Executive Summary

Report

Recommendations

Appendix I

Press Release

Consumers Union produced this report, on behalf of the Texas Community Reinvestment Coalition, with research from the Austin Tenants’s Council.

This study incorporates the two measures of lender performance utilized in the 1998 study: a “disparity ratio” based on the rate at which different types of applicants are denied mortgage loans; and a “market share ratio” comparing each company’s home purchase loan market share in underserved communities to its mortgage loan market share in an MSA as a whole.

We reviewed 1996, 1997 and 1998 data on more than 700,000 home purchase loans, 130,000 home improvement loans, and 250,000 refinancing loans in Texas from the Federal Financial Institutions Examinations Council (FFIEC).33 In order to focus on actual originations made to consumers, we eliminated information related to loans sold by one institution to another. We also limited our study to owner-occupied loans on one-to-four family homes. Finally, for the denial ratio and marketshare analysis, we eliminated records flagged by FFIEC as having data quality or validity edit-failure problems.34

A denial rate is the ratio of the number of loans denied to the total completed applications (which includes applications resulting in a loan, applications approved by the lender but not accepted by the applicant, and applications denied).

To describe the differences between denial rates for White and minority applicants, we calculated a “disparity ratio” (used in all charts). The “disparity ratio” is the denial rate for Black or Hispanic applicants divided by the denial rate for White applicants. If there were no disparities among these groups of applicants, the disparity ratio would be 1.0. Where the disparity ratio is substantially higher for minority applicants, it may indicate unfair lending practices.

In addition to loan denial, HMDA data allows researchers to quantify geographically where lenders make loans and where they do not. For Austin, Dallas, Fort Worth, San Antonio, El Paso, and Houston, we compared lending patterns in minority and low income census tracts to lending in the city as a whole.35 For each large lender studied, we compared its own share of lending in minority and low income tracts to its share of lending in the city as a whole. This is the market share ratio.

We grouped census tracts in two ways: by their minority concentration (into low minority, below citywide average, and above citywide average minority) and income (low, median, above median, and upper income).36

For each city, we counted all owner-occupied, one-to-four family loans and all applications for all lenders in each grouping of census tracts.37 The total number of loans in each group of tracts is the existing “market.” This is a conservative approach, since it assumes there are no additional credit needs unserved by some lender, when in fact there are certainly unmet capital needs in low income and minority urban areas. CU believes that company performance would appear worse if measured against a reasonable “target” market that included an estimate of unmet demand.

In each of these urban areas we reviewed the lending patterns of the largest fifteen lenders to ensure adequate loan volume for study.38 In order to offset differences in size and marketshare among companies, we divided each company’s marketshare in low income and minority tracts (its total loans/applications in all these tracts combined divided by the total loans/applications made by all lenders in these tracts) to its own overall market share. If the company made loans equally everywhere, the low income and minority marketshare ratio would be 1.0. A ratio below 1.0 indicates that the company makes relatively few loans in those census tracts compared to its lending in the city as a whole.

To these basic measures we also now add an additional approach to measuring equity: the total number of loans made to minority applicants by major lenders, and whether those were conventional or FHA loans, subprime or manufactured home loans. We used a list of subprime and manufactured home lenders created by HUD, as well as Securities and Exchange filings and industry publications to identify which HMDA reporters are manufactured home or subprime lenders. If minority applicants are disproportionately issued more costly FHA loans, this could represent the “steering” of these applicants to a less favorable credit product than they might qualify for otherwise.

In addition, this report uses these measures to look also at the home improvement loan market and the refinancing market for the Austin MSA. The expanded study of the Austin MSA also includes the results of a survey sent out to the largest lenders in the Austin/San Marcos MSA.

At the time Consumers Union issued its 1998 report, lenders responded that minority borrowers, especially Black borrowers, came to them with poor credit histories and too much debt. Therefore, although they denied Black borrowers more often than Whites at a similar income level, the denials were unrelated to race or any form of discrimination. Consumers Union does not have access to the private credit histories of individual applicants to affirm or deny this generalization.

