Disparity in interest on loans to be examined via review of 200 firms

BINYAMIN APPELBAUM

Staff Writer

In a national report issued Tuesday, the Federal Reserve Board said blacks and Hispanics disproportionately receive high interest rates on mortgage loans, it does not know why, and it intends to find out.

Regulators will examine lending by about 200 selected companies to see if discrimination affected pricing decisions, the report said. The Fed declined to name the firms.

The Fed also said it will examine whether African Americans and Hispanics are sometimes steered to high-rate lenders when they could qualify for a market-rate loan.

The report is the federal government's opening statement in an accelerating public debate about the role of race in loan pricing.

For the first time, lenders must disclose which of their loans carry a high rate.

The Observer reported last month that blacks were four times as likely as whites last year to receive high rates on home purchase loans, based on the paper's analysis of about half of all loans. Hispanics were twice as likely.

The government released complete national lending data Tuesday showing similar disparities among all lenders.

Charlotte's big banks, Bank of America Corp. and Wachovia Corp., made few high-rate loans last year. They also made relatively few loans to blacks.

The gaps do not prove discrimination. Lenders say pricing is based on risk and that race is not considered. The data do not include credit scores, down payment amounts or other factors lenders use to determine interest rates.

But the Fed report said discrimination might be a part of the explanation.

The report found that much of the disparities resulted from the fact that minorities are far more likely than whites to borrow from companies that specialize in loans with high rates. In 2004, interest rates of about 8 percent and higher were considered high, while market rates averaged around 6 percent.

In addition to the possibility that borrowers are steered to high-rate lenders, the Fed said it will explore whether some market-rate lenders fail to make their loans equally available in minority communities.

"This industry is certainly under a spotlight," said Paul Hancock, a lawyer who once led the Justice Department's enforcement of fair housing laws and now works with lenders on compliance issues. "To the extent that differences in loan prices are correlated with race and national origins, the burden will be on the lender to explain the reason for the differences."

Hancock emphasized he believed most lenders were eager to comply with fair lending laws. The Fed report found no reason to doubt that most already do. The 200 companies selected for scrutiny, based on the how often they made high-rate loans to borrowers of different races, make up less than 2 percent of the nation's mortgage lenders.

The data released Tuesday show 11.5 percent of home purchase loans last year carried a high rate, including 32.4 percent of loans to blacks, 20.3 percent of loans to Hispanics, and 8.7 percent of loans to whites.

Income did not explain the disparities, the report found.

"This should cause lenders to pause, because they had been saying they were waiting for this," said Stella Adams, director of the N.C. Fair Housing Center.

Lenders said the report showed an industry that is doing a good job serving the vast majority of its customers. They note the steady climb in home ownership rates.

"The banking industry is committed to helping all prospective homebuyers qualify for loans and helping them get the best rate possible," Edward Yingling, president of the American Bankers Association, said in a statement. "Disparities based on anything other than creditworthiness are unacceptable; as an industry, we will work to eliminate any such disparities."

It is not clear how much of the disparities can be explained by differences in creditworthiness.

In preparing the report, the Fed reviewed a database containing credit score information from eight lenders. It found that credit data likely explained some portion of the disparities.

The Fed has not required lenders to provide such data to the public, citing privacy concerns. Lenders have declined to do so voluntarily. The Fed has said it will examine such data as part of its review of individual lenders.

Some members of Congress have said they will review Tuesday's report before deciding whether to press for the public release of additional data.