February, 1998

Access To The Dream:
Mortgage Lending in Texas

Written by the Consumers Union Southwest Regional Office.
on behalf of the Texas Community Reinvestment Coalition

While some lenders in Texas boast of increasing application rates among minority and low income consumers for home mortgage loans,¹ denial rates remain higher than for White and higher income applicants. Some in the financial industry associate increases in minority and low income applicants with higher denial levels and attribute credit problems as the primary reason for the denials.²

On the other hand, the Mortgage Insurance Company of America (MICA) reports that low and moderate income consumers default less on mortgage loans,³ and new companies have sprung up to help banks find a market in low income areas. "Most banks assume that people living in lower income areas aren't profitable," Ned Brown of Financial Modeling Concepts told Future Banker in 1997. "There are enough studies that have been done to show the exact opposite."⁴

Brown's company, like many lenders, uses consumer credit score information to find potential loan customers for mortgage lenders and assumes credit scoring is a primary way to determine which are the safest borrowers. A credit score is a numerical representation of the consumer's overall credit history, designed to predict the probability of loan default or delinquency based on information from the credit bureaus.⁵ But, for many creditworthy borrowers the credit score may represent a barrier to the loan market.

Three national institutions maintain the collection of credit information on consumers: Equifax, Experian (formerly TRW), and Trans Union. Consumers Union studied credit reports in 1991 and found serious problems, including credit denials caused by inaccuracies in credit reports.⁶ Consumers Union has long advocated for reforms to improve the accuracy and privacy of information in credit bureau reports. Congress approved new reforms in September 1997 to ensure credit bureaus maintain more accurate, fair and private files.⁷ Similar improvements of consumer reporting agencies operating in Texas have been codified into state law.

But for consumers like Mr. and Mrs. Roach of Irving who have little credit and others with no credit history at all, scoring models are harmful. "We were trying to buy a $45,000 house .We went to Nationsbank, paid the application fee, and two to three weeks later were denied because we didn't have enough credit and in order for the bank to help us, we needed $13,000 down." As credit scoring models become more common practice, manual underwriting of applicants with little or no credit will become more cost prohibitive, regardless of their creditworthiness.⁸ Further, some scoring systems negatively rate consumers who "bank" with fringe lenders like finance companies for their credit needs.⁹

Many industries view the credit report as a good indicator of risk, and, as a result, incorporate credit scoring into their lending decisions. In correspondence sent to its lenders in 1995, both the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Corporation (Fannie Mae) endorsed credit scoring in mortgage originations.

Advocates assert that credit reports do not always serve as an accurate predictor of an individual's credit performance. Even studies promoting the use of credit-scoring models caution that "the accuracy of the scoring systems for underrepresented groups is still an open question [since] accuracy is a very important consideration in using credit scoring."¹⁰ The desire for quicker, cheaper, and more objective means of assessing risk should not outweigh the need to use a variety of sources of financial information to accurately determine an individual's ability to repay a loan. Mrs. Roach agrees, "We have stable employment. My husband has been in his job since 1983. Nobody would give us a break."

2 See Mark Mensheha, "S.A. Home-Loan Figures Show Racial Disparity: Findings Are Reflected Across Industry Sectors," San Antonio Business Journal, (Vol. 10, No. 4, Feb. 9, 1996), p. 1; Jim Mitchell, "Texas Commerce Minority Loans Rise 24.3%; But Activity Virtually Flat in Dallas, Dallas Morning News, (June 21, 1996), p. 3D; Earl Golz and Jeff South, "Minorities Get More Home Loans But More Rejections, Too; Loan Applications, Rejections Up For All Texans," Austin American-Statesman, (Sept. 15, 1996), p. A1.

3 See Mortgage Insurance Companies of America, 1994-1995 Factbook and Membership Directory, p. 13.

4 Future Banker, September 1997, p. 56.

5 Loretta J. Master, "What's the Point of Credit Scoring," Federal Reserve Bank of Philadelphia, p. 3-5.

6 "Credit Reports Dangerous to Financial Health, Charges Consumers Union," Consumers Union News, (April 29, 1991).

7 Consumer Credit Reporting Act of 1996, 15 U.S.C.A. Sec. 1681s-2 (1996).

8 See Florence Lockefeer and David Rosen, Mortgage Scoring and Discriminatory Effects: Guarding Against Bias, (September 1996), p. 19-20.

9 Fair, Isaac and Company, Inc., The Effectiveness of Scoring on Low-to-Moderate-Income and High-Minority Area Populations, (Aug. 1997), p. 18.

10 Master, "What's the Point of Credit Scoring," p. 10.