The new four bedroom home in Charlotte, North Carolina was Crystal Marie and Eskias McDaniels’ personal American dream, the reason they moved there from expensive Los Angeles.
A lush, long lawn, 2,700 square feet of living space, a shiny kitchen, and a neighborhood pool and playground for her son Nazret. All for $ 375,000.
Pre-qualifying for the mortgage was a breeze: They had high credit ratings, earned around six figures each, and had saved more than they would need to pay the down payment.
But two days before they were due to sign, in August 2019, the loan officer called Crystal Marie with bad news: the deal would not be closed.
“It seemed like an algorithm was rejecting it,” she said, “and then there was a person who could step in and decide whether or not to override it.”
She was told that she did not qualify because she was a contractor and not a full-time worker – even though her colleagues were also contractors. And they had mortgages.
Crystal Marie’s employees are white. You and Eskias are black.
“I think it would be really naive for someone like me not to think that the race played a role in that,” she said.
While technology has made it easier for anyone to apply for a home loan, such innovations have not completely eliminated one: Bias.
Long-standing discrimination against people of color when taking out a home loan can be replicated in software-based lending, a technology that proponents say is designed to prevent prejudice.
Research by The Markup found that in 2019, lenders were more likely to refuse home loans to people of color than whites with similar financial characteristics – even if the research’s authors checked for newly available financial factors that the mortgage industry has brought into play, the racial disparities in the past explain the lending.
In a complex statistical analysis of more than 2 million traditional home purchase mortgage applications reported to the government, they held 17 different factors constant and found that when compared to similar white applicants, lenders:
● 80% more rejections from black applicants
● 70% more likely to reject Native American applicants
● 50% higher chance that applicants from Asia / Pacific Islands will be rejected
● 40% more frequent rejection of Latino applications
These are national tariffs.
The American Bankers Association, the Mortgage Bankers Association, the Community Home Lenders Association, and the Credit Union National Association criticized the analysis.
In written statements, the ABA and MBA rejected The Markup’s findings because they did not include creditworthiness or government loans, which are mortgages guaranteed by the Federal Housing Administration, the Department of Veterans Affairs, and others.
According to The Markup article, government loans have different eligibility thresholds that bring people to market who otherwise wouldn’t qualify, but generally cost buyers more. Even the Federal Reserve and the Consumer Financial Protection Bureau, the agency that publishes mortgage data, separate conventional and government loans in their research into credit disparities.
The nonprofit news organization says it’s impossible for them to include creditworthiness in their analysis because the CFPB is removing them from the public version of the data – in part because of lobbying the mortgage industry citing borrowers’ privacy.
While home loan decisions are officially made by loan officers in each institution, they are largely controlled by software, largely commissioned by two quasi-government agencies.
Rules by Freddie Mac and Fannie Mae
Freddie Mac and Fannie Mae were founded by the federal government to boost home ownership and now buy about half of all mortgages in America. In doing so, they essentially lay down the rules in the mortgage approval process from the very beginning.
They require lenders to use a certain credit scoring algorithm, “Classic FICO”, to determine whether an applicant meets the minimum threshold to be considered for a conventional mortgage at all, currently a score of 620.
Classic FICO was introduced more than 15 years ago based on data from the 1990s and is widely viewed as harmful to people of color as it rewards traditional loans that they have less access to than white Americans. It takes into account non-on-time payments for rent, utilities, and cell phone bills, among other things – but it will lower people’s scores if they fall behind on those bills and are followed by debt collection agencies. Unlike newer models, Classic FICO also penalizes people for past medical debts after they are paid.
But Fannie and Freddie have resisted a number of requests from proponents, the mortgage and housing industry, and Congress since 2014 to approve a newer model. They didn’t answer questions about why.
The approval process also requires a green light from Fannie or Freddie’s automated underwriting software. Even their regulator, the Federal Housing Finance Agency, doesn’t know exactly how to choose, but some of the factors companies consider in their programs can affect people differently based on race or ethnicity, researchers found.
For example, traditional banks are less likely than payday loan sellers to set up branches in neighborhoods that are mostly populated by colored people. Payday lenders do not report on-time payments so they can only damage loans.
History of bias
For decades, people of color have faced higher hurdles than whites when it comes to obtaining a home loan, with even creditworthy borrowers being rejected or wrongly charged higher interest rates.
A Berkeley study found that between 2008 and 2015, both personal and online lenders rejected a total of 1.3 million creditworthy Black and Latino applicants. “That’s because the mortgage application was accepted when it was income and creditworthy of the rejected applications used but deleted the race identifiers.
The president of the trade group that represents real estate appraisers recently confirmed that the real estate valuation industry is dominated by racial bias and said it has launched new anti-prejudice programs.
“If the data you enter is based on historical discrimination,” said Aracely Panameño, director of Latino affairs at the Center for Responsible Lending, “then you are basically cementing the discrimination on the other end.”
In written statements, Fannie said his software analyzes applications “regardless of race,” and both Fannie and Freddie said their algorithms are routinely checked internally as well as by the FHFA and the Department of Housing and Urban Development for fair lending laws will. HUD said it asked the couple to make changes as a result, but not to reveal the details.
Many large lenders also use their institutions’ own underwriting software to guide applicants. How these programs work is even more mysterious; they are also proprietary.
Should the system be optimized?
Some advocates of fair lending have begun to wonder whether the value system in mortgage lending should be adjusted.
“As an industry, we need to consider which alternatives are less discriminatory, even if they are a valid risk predictor,” said David Sanchez, a former FHFA policy analyst who currently leads research and development at the National Community Stabilization Trust. “Because if we let risk determine all of our decisions alone, we will end up in exactly the same place in this country as we are now when it comes to racial justice.”
The race contested by Crystal Marie and Eskias McDaniels had something to do with their rejection. In an email, Lori Wildrick, LoanDepot’s vice president of communications, said the company complies with the law and expects “fair and equitable treatment” for every claimant.
The couple refused to give up after the loan officer told them the mortgage had failed and turned to their real estate agent for help. Crystal Marie’s employer sent several emails vouching for her.
At around 8 p.m. the night before the original closing date, Crystal Marie received an email from the lender saying, “You are cleared for closing.” She still doesn’t understand how she came to say yes, but is relieved and elated.
“It means so much to me as a black,” said Crystal Marie, who said her family descended from slaves in neighboring South Carolina, “to own property in a place that was not owned too many generations ago.
“It meant so much.”
This story was reported by The Markup, and the story and dates were distributed by The Associated Press. Christopher Brooks of CBS News contributed to the coverage.