Millions of Americans improve their lives with access to mortgage credit, gaining the power to build their economic assets and construct their financial futures. Access to this type of credit, however, is not evenly distributed across racial, ethnic or income groups. The mortgage industry can help tear down the walls that prevent equal access to this credit once and for all.
Minority populations are disproportionately blocked from entering the housing-finance market. This depletes these individuals of the financial power needed to build wealth and causes the dream of homeownership to become less of a reality.
Homeowners possess a median net worth of $255,000 compared to a figure of only $6,300 for renters, according to the Federal Reserve’s Survey of Consumer Finances. Homeownership represents a key wealth-building opportunity for consumers. But without equal access to credit, many minority, low-income and other financially underserved consumers are unable to capitalize on this to the same extent as their peers, putting them perpetually behind the economic eight ball.
Historically, minority communities have endured impenetrable barriers that prevent them from participating in the housing market. Increasingly tight underwriting standards, loan origination credit requirements that do not account for the contemporary indicators of a borrower’s ability to pay, and hidden bias are mostly to blame for the issue. Underserved populations are often unable to secure loans with mainstream credit requirements that do not take nontraditional credit sources — such as on-time monthly rent and utility payments — into consideration.
This is important to consider as mortgage originators look to grow their business. Minority populations in the U.S. are rapidly growing in size, and current estimates show that four in 10 Americans identify with a racial or ethnic group other than white. This makes it more urgent than ever for the housing and mortgage industries to find ways to increase responsible financial access and resources for all.
Expanding credit access requires the participation of every entity in the industry, regardless of size. This includes reimagining the way creditworthiness is determined to accurately reflect the financial stories of all borrowers, actively examining lending practices and technology for bias, and relentlessly enforcing fair lending laws.
Although ensuring fair access to mortgage credit has been an ongoing challenge, lenders tightened their credit standards considerably following the regulatory changes brought on by the subprime mortgage crisis and ensuing Great Recession. The Urban Institute, for example, found that due to tight credit standards, nearly 1.1 million fewer mortgages were made in 2015 than if more reasonable standards from 2001 had been in effect.
This finding is emblematic of the overall state of mortgage credit standards since the passage of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010, along with the ability-to-repay and qualified mortgage rule of 2014. The situation has not improved much over time.
The current gap in homeownership rates between Black and white households is larger today than when the federal Fair Housing Act was enacted in 1968, according to the National Fair Housing Alliance. When examining this gap across metropolitan statistical areas, the Urban Institute found that while variations in the homeownership gap between Blacks and whites can largely be explained by differences in marital status, FICO scores, income distribution and age distribution, 17% of this gap remains unexplained by these observed differences.
As part of the Urban Institute’s recommendations for addressing this unexplained gap, researchers pointed to two main areas within the purview of federal regulators and lending institutions. The first is to improve credit-measurement and underwriting systems for evaluating access to the housing-finance system. The second involves broadening and updating underwriting standards to address income variations and better assess the ability to pay. The mortgage industry as a whole has been impacted by credit standards that have historically excluded populations that do not fit the mainstream mold, slowing the growth and potential of the market on a large scale.
As a result, members of minority and socially vulnerable communities may be credit invisible — meaning they possess no credit history and, therefore, their creditworthiness cannot be determined. This gives consumers no choice but to resort to utilizing alternative financial services, such as microfinance, check cashing, hard money and subprime lenders that do not appropriately report on a borrower’s positive repayment behaviors.
The mainstream credit system should serve all borrowers, not only those with historically pristine credit reports. Individuals without deep credit histories do indeed make rent, utility and other payments on a regular basis.
In many cases, renters may be paying hundreds of dollars per month more than they would pay on a mortgage. Although not traditionally measured as factors of creditworthiness, these indicators provide a more holistic view of a borrower’s story and their ability to sustain a mortgage. That is, why shouldn’t a person’s record of making timely payments for rental housing and related utility services be more heavily weighted as a predictor for a person’s ability to make timely payments on a residential mortgage? Thinking beyond the traditional credit report opens up a world of opportunity for lenders to serve an entirely new pool of clients.
Modern lenders employ countless pieces of technology across their organizations to automate and streamline processes. Unfortunately, some business technologies of the past have used racially biased algorithms that result in discriminatory practices such as redlining.
In order to prevent bias from sitting at the helm of automation and algorithms, lenders and vendors alike must understand the implicit bias that can be perpetuated through technology, and how to prevent it from occurring in the first place. Discrimination could appear as minority borrowers being more likely to receive loan rejections or unfavorable loan terms than white borrowers, even when they possess the same credit-determining characteristics.
As lenders seek more ways to automate processes, they must be conscious of the ways that systems could be negatively impacting members of certain social, racial or ethnic groups. Mortgage technologies that prioritize the credit score above other influential factors in determining creditworthiness may be more likely to shun borrowers of underserved communities.
Understanding the implications of bias in technology will enable mortgage lenders, vendors and originators to innovate new methods for reaching these groups, and qualify them for mortgages using more inclusive methods. Mortgage technology and lending practices must aim to increase borrower access to financial opportunities and level the playing field.
Some may think that discrimination in lending is a thing of the past, but equal access to homeownership has yet to be achieved. The gap continues to widen between white and minority homeowners. Half a century since the Fair Housing Act outlawed racial discrimination in lending, statistics surrounding mortgage lending to minority communities still reflect unequal opportunities.
Simply advertising as an “equal housing lender” is not enough to rid the industry of lending inequities — it must begin with action. Lenders must ensure their processes adhere to standards aimed at dismantling prejudice by enforcing the guidelines put into place by the Equal Credit Opportunity Act of 1974, which prevents discrimination in credit access.
Discrimination does not always manifest itself as conspicuously as one might think. Rather, it can more often take the form of microaggressions or policies that impact one community differently than another.
Enforcing fair lending practices means examining every step of the prospecting and origination processes. Lenders and originators must ensure they are not turning away potential borrowers during the preapplication stage by providing them with relevant financial resources and materials. They also must apply the same level of effort in coaching borrowers throughout the loan process, since they have been approved based on equal measurements. Lenders and originators also should become affiliated with industry organizations that advocate for the expansion of responsible mortgage credit access.
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The existence of financially underserved communities signifies a gaping hole in the serviceability of the mortgage industry. In light of recent events surrounding racial injustice, the industry must take an active stance against methods that disenfranchise certain communities. With such troubling data about financial access for minorities, it cannot be assumed that fair lending is the standard.
Each participant in the mortgage lending sphere plays an important role in ensuring that all consumers have equal access to vital financial resources. By challenging its traditional methods of determining creditworthiness, and by sifting through technologies and policies that perpetuate unintentional bias, the mortgage industry will move one step closer to reflecting inclusion. ●