Inner City Press/FFW: Watchdogging and Taking Action Since 1987

Updated April 24, 2006

NYC Racial Disparities in Mortgage Lending Grew Worse in 2005 at Largest Banks, Study Finds: Citigroup Confined Bronxites to Higher Cost Loans 35 Times More Frequently than in Manhattan; Even in the Same Borough, Chase Confined African Americans to High Cost Loans 11 Times More Frequently than Whites

  New York, April 24 -- In the first New York City study of the just-released 2005 mortgage lending data, the Bronx-based watchdog organization Inner City Press / Fair Finance Watch has found worsening disparities by race and ethnicity in the higher-cost lending of some of the city's (and world's) largest banks. The trend raises concerns: 2005 is the second year in which the data distinguishes which loans are higher cost, over the federally-defined rate spread of three percent over the yield on Treasury securities of comparable duration on first lien loans, five percent on subordinate liens.

   Citigroup in 2005 confined its borrowers in The Bronx to higher-cost loans above this rate spread over 35 times more frequently than in Manhattan, worse than Citigroup's record in 2004. The Bronx is the lowest income and most predominantly African American and Latino county in New York State. In Brooklyn, Citigroup was almost as disparate as in The Bronx, confining its borrowers in Brooklyn to higher-cost loans above the rate spread 23 times more frequently than in Manhattan. For the entire New York City Metropolitan Statistical Area in 2005 Citigroup confined African Americans to higher-cost loans above this rate spread over seven times more frequently than whites, also worse than Citigroup's record in 2004.

   JPMorgan Chase was nearly as disparate in New York City. In 2005, JPM Chase confined its borrowers in Queens to higher-cost loans above the rate spread 8.64 times more frequently than in Manhattan. Chase's disparities were also intra-borough: in 2005 at JPMorgan Chase African Americans in Manhattan were confined to higher cost loans over the rate spread 11.42 times more frequently than whites in Manhattan.

    Redlining and continued disproportional denials to people of color are also evidenced by the new 2005 data. Citigroup denied applications from The Bronx 4.62 times more frequently than applications from Manhattan; the disparity at Wells Fargo was nearby as bad, at three-to-one. While the disparities are nationwide, they are more pronounced in New York City. Nationwide for conventional, first-lien home purchase loans, Citigroup denied the applications of African Americans 2.69 times more frequently than those of whites, and denied the applications of Latinos 2.02 times more frequently than whites, both disparities worse even than in 2004. Bank of America in 2005 was more disparate to Latinos, denying their applications 2.38 times more frequently than whites, and denying African Americans 2.27 times more frequently than whites.

   Last April, Inner City Press / Fair Finance Watch found similar but less extreme disparities; ICP's studies were reported on in the English and Spanish-language press. El Diario reported for example that "at Citigroup, Latinos borrowers were 3.92 times more likely to receive the higher interest rate loans than were white borrowers." Soon thereafter, the NYS Attorney General (NYAG) requested information behind the data from four large national banks: Citigroup, JPMorgan Chase, HSBC and Wells Fargo. Less than a week later, the Office of the Comptroller of the Currency and the New York Clearinghouse trade association both sued to block this inquiry.

   Now the 2005 data has become available, with a few exceptions, allowing a comparison to the previous year and that degree, identification of trends. Focused initially on the NYAG-targeted banks, a review by Inner City Press / Fair Finance Watch of the New York City data of these four shows that not only did a higher percentage of borrowers overall receive loans over the rate spread, but also the disparities between races grew more stark. The banks have tried to blur the two issues, in strikingly similar cover letters they sent along with the data.
Citigroup's senior vice president Eric Eve, for example, wrote in a March 30 letter to Inner City Press that "Citigroup, as we expect will be the case with most other lenders, will show a greater percentage of loans above the threshold for 2005 than 2004... The issue is the narrowing gap between short- and long-term interest rates, a phenomenon known as the 'flattening yield curve.' This is not an indication that borrowers were treated differently in 2005."
Based on Citigroup's 2004 disparities reported, for example, by El Diario, merely denying that practices in 2005 were different that in 2004 might seem to be a strangely limp defense. In fact, Citigroup's 2005 data show worsening disparities. In the state's poorest and least white county, The Bronx, for example, Citigroup confined 7.39% of its borrowers to higher cost loans over the rate spread -- 35.19 times more frequently than in more affluent and less minority Manhattan, where only 0.21% of Citigroup's borrowers were confined to rate spread loans. While of the five boroughs, The Bronx had the highest percentage of loans from Citigroup over the rate spread, Citigroup's percentage of higher cost loans in each of the four outer boroughs was higher than in more suburban, and less diverse, Westchester.

