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In the 1990s the Texas economy finally recovered from its long slump. Today, employment is up and home values soar. Yet the rising tide leaves some neighborhoods drowning. Consumers Union and the Austin Tenant's Council studied Home Mortgage Disclosure Act (HMDA) data from 1996 to 1998, hoping to see a surge of lending in all census tracts and to all types of borrowers.

Instead we found that inequities continue in the home purchase market, and subprime lenders disproportionately refinance the homes of minority borrowers in low income areas.

· The disparity between denial rates for minority applicants and denial rates for white applicants was actually higher in the booming 1998 refinance market, after the introduction of home equity "cash-out" refinance, than in previous years. In 1998, 14.5 percent of completed applications by white applicants were denied, compared to 29.5 percent of Hispanic applicants and 31.3 percent of Black applicants.

· Six of the top ten refinance lenders to white borrowers statewide were banks, and none were subprime lenders. By contrast, five of the top ten refinance lenders to black borrowers were subprime lenders, and only three were banks (or bank affiliates). Subprime lenders generally charge higher interest and loan to borrowers with less than perfect credit. Overall, 27 percent of all Black refinance loans were issued by subprime companies, compared to 15.3 percent of Hispanic refinance loans and 6.3 percent of White refinance loans.

· In general subprime lenders dominate refinance in low income areas in Texas, but when we examine the race of the applicant it appears that black applicants disproportionately get their home equity loans from subprime lenders. The ten largest lenders refinancing all homes in low income areas included five subprime lenders, one manufactured home lender, and two banks (or bank affiliates). But the top ten lenders to Black refinance borrowers in low income census tracts were nearly all subprime companies-seven of ten. By contrast, only one of the top ten refinance lenders to White borrowers in low income tracts statewide is a subprime lender.

· This pattern is most striking in Dallas and Houston. In Dallas, eight of the top ten refinance lenders to Black borrowers in low income census tracts in 1998 were subprime lenders, while only two of the largest lenders to whites refinancing homes in these same tracts were subprime lenders. In Houston, six of the top ten refinance lenders to Blacks in low income areas were subprime, including the two largest, Ameriquest and WMC Mortgage.

· When we look at all Dallas census tracts at low, moderate or median income levels (up to 120% median family), we find that six of the top ten lenders to Black applicants were subprime and none of the top ten lenders to White applicants were subprime. In Dallas census tracts with income below 120% median family, 39.2% of Black applicants received home refinance loans from subprime companies while only 10.2% of whites and 17.1% of Hispanics borrowed from a subprime lender.

· In a disturbing trend, lenders far more frequently report that the information about an applicant's race or national origin was not provided in mail or telephone applications-undermining HMDA analysis. In the refinance market, this is particularly true for subprime lenders. Since subprime lenders do not report the race of the applicant at a much higher rate than prime lenders, it is possible that subprime lending to minority borrowers is occurring at even higher rates than we have outlined in this report.

· Black and Hispanic applicants remain a much smaller proportion of the total applicant pool relative to their proportion in the population. Home purchase loans to Black applicants increased only 19.4%-less than the growth in the market as a whole. As a result, although more Black applicants received loans in 1998, Blacks also saw their share of the overall home purchase loan market remain flat at 5.7%, less than half their presence in the population.

· Most owner occupied home purchase loans are made in the conventional loan market, but Black and Hispanic applicants are more likely to apply for and receive FHA loans. Several of the state's largest mortgage lenders (including North American Mortgage, Irwin Mortgage, Countrywide and FT Mortgage Companies) made more loans to Black and Hispanic borrowers through their FHA program than through their conventional loan program, while making conventional loans to the majority of their White borrowers.

· Most lenders continue to have a poor lending record in low income and minority areas in their own communities, and many continue to deny Black and Hispanic applicants at a much higher rate than White applicants. At the lowest income levels, denial rates for Black and Hispanic applicants statewide are only slightly higher than those for low income White applicants. However, at the highest income levels, Black and Hispanic applicants are nearly twice as likely to be denied a home purchase loan as White applicants at the same income level.

· The highest disparities between denial rates for minority applicants and White applicants in 1998 appear in Austin-San Marcos and Bryan-College Station. In Austin/San Marcos Blacks were denied slightly more often relative to Whites than they were in 1996.

· Again in this study, we find that Norwest, one of the state's largest bank mortgage lenders, has a poor track record in both low income and minority census tracts in all the major urban areas we studied. This is disturbing because Norwest's growth can be attributed in part to the acquisition of local Texas banks in the 1990s, increasing its reinvestment responsibilities here. Guaranty Federal FSB, which received an "Outstanding" CRA rating last year, did not make home purchase loans in low income and minority census tracts at the same level it made loans in other areas.

· While we found no lenders in any city with loans equally spread across all census tract groups, we found several where the differences in lending were nominal. NationsBank in Austin, Houston and San Antonio took its fair share of applications and made about the same share of loans in low income and minority tracts as elsewhere in the city. Also performing well in Dallas, San Antonio and Austin were CrossLand Mortgage, affiliate of Utah-based First Security Bank, and Sterling Capital Mortgage, affiliate of Houston-based Sterling Bank (showing equitable lending in Austin, but not Houston).

· Lenders in the manufactured home market-like Green Tree Financial, Oakwood Acceptance and 21st Century Mortgage-have a strong presence in low income areas. Unlike the prime banks, these lenders generally do not deny minority applicants at a substantially higher rate than White applicants.

· Of the ten lenders making the largest number of loans in low income tracts statewide, six were manufactured housing lenders (Green Tree, Oakwood, 21st Century Mortgage, Bank of America FSB, Vanderbilt and Associates Housing Finance). Of the ten lenders making the largest number of home purchase loans to Black applicants in low income tracts statewide, four are manufactured housing lenders, three are subprime lenders, and two are large FHA-program lenders. Loans in all these categories tend to cost more than prime, conforming mortgage loans.

· Manufactured home and subprime lenders also make a disproportionate number of the total home purchase loans to minority borrowers. At least 20 percent of Black borrowers and 18 percent of Hispanic borrowers statewide received loans from a manufactured home or subprime lender, compared to only 14 percent of White borrowers.

· While lending inequities remain, the Community Reinvestment Act has resulted in creative new investment partnerships between nonprofit community development organizations and local depository institutions. This report highlights a number of sucessful projects resulting in new homes for low income families or the rehabilitation of declining properties-primarily in our major urban areas. Unfortunately, such successes are occurring less frequently in rural communities. In visits to East and West Texas, Consumers