The study, just published in the Journal of Urban Economics by economists from Marquette, Texas Christian and Georgia State University, identified Mortgage Loan Originators, or MLOs, as part of the problem. The study looked at 5,464 MLOs, who are the primary point people homeowners deal with when applying for a mortgage.
According to the study, “MLOs are essentially licensed mortgage sales workers who assist customers with loan applications and have the ability to offer and negotiate the terms of a mortgage with applicants. MLOs are typically the initial and primary contact person for borrowers seeking a mortgage, and, as sales workers whose compensation is tied to performance, have some discretion over how they respond to customer inquiries.” Therefore, as advisers and information providers to home buyers, MLOs play a pivotal role in the lending process.
Through an email correspondence experiment with these MLOs, the study determined whether they treated customers differently based on race and credit score. The authors found that 1.9 percent of MLOs who received email refused to respond to Black clients, while responding to white clients. Further, white clients received more information and responses to inquiries and were treated to friendlier language. Discrimination based on race was about half the level of discrimination based on credit score — that is, high vs. low score — but it remains significant.
The “borrowers” in the experiment who were seeking mortgages were assigned white-sounding names or Black-sounding names based on the national popularity of certain names. So-called white customers included people with names such as Jake Krueger, Brett Nelson and Ethan Schmitt, while black customers were assigned names such as Kadeem Jefferson, Tyrone Washington and DaShawn Banks.
Perhaps the most revealing finding of the experiment was how the results reflected a material impact on Black financial well-being.
“The effect of being African American on MLO response is roughly equivalent to the effect of having a credit score that is 71 points lower,” the authors wrote. Suddenly, the joke about Black people having bad credit is not so funny, since there are policies and practices afoot by financial institutions to shortchange, disable and disadvantage Black people in the marketplace.
A December 2015 study reported in the Boston Globe revealed that Black and Latino borrowers face significant discrimination in mortgage lending, facing substantially higher rejection rates than whites. The study from Jim Campen, economics professor emeritus at the University of Massachusetts Boston, found that 21 percent of blacks in Boston were rejected for a mortgage in 2014, in contrast to a mere 6 percent of white loan applicants. In the rest of Massachusetts, it was more of the same, with 17 percent of blacks being rejected for a mortgage compared to 6 to 7 percent for white applicants, and Latino home buyers facing a rejection rate double that of whites.
Another study found that in Baltimore, where Blacks outnumber whites 2-to-1, banks grant mortgages to twice as many whites as Blacks, showing that banks are cheating people out of mortgages based on race, not income.
The larger context of these studies are the real world effects of discriminatory lending practices during the housing boom of 2004-2008 and the subsequent Great Recession. Banks and other financial institutions have paid out some of the largest settlements in history amid allegations that these corporations steered equally qualified applicants of color into high-interest, subprime loans and charged them higher fees than white mortgage borrowers on top of that. Some of the largest settlements include $335 million from Bank of America’s Countrywide group and $175 million from Wells Fargo. When the economy wiped out, Black and Latino homeowners were decimated, losing their homes in a historic transfer of wealth, and sinking households further into poverty and hard times.
The latest study confirms that discrimination is alive and well in the lending industry, and that it exists across a larger sample — and geographic scope — than previous studies. The authors have concluded that in order to assess the levels of discrimination involved in mortgage lending, it is insufficient to merely look at lending outcomes: “Our work also suggests that to uncover the full extent of discrimination in this market, multiple types of communication should be used in addition to in-person audits, and that enforcement of Fair Lending Laws would be more robust if audits included other means of communication,” the authors wrote.
Andrew Hanson, associate professor of economics at Marquette and one of the researchers for the report, told Digital Journal that for Black borrowers, the implications are clear.
“It means they’ll unfortunately have to work harder to get the information they want, like sending inquiries to two lenders rather than one,” he said.
As for MLOs, Hanson urges them to “take all their clients seriously, and try to work with as many clients as possible…It might be do them better to rethink their general rules of thumb when dealing with clients.”