  Citigroup's CEO Charles Price and chairman emeritus Sandy Weill were each questioned by Inner City Press about these patterns on April 18 at the company's annual shareholders' meeting at Carnegie Hall. Mr. Weill referred the question to Mr. Prince, who said that the issues are "too complex to be addressed in this forum," adding that the disparities were clearly not so bad that the Federal Reserve would continue to block Citigroup from large mergers. His reference, repeated throughout the shareholders' meeting, was to the Federal Reserve's recent lifting of its year-old ban on significant expansion, which took place before Citigroup's 2005 mortgage data was released.

   Mr. Prince's claim that the Federal Reserve has implicitly condoned the disparities in Citigroup's 2005 mortgage data is dubious. In any event, federal regulatory laxity is one of the problem that allows the disparities, from most grassroots communities' perspectives. In Brooklyn, New York, JPMorgan Chase in 2005 confined 6.64% of its borrowers to higher cost loans over the rate spread -- 9.1 times more frequently than in more affluent and less minority Manhattan, where only 0.73% of JPM Chase's borrowers were confined to rate spread loans. Bank of New York, from which Chase is applying to buy 338 branches in the New York metro area, confined its Bronx borrowers in 2005 to higher cost loans over the rate spread 7.87 times more frequently than in more affluent and less minority Manhattan. Bank of New York's disparity-ratio between borrowers in Brooklyn and Manhattan, at 6.5, was almost as pronounced.

   While comprehensive income comparisons will not be possible until the aggregate data is released in September, ICP and its academic support team have designed an innovative way to consider income correlations, by calculating upper and lower income tranches based on each lenders own customers. At JP Morgan Chase for conventional first-lien loans nationwide, upper income African Americans were confined to higher cost loans over the rate spread 3.34 times more frequently than whites. At Citigroup for conventional first-lien loans nationwide, 37.73% of upper income African Americans were confined to higher cost loans over the rate spread, versus only 11.46% of upper income whites. Income does not explain the disparities at Citigroup or JPMorgan Chase. Nor at HSBC, where less than half of upper income white borrowers were confined to rate spread loans, versus 61.87% of upper income African Americans and an even higher percentage of Latinos, 62.82%. HSBC, which bought Household International in 2002 just after its predatory lending settlement, has increased the interest rates changed by its former Household units. Over eighty percent of HSBC's home purchase loans to African Americans and Latinos were higher-cost loans over the rate spread, much higher than in 2004 at these ex-Household units.

   Back in The Bronx, HSBC was the largest subprime lender of the NYAG Four. HSBC's March 29 letter to Inner City Press accompanying its data is nearly identical to Citigroup's, concluding that "had the yield spread between short term and long term interest rates stayed at the 2004 levels, far fewer longer maturity loans would have exceeded the thresholds in 2005. Consequently, a meaningful comparison of the rates at which loans exceeded the rate spread between 2004 and 2005 cannot be made."

   While it may be true that a comparison of the raw percentages of a lender's 2004 and 2005 loans that exceeded the rate spread should also take into account "the effect of monetary policy" (as Citigroup's March 30 letter puts it), there is no reason that the disparities between white and African Americans and Latinos cannot be compared year to year. In this comparison, the NYAG Four were more disparate in 2005 than in 2004.

   And the 2005 disparities extended beyond this quartet. Strikingly the largest lender, both prime and subprime, to African Americans in NYC in 2005 was Ameriquest and its affiliates including Argent, which made 6394 loans in NYC in 2005, 4656 (or 72.8%) of them over the rate spread. Ameriquest recently settled charges of predatory lending for $325 million, while leaving its Argent affiliate entirely unreformed. In NYC in 2005 Washington Mutual and its higher-cost affiliate, Long Beach Mortgage, together confined their borrowers in The Bronx to higher-cost loans above this rate spread over 35 times more frequently than whites, worse than their record in 2004. ICP's analysis of other NYC lenders continues. Some lenders are trying to avoid such comparisons by only providing data to the public in unanalyzable form, an evasion it's proved surprisingly difficult to get regulatory guidance on. Evaders for now include New York Community Bank, North Fork / Greenpoint, Lehman Brothers and AIG, down through the NYAG-sued subprime lender Delta Funding Corporation. Each federal regulator has an evader in its midst; none of the agencies has yet acted on this issue.

