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Are Nonbank Mortgage Lenders Good For Minority Borrowers?

Above Photo: Mikes pics.

Complaints charging two lenders with anti-Black business practices raise questions about growing industry sector.

A loan officer at a mortgage company questions a Black loan applicant about household debts, but subsequently invites a less creditworthy white borrower to fill out an application with “no inquiry about credit standing or debts.” He then offers to walk the same white homebuyer through the loan application and preapproval process and follows up with personal emails. The Black borrower receives neither offers of extra help nor emails from the lender.

This unequal treatment played out in Seattle, Washington, and was part of a study in which testers with white and Black-sounding names and similar credit and asset profiles called a random sample of mortgage companies, including Movement Mortgage, seeking loans, according to a complaint filed in October by the National Community Reinvestment Coalition, a Washington, D.C.-based fair housing organization.

Ironically, in 2019, South Carolina-based Movement Mortgage held a three-hour training session with NCRC managers on how to comply with civil rights laws meant to ensure women and minorities receive equitable treatment when buying a home. Two years later NCRC would test Movement on the material.

“It made it even more egregious that we had trained some subset of employees a number of years ago,” said Brad Blower, general counsel at NCRC.

Fairway Independent Mortgage Corporation was also charged with offering Black borrowers fewer lending options and less encouragement in a second complaint, filed with the Department of Housing and Urban Development (HUD). Testers sought loans from the Madison, Wisconsin-based lender in Charlotte, North Carolina.

NCRC regularly conducts these “matched pair tests,” and last year gained national attention for one that demonstrated alleged discriminatory lending connected to the Paycheck Protection Program, through which loans were offered to small businesses impacted by the COVID-19 pandemic. That study sent testers to secure loans from 17 banks in the Washington, D.C. area.

Nonbank Mortgage Lenders Are Now The Primary Source Of Credit For Minority Borrowers, Although Advocates Say The Loans They Offer Cost More Than Those Provided By Banks.

This time, the NCRC put a spotlight on two firms that are part of a growing sector of the economy that is increasingly gaining market share over banks, which are still chafing from their losses due to the financial crisis. In 2009, independent (nonbank) mortgage lenders originated 25% of loans, according to the Mortgage Bankers Association. They accounted for 59% in 2019, according to the Wall Street Journal, and 68.1% in 2020.  These financial institutions are now the primary source of credit for minority borrowers, although advocates for minority homebuyers say the loans they offer cost more than those provided by banks.

The absence of oversight over how mortgage lenders provide credit to underserved  homebuyers raises concerns among these advocates. They worry that individual mortgage lenders may be discriminating against minority borrowers, even if nonbank institutions as a whole are lending more to those homebuyers than traditional banks. They also say independent mortgage lenders provide higher cost loans than traditional banks to Black and Latino borrowers similarly qualified as their white counterparts.

If HUD determines investigations into Movement Mortgage and Fairway Independent Mortgage are warranted, the complaints may be settled through a mediation process. Alternatively, the lenders may be fined if they are found to be in violation of the Fair Housing Act. “Fairway Independent Mortgage [Corporation] disagrees with the allegations made in the complaint, and plans to strongly defend itself,” said a company representative who wrote in an email that the firm still had not been contacted by HUD. Movement Mortgage did not respond to repeated requests for comment.

So-called shadow banks, unlike banks, do not accept deposits or offer checking and savings accounts. Many, like Movement Mortgage, are privately held companies. But some are backed by private equity and, with the boom in refinancing last year, they are increasingly going public. They don’t have the same capital requirements as traditional banks — and so are potentially more at risk in a housing market that is on the decline.

Also different from banks, these financial institutions are not covered by the Community Reinvestment Act. Enacted in 1977, the CRA is a key tool used by regulators and activists to prod banks to meet the credit needs of low and moderate income neighborhoods among the communities they serve. When those banks attempt a merger or to open new branches, a low score on a CRA exam can make that process more difficult.

Lately, there has been a movement to increase scrutiny of the lending activity of nonbank financial institutions as the nation wrestles with its history of redlining minority neighborhoods and the present-day chasm in white and Black homeownership rates, now at its highest level in 50 years. The homeownership rate for white Americans in the fourth quarter of last year was 74.5%. For Black Americans, the rate was 44.1% and for Latinos it was 49.1%, and for Asian and Pacific Islanders it was 59.5%. “Homeownership is one of the strongest ways of passing on wealth from one generation to another, and the fact that there isn’t as much access to sustainable loans in the Black community exacerbates [the gap between white and Black homeownership],” says Blower.

In California, Movement Mortgage Denied Loans To Black Borrowers At More Than Twice The Rate It Turned Down White Borrowers For Loans In 2019 And 2020.

