Mortgage Pricing Discrimination --
What Needs to Be Done
When Your Bank Says "No" -- The Predators Step In
by Matthew Lee* Click here for ICP CRA Reporter
“Has your bank said ‘no’? Call us-- we’ll say ‘YES!” Late-night television viewers are being bombarded by smiling pitchmen. Phil Rizzuto and Jim Palmer for the Money Store; Miami Dolphins quarterback Dan Marino for FirstPlus; smiling grandfatherly Joseph Goryeb for Champion Mortgage, now owned by KeyBank. All of them are offering mortgage loans, but at higher than normal prices. Well, at least people with blemished credit histories can get loans, the less desperate among us probably say. And if this higher-than-normal interest rate lending were being done fairly, maybe it would be a good thing.
But it is not.
“Fairly” would mean that applicants would be treated based on their credit histories. Whatever their race, two applicants who both have made three late credit card payments in the last year would both pay the same “overage,” the same level of extra fees or interest rate points to protect the lender from the extra credit risk.
But what if, simply because you lived in a “minority” community like Bedford Stuyvesant or the South Bronx in New York City, like the South Side of Chicago, East and South Central L.A., East Saint Louis, where you have less access to bank branches and to normal interest rate loans, you were only offered much higher priced credit? That would be discrimination - a violation of the Federal Fair Housing and Equal Credit Opportunity Acts.
The problem, however, is: HOW WOULD YOU KNOW? If you need a loan and get it, even at higher than normal pricing, how do you know what other people are paying? Mortgage lending is, by its nature, less transparent than the price of milk, or gas, which can be compared to going to stores in different neighborhoods, or simply driving by gas station jotting down the prices off the signs. Lenders will tell you that each loan is unique -- even as they compare credit scores to their own matrix of risk and price.
Because no one borrower can know if she is being treated fairly on loan pricing, consumers must rely on the government agencies which regulate banks and mortgage companies. In February 1998, the New York State Banking Department struck a blow for fairness, the first, it is hoped, in a series of needed blows.
On February 17, 1998, the New York State Banking Department announced that it had accused Roslyn Savings Bank and its mortgage company, Residential First, of racial discrimination: charging African Americans and Latinos more for mortgage loans than was charged to whites with the same credit histories. Roslyn’s CEO Joseph Mancino, while agreeing to pay $5,000 each to more than 550 over-charged borrowers, maintained that Roslyn had done nothing wrong, and that the bank only settled the case to avoid costly litigation. Right.
Ironically, Roslyn itself had discovered the pattern that minority borrowers at Residential Funding paid more for their loans than whites with the same credit histories. However, rather than begin addressing the problem when they found it, Roslyn Savings’ management massaged the numbers until it came up with a justification. If you only compared the rates at particular branches, there was no disparity. That is to say, at Roslyn / Residential First’s Brooklyn-Queens branch in Bayside, most borrowers with the same credit histories were paying the same rates. Only if you compared these rates to those on loans made through Roslyn/Residential First’s branches in less predominantly minority communities in Connecticut and New Jersey (or in Hauppauge, where Residential Funding is headquartered) -- would you see that there, borrowers were being charged less.
Well, after more than a year of behind-the-scenes discussions and negotiations with Roslyn, on February 17 the Banking Department brought down the boom, requiring Roslyn to pay each over-charged borrower $5,000, and to re-train its lending employees in fair lending compliance. Until this re-training is done, Roslyn and Residential First have stopped charging higher rates.
But what about Jim Palmer, Dan Marino, and the opportunistic companies who use them as their front men? What about the largest bank in the country, Chase Manhattan Corporation, which has a higher-than-normal interest rate lending unit called Chase Manhattan Funding? The trade newspaper American Banker reports that the Banking Department is investigation at least three other mortgage companies in New York for discriminatory pricing. The Banking Department will not name thecompanies these are (until it is ready to lower the boom). For the sake of another kind of fairness -- that between the biggest and relatively small companies -- we hope that the Banking Department, after very publicly reprimanding Roslyn Savings Bank, does not allow larger companies which have wider effects to settle or resolve similar charges in a quieter, less public way...
Non-discrimination is not rocket science: stick to a matrix, or formula, to ensure that people with similar credit histories are charged similar rates, whatever their race. This is as close to “Mom, apple pie and the American flag” as we’re likely to get in these contentious times. Any New York State lender who disputes this simple principle of fairness -- should not be licensed to lend in New York State. Even if they DO quarterback the Miami Dolphins....
* * * *
* -- Note: Another version of this appeared in New York Newsay of March 12, 1998.
Further note that, in December 1998, the New York State Banking Department and the FDIC approved Roslyn's application to acquire another bank -- before there has been any proof that Roslyn has truly cleaned up its act, and while Roslyn, in 1997 and 1998, did not make a single loans in an low income census tract on Long Island. Hey -- what the law says, "No" -- the regulators say "Yes!"
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