   In New York, the NYAG is now focused on running to become state governor; in any event his inquiry has been blocked for now by the courts. So who will take action, on the disparities in the 2005 data? Given preemption and inertia at the federal bank supervisory agencies, it must be regulation from below. As to JPMorgan Chase, the issues can be raised to the Office of the Comptroller of the Currency, on Chase's proposal to buy 338 branches from the Bank of New York. Inner City Press / Fair Finance Watch filed such comments on April 10, as reported on Associated Press and elsewhere. Now that Citigroup is no longer explicitly blocked from large acquisitions by the Federal Reserve, its pent-up M&A hunger may soon trigger the Community Reinvestment Act lending reviews that accompany merger reviews. Wells Fargo is embroiled in fights about its environmental record, with no reforms in sight. HSBC is buying, but in Mexico for now. Everything is growing, including the disparities in the data. And what of 2006, the loans being made today? More scrutiny and enforcement actions are needed, to cut through the fogs of the banks' excuses.
 

Definition: the Federal Reserve has defined higher-cost loans as those loans with annual percentage rates above the rate spread of three percent over the yield on Treasury securities of comparable duration on first lien loans, five percent on subordinate liens.

The nationwide

Racial Disparities Grew Worse in 2005 at Largest Banks, Study Finds: Citigroup Confined African Americans to Higher Cost Loans Seven Times More Frequently than Whites; HSBC Was Worse to Latinos, and Made Over 5000 Super High Cost HOEPA Loans

New York, April 10 -- In the first study of the just-released 2005 mortgage lending data, the watchdog organization Inner City Press / Fair Finance Watch has found worsening disparities by race and ethnicity in the higher-cost lending of some of the nation's largest banks. The trend raises concerns: 2005 is the second year in which the data distinguishes which loans are higher cost, over the federally-defined rate spread of three percent over the yield on Treasury securities of comparable duration on first lien loans, five percent on subordinate liens.

            Citigroup in 2005, in its headquarters Metropolitan Statistical Area of New York City, confined African Americans to higher-cost loans above this rate spread over seven times more frequently than whites -- worse than Citigroup's record in 2004.

            Redlining and continued disproportional denials to people of color are also evidenced by the new 2005 data. Nationwide for conventional, first-lien home purchase loans, Citigroup denied the applications of African Americans 2.69 times more frequently than those of whites, and denied the applications of Latinos 2.02 times more frequently than whites, both disparities worse even than in 2004. Bank of America in 2005 was more disparate to Latinos, denying their applications 2.38 times more frequently than whites, and denying African Americans 2.27 times more frequently than whites.

            While comprehensive income comparisons will not be possible until the aggregate data is released in September, ICP and its academic support team have designed an innovative way to consider income correlations, by calculating upper and lower income tranches based on each lenders own customers. Nationwide at Citigroup for conventional first-lien loans, 37.73% of upper income African Americans were confined to higher cost loans over the rate spread, versus only 11.46% of upper income whites. Income does not explain the disparities at Citigroup. Nor at HSBC, where less than half of upper income white borrowers were confined to rate spread loans, versus 61.87% of upper income African Americans and an even higher percentage of Latinos, 62.82%.

            HSBC, which bought Household International in 2002 just after its predatory lending settlement, has increased the interest rates changed by its former Household units. Over eighty percent of HSBC's home purchase loans to African Americans and Latinos were higher-cost loans over the rate spread, much higher than in 2004 at these ex-Household units. In Buffalo, HSBC's long-time headquarters, HSBC in 2005 confined African Americans to higher cost rate spread loans 2.15 times more frequently than whites. 

            In 2005, HSBC made over five thousand super high-cost loans subject to the Home Ownership and Equity Protection Act (HOEPA) -- that is, at least 8% over comparable Treasury securities.  Wells Fargo made 795 HOEPA loans in 2005. Keycorp, which has said it had discontinued HOEPA loans, made 755 such loans in 2005. [April 19 update: Keycorp today notes that it made its commitment to cease HOEPA loans in July 2005, and states that all but two of the 755 HOEPA loans it reported for full-year 2005 were made prior to then and that "you will find that there were two loans made after that time frame that we are adjusting appropriately." Duly noted.]

