Modern Day Redlining: Reveal's Investigation of Potential Racial Discrimination in Mortgage Lending Leads to Government Inquiries

Ballard Spahr LLP

Ballard Spahr LLP

The Pennsylvania attorney general and state treasurer each announced separate inquiries last week into potential mortgage-lending redlining in Philadelphia. These inquiries come on the heels of a series of investigative reports from Reveal, the online news outlet for the Center for Investigative Reporting. Reveal has reported it found significant racial disparities in the number of conventional mortgage loans obtained from lenders and mortgage brokers in several U.S. cities.

Reveal analyzed public data available under the Home Mortgage Disclosure Act (HMDA) and concluded that black applicants were denied conventional mortgage loans at significantly higher rates than white applicants in 48 cities, including Philadelphia. Reveal also found that Latinos, Asians, and Native Americans were similarly less likely to obtain a conventional mortgage loan than whites in certain cities. Reveal concluded that "African Americans and Latinos continue to be routinely denied conventional mortgage loans at rates far higher than their white counterparts. This modern-day redlining persisted in 61 metro areas even when controlling for applicants’ income, loan amount and neighborhood . . . ." Reveal determined that in Philadelphia, "although black and white residents make up similar proportions of the area's population, white applicants received 10 times as many conventional mortgage loans in 2015 and 2016."

The Reveal reporting has ignited the interest of governmental officials who want to investigate this so-called modern redlining. Pennsylvania Treasurer Joe Torsella and Pennsylvania Attorney General Josh Shapiro each opened an official inquiry into mortgage lending practices in Philadelphia in response to the Reveal reporting. The Philly Voice reported that Shapiro said he opened the investigation in conjunction with the U.S. Bureau of Consumer Protection, adding, "We are chasing this down and we take this seriously." The Philadelphia City Council also passed a resolution to hold hearings regarding mortgage lending practices in Philadelphia.

While Reveal focused mostly on Philadelphia, news organizations across the country have picked up on the reporting, including the Detroit Free Press, the St. Louis Post-Dispatch, and PBS, which produced a two-part piece for PBS News Hour in conjunction with Reveal that aired earlier this month. The Reveal reporting has spurred dialog among politicians and civil rights activists regarding what can be done to address potential racial discrimination in mortgage lending practices. This increased awareness and discussion could lead to additional fair lending inquiries in other states and more focused action in this area by the OCC and CFPB.

But the Reveal reporting is not without criticism. For its methodology, Reveal reported that it analyzed nine economic and social factors, including "an applicant's income, the amount of the loan, the ratio of the size of the loan to the applicant's income, and the racial makeup and median income of the neighborhood where the person wanted to buy property." Reveal did not analyze borrower credit score information because that information is not publicly available and is not reported under the HMDA.

Because Reveal did not consider credit scores and other factors that lenders use in making lending decisions, lender groups have criticized Reveal's methodology as "defective" and "deeply flawed." The American Bankers Association issued a statement responding to Reveal's analysis, stating it "was missing critical ingredients needed for an accurate assessment of fair lending practices" and "the HDMA numbers alone do not reveal a bank's fair lending performance." Rather, "the most important factors in the decision to lend are a borrower's credit score and history, their income and DTI ratio, and the LTV ratio. By its own admission, Reveal only looked at income on that list."

The Mortgage Bankers Association and its President and CEO David H. Stevens also issued responses to the Reveal analysis, echoing many of the same criticisms the ABA identified, and pointing out that the Reveal analysis focuses only on conventional loans, "ignoring government lending, particularly FHA." Government programs are "widely available, allow smaller downpayments, and in some ways are more flexible with respect to credit history than conventional programs."

While the verdict may be out on the reliability of Reveal's conclusions, its reporting has garnered considerable attention in the industry and may lead to increased scrutiny of fair lending policies within institutions and greater fair lending enforcement in 2018.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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