In early November, New York’s Gov. Kathy Hochul signed legislation that expanded the state’s version of the CRA to cover nonbank mortgage lenders. Illinois and Massachusetts already subject nonbank mortgage lenders to CRA’s anti-redlining requirements.

“We’re hoping to push for a state CRA in California,” said Rawan Elhalaby, a senior program manager at the Greenlining Institute, an Oakland-based advocacy group. (An expansion of the federal Community Reinvestment Act would require an act of Congress.) In addition, a U.S. Justice Department-led initiative, announced in October, promises to expand the department’s analyses of potential redlining conducted by both nonbank mortgage lenders and banks.

Do these lenders’ records make the case for CRA oversight? It appears so. The complaints do not rest on the behavior of a single loan officer. They also follow from an analysis of lending data. In the case of Movement Mortgage, two separate analyses, including one conducted by Capital & Main, have also raised red flags about the company’s treatment of minority borrowers.

In California, Movement Mortgage’s second largest market, the company denied loans to Black borrowers at more than twice the rate it turned down white borrowers for loans in 2019 and 2020. Its peer lenders in the state, meanwhile, denied loans to Black borrowers at about one and a half times the rate of white borrowers during that same time period. Capital & Main’s analysis, based on Home Mortgage Disclosure Act data, does not take into account California borrowers’ credit profile or the types of loans they sought.

Because Movement Mortgage is not subject to CRA review, its performance in low and moderate income and minority communities — and that of the hundreds of independent mortgage lenders overseen by California’s Department of Financial Protection and Innovation — remains largely unexamined in the state.

Movement Mortgage made a list of mortgage companies with the worst lending disparities, according to an investigation last August by The Markup. Movement Mortgage was 110% more likely to reject Black and Latino applicants than similarly qualified white applicants. (A company spokesperson told The Markup that its analysis did not take into account a borrowers’ credit score, information that is not publicly available.)

In 2017, 23% Of Government-Insured Nonbank Loans To Low Income Borrowers Were Classified As High Cost, Compared To 10% Of Bank Loans And Just 3% Of Credit Union Loans.

Nevertheless, as a group, independent mortgage companies are increasingly lending to minority, first time and low and moderate income borrowers in California and nationwide. They accounted for two-thirds of loans to minority home buyers in 2019, according to the Mortgage Bankers Association, the industry’s lobby group. They are responsible for another development that may have increased access to credit for minority borrowers. Fintech lenders like Detroit-based Rocket Mortgage, which have automated the delivery of financial services, have nudged banks and nonbanks alike to offer exclusively online borrowing options. Removing a loan officer from the equation has actually reduced discrimination in lending although it hasn’t eliminated it, according to a 2019 UC Berkeley study.

To Karan Kaul, senior research associate for the Housing Finance Policy Center at the D.C.-based Urban Institute, independent mortgage lenders are expanding credit for low income and minority borrowers, and more rules imposed on an already highly regulated sector will increase costs. “Mortgage credit has been arguably exceedingly tight over the last 10 years after the Great Recession, and nonbanks actually have made credit more available than it would otherwise be,” he said.

But can a fast-growing industry that is increasingly accountable to Wall Street be trusted to put the needs of underserved borrowers first?

Advocates are concerned over whether individual mortgage lenders are lending consistently to low and moderate income and minority homebuyers, and whether they are offering borrowers the best available loan product. Studies by the NCRC have found that loans from nonbank financial institutions were higher cost than bank loans across loan types. In fact, 23% of government-insured nonbank loans to low income borrowers were classified as high cost in 2017, compared to 10% of bank loans and just 3% of credit union loans. “There’s reverse redlining, which is just as bad” as redlining, says Blower.

There is also worry about how borrowers are being treated. Elhalaby says some companies target homebuyers with Spanish language marketing materials only to provide loan contracts in English.

As a program manager for New Economics for Women (NEW), a Los Angeles nonprofit, Rosie Papazian worked with CRA-regulated banks to provide financing to mostly Latino first time homebuyers on Los Angeles’ Eastside for nine years. Even once affordable South Los Angeles has become out of reach for many of them, she says. Most of her clients have been finding homes to the east, in Riverside County or San Bernardino County, or “maybe buying townhomes versus single family” houses, she said in November.

Papazian, who left NEW last month to work as a community lending officer in a bank, sees the attraction of mortgage lenders over banks for her former clients. The nonbank lenders often have more relaxed qualifying guidelines and promise shorter escrows, according to Papazian. That speed can be appealing to borrowers facing Southern California’s intensely competitive real estate market. But those borrowers may pay a hefty price in higher interest rates over the life of the loan and upfront costs. “Next thing you know, they’re paying $11,000 in lender fees,” she said. When they secure a bank loan with NEW, “They’ll close maybe five days later, but they’ll still close and save so much money,” she said.

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