            Using its unique method of analyzing income correlations, by calculating upper and lower income tranches based on each lenders own customers, ICP / Fair Finance Watch has found that nationwide at JP Morgan Chase for conventional first-lien loans, upper income African Americans were confined to higher cost loans over the rate spread 3.34 times more frequently than whites. At Royal Bank of Scotland's U.S. units, upper income African Americans were confined to higher cost loans over the rate spread 4.01 times more frequently than whites. And at Washington Mutual and its higher-cost affiliate, Long Beach Mortgage, upper income African Americans were confined to higher cost loans over the rate spread fully 4.19 times more frequently than whites.

            Washington Mutual was also among the most disparate when considering conventional first-lien loans without regard to income, confining African Americans to rate spread loans 3.70 times more frequently than whites. Wells Fargo was nearly as disparate, confining African Americans to rate spread loans 3.31 times more frequently than whites.  Royal Bank of Scotland U.S. units came in at 3.11, and JP Morgan Chase at 2.98.  The disparity at Wachovia was 2.58, and at Atlanta-based SunTrust it was 2.40. The disparity at GMAC was 2.92, while at Countrywide it was 2.86.

            Countrywide’s disparity between pricing to African Americans and whites was even worse when considering conventional first lien home purchase loans: Countrywide confined African Americans to rate spread loans 3.53 times more frequently than whites. Countrywide was topped, however, by Milwaukee-based M&I, with a disparity of 3.78, and by Bank of America's MBNA unit, with a disparity of 4.23.

            Bank of America also enabled other subprime lenders in 2005 by securitizing loans through its generically-named Asset-Backed Funding Corporation unit for, among others, Ameriquest, which earlier this year settled predatory lending charges with state attorneys general for $325 million. The settlement only required reforms at Ameriquest Mortgage and two affiliates, but not its largest affiliate, Argent Mortgage. The 2005 data show that Argent made 220,069 loans over the rate spread, while Ameriquest Mortgage made 122,868 such loans. The reforms announced in support of the predatory lending settlement with the attorneys general cover barely 35% of ACC's high-cost lending. 

            Like ACC / Ameriquest, Citigroup and HSBC, other large subprime lenders also increased the percentage of their loans that were over the rate spread, from 2004 to 2005. At New Century in 2005, fully 215,579 of the company's 268,101 loans were over the rate spread, a much higher percentage than in 2004.  National City / First Franklin made 177,526 higher cost loans over the rate spread in 2005. Countrywide in 2005 made 190,621 loans over the rate spread. 199,249 of 237,700 loans were over the rate spread at H&R Block, which also in this season offers problematic high-cost tax refund anticipation loans. Further on fringe finance, the study notes that Citigroup helped Dollar Financial to go public, and since continued to lend to and assist this pawn and payday lender.

            Another of the top four banks which enables predatory lenders is North Carolina-based Wachovia. Most recently, the U.S. District Court for the Southern District of New York denied a motion by the Federal Reserve Board to get reconsideration of a decision won by Inner City Press, requiring the disclosure of Wachovia's connections with a range of subprime lenders, including payday as well as mortgage lenders.  Inner City Press v. Federal Reserve Board, 380 F. Supp. 2d 211. On the Federal Reserve Board's motion, the Court ruled that:

"The Board made absolutely no showing in its summary judgment submissions, however, that the disclosure of data regarding Wachovia’s aggregate exposure and loan outstandings to the [subprime lending] clients listed in Exhibit 3 would cause competitive harm to Wachovia or that the public disclosure of this information would make it difficult for the Board to elicit similar information in the future... The Board points to portions of a document entitled 'Subprime Lending and Related Activities' that Wachovia submitted in the public portion of the Merger Application as a ‘glimpse into the conclusory statements [regarding due diligence practices] defendant can expect in future filings’ if merger applicants know such information is to be released to the public. This argument was not made in the Board’s original submission. In any event, without more specific testimony from Wachovia’s representative regarding why Wachovia would not wish its due diligence practices with regard to its subprime lending clients to be made public, it cannot be said that this document represents the limits of what Wachovia would willingly reveal at the Board’s request."

