Role of High Risk Lenders 3–6 (Feb. 1, 2016), available at

  • 306 {306} Id. at 26–28.

  • 307 {307} See, e.g., McGlawn v. Pennsylvania Human Relations Comm’n, 891 A.2d 757 (Pa. Commw. Ct. 2006) (brokerage firm targeted African Americans through advertising in sources “oriented toward African American audiences”). See generally National Consumer Law Center, Credit Discrimination Ch. 8 (7th ed. 2018), updated at

  • 308 {308} Charles Lamb, Race, Segregation, and Housing in America 7, 9, 17–19 (2014), available at (summarizing the studies relying on HMDA data that show a large disparity exists across racial groups in terms of who receives mortgage money; finding that the HMDA data he used revealed that as black-white segregation increases, the number of conventional mortgages received by African Americans decreases, and this effect was larger in 2010 than in 2005).

  • 309 {309} Allen J. Fishbein, Patrick Woodall, Consumer Fed’n of Am., Women Are Prime Targets for Subprime Lending: Women Are Disproportionately Represented in High-Cost Mortgage Market (Dec. 2006), available at; Nat’l Cmty. Reinvestment Coalition, The 2005 Fair Lending Disparities: Stubborn and Persistent II (May 2006), available at But see Robert B. Avery, Kenneth P. Brevoort, & Glenn B. Canner, Higher-Priced Home Lending and the 2006 HMDA Data, Fed. Reserve Bull. A123 (Sept. 8, 2006), available at

    Unlike the Federal Reserve Board’s analysis, the Consumer Federation of America study looked not only at loans with a single female borrower, but also at those with a male co-applicant when the female was listed as the primary borrower.

  • 310 {310} See Howard Lax, Michael Manti, Paul Raca, & Peter Zorn, Subprime Lending: An Investigation of Economic Efficiency, 15 Hous. Pol’y Debate 533, 545 (2004) (30% of borrowers receiving subprime loans are aged 55 and older as compared with 17% of prime borrowers in this age category).

  • 311 {311} See Allen J. Fishbein, & Patrick Woodall, Consumer Fed’n of Am., Subprime Locations: Patterns of Geographic Disparity in Subprime Lending (Sept. 5, 2006), available at (also finding that African-American and Latino borrowers were more likely to receive subprime loans).