Finally, individual lender HMDA data is supplemented by a review of CRA public files (for banks), company filings with the Securities and Exchange Commission, and interviews with lenders, community groups and government agencies involved in community reinvestment projects throughout the state.

To understand the CRA and community revitalization activity taking place outside the major cities, we decided to focus our research on two large rural areas, east and west Texas. For east Texas, we included the eastern section of the state and a number of adjacent counties along the Louisiana and Arkansas border from Beaumont to Texarkana. For West Texas, our area included about 30 counties, including the areas around San Angelo, Big Spring, Sweetwater, and Abilene.

To locate local resource people working with community revitalization projects, we contacted state and national nonprofit organizations, government agencies, and financial institution regulators39 such as the Texas Department of Housing and Community Affairs, the U.S. Department of Housing and Urban Development (HUD), the Federal Reserve Bank of Dallas, the Office of Comptroller of the Currency (OCC), and the Federal Home Loan Bank of Dallas.

We mailed a Community Revitalization Survey to 60 entities (nonprofit, government, or financial institution). From our mailing we received back 24 responses (40 percent return). We received 17 responses from nonprofits, four from local government, two from lenders, and one local foundation. Most of our survey responses were from East Texas (22 out of 24).

After analyzing the responses to our survey, we visited East and West Texas and conducted interviews. In July and August 1999, we conducted 17 interviews (four in West Texas and 13 in East Texas) talking to nonprofit organizations and supplementing it with interviews from local and state government employees. We then followed-up these personal interviews in November, 1999 with telephone interviews with five lenders (one in West Texas and four in East Texas).

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NOTES:

33 While most lenders report HMDA data, mortgage companies with assets of less than $10 million do not report unless they originated 100 or more home purchase loans during a calendar year. Banks report HMDA data if they have assets of more than $29 million or made no home purchase or refinancing loans in the preceding calendar year. Finally, consumer loan companies may not have to report mortgage loans if mortgages comprise less than 10 percent of their overall business. For example, according to HUD, Household International was the nation's largest subprime mortgage lender in 1997 and 1998, but Household is not a HMDA reporter because mortgages are less than 10 percent of their porfolio.

34 FFIEC flagged about 10% of the total records for the state based on data edits they create to identify records that are internally inconsistent on any of several issues. Since these records do relate to actual loans made, we used them to summarize gross market trends, but did not use them to look at denial rates or MSA marketshares. A brief review of the data with edit failure codes indicates that eliminating these records does not substantially alter the final analysis, except that thrifts have a disproportionate number of records with edit failure codes-in particular Standard Federal Bank and Trust. Therefore, although Standard Federal is large enough to warrant analysis in most Texas MSAs, we do not include it in our analysis here.

35 In this study, all references to "city" refer to MSAs as defined by the census bureau and used by FFIEC.

36 For this study, Consumers Union adopted 1995 MSA level minority concentration projections (scenario 0.5) issued in the paper "Projections of the Population of Texas and Counties in Texas by Age, Sex, and Race/Ethnicity for 1990-2030," Texas State Data Center, Texas Agricultural Experiment Station, Texas A&M University, February 1998. Low minority refers to tracts identified by FFIEC as having a minority concentration below 50% of the estimated MSA overall concentration for 1995. Below average tracts are those with 50% to less than 100% of the MSA average, and high minority concentration tracts have the MSA average or above.

Low income means tracts with less than 80% of median family income for the MSA. Median tracts have 80% to less than 120% MF, above median tracts have an income of 120% to less than 150% MF, and high income tracts are all those at or above 150% of MF.

37 For some MSA areas, tract level demographic information is not available, so we did not analyze loans in these areas.

38 We defined lenders regulated by HUD as independent "mortgage companies," lenders regulated by either the OCC (regulating nationally chartered banks), the FRB (regulating state chartered, Federal Reserve member banks and bank holding companies) or FDIC (regulating state chartered, non-member banks) as "banks," and lenders regulated by the Office of Thrift Supervision as "savings and loans."

39 From the nonprofit side, a number of organizations were helpful with providing contact lists and names of key local and statewide resource people, including the Texas Low Income Housing Information Service and the Texas Association of Community Development Corporations.