            There is a need for more information, including the credit score information that the lending industry opposed being included in Home Mortgage Disclosure Act data. In fact, some lenders resist providing even the data required by law, at least in an analyzable form.

            Several lenders have sought to avoid being scrutinized by refusing to provide their data in computer analyzable form.  Institutions insisting on providing their data in paper or PDF form include Lehman Brothers, Delta Funding, Fremont Investment & Loan and other large subprime lenders, as well as banks like New York Community Bancorp, Whitney Bank and Fifth Third Bank. The latter institution is widely reported to be suffering a crisis in corporate governance, which might explain the intransigence. Another company surrounded by corporate scandal, American International Group (AIG), grew more secretive in 2005 -- all data in PDF -- than in 2004, when at least its savings bank's data was provided in analyzable form.

            Inner City Press / Fair Finance Watch is demanding action on all of these issues from the relevant regulatory agencies, including the Office of Thrift Supervision (responsible for AIG and Lehman Brothers Bank, among others), the FDIC (considering giving a bank charter to Wal-Mart), the Office of the Comptroller of the Currency (which since suing to New York last year to block fair lending enforcement has done little to none of its own) and also the Federal Reserve Board.

            While the Federal Reserve will wait, as it did last year, until September to release its own study, it has had the 2005 data since March 1, 2006. "Now that a second year of data is out, with worsening disparities at the largest bank in the nation and many of its peers, there is no more time for the Federal Reserve and other regulatory agencies to equivocate," concludes the Inner City Press report. "The time for enforcement actions to combat this discriminatory and predatory lending is now."

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The report also casts its glance local. The nation's largest bank, Citigroup, was disparate in Metropolitan Statistical Areas all over the country in 2005.

In Los Angeles, Citigroup confined African Americans to higher cost rate spread loans 2.13 times more frequently than whites; its disparity for Latinos was 2.02.

Citigroup's African American to white disparity was 2.27 in the Washington DC MSA, and 2.72 in Chicago. 

In Philadelphia, Citigroup confined African Americans to higher cost rate spread loans 3.43 times more frequently than whites; its disparity for Latinos was 2.50.

Definition: the Federal Reserve has defined higher-cost loans as those loans with annual percentage rates above the rate spread of three percent over the yield on Treasury securities of comparable duration on first lien loans, five percent on subordinate liens.

Last September, the Federal Reserve announced the availability of final and aggregate 2004 Home Mortgage Disclosure Act data.  www.ffiec.gov/hmcrpr/hm091305.htm The Fed also put forth its spin on the data, in the form of 51-page study by staff members Bob Avery, Glenn Canner and Robert Cook.  www.federalreserve.gov/pubs/bulletin/2005/3-05hmda.pdf  While the prose of the Fed's study is typically dense, here's the conclusion the Fed reaches on the final page of its study:

…”black and Hispanic borrowers taken together are much more likely than non-Hispanic white borrowers to obtain credit from institutions that report a higher incidence of higher-priced loans. On the one hand, this pattern may be benign and reflect a sorting of individuals into different market segments by their credit characteristics. On the other hand, it may be symptomatic of a more serious issue. Lenders that report a lower incidence of higher-priced products may be either less willing or less able to serve minority neighborhoods. More troubling, these patterns may stem, at least in part, from borrowers being steered to lenders or to loans that offer higher prices than the credit characteristics of these borrowers warrant. Reaching accurate determinations among these alternative possible outcomes is one goal of the supervision system.”

   What the Fed doesn’t say in this is that these disparities are most stark some of the largest conglomerates in the country, including in their headquarters cities (where they have Community Reinvestment Act duties).  As two example, with the largest bank and thrift in the United States: Citigroup in the New York City Metropolitan Statistical Area in 2004 confined African Americans seven times more frequently than whites to higher cost, rate spread loans. The largest savings bank in the country, Washington Mutual, confined African American couples to high cost loans 4.5 times more frequently than white couples, on nationwide basis. How could such patterns be plausibly described as “benign” or as reflecting “a sorting of individuals into different market segments”?

  Where the rubber will meet the road will be in how the Federal Reserve and other agencies act on specific disparities at specific lenders, including as these are formally raised to them in timely comments on merger applications. See, Inner City Press / Fair Finance Watch's other studies of the 2004 HMDA data: first   second   third fourth fifth. For or with more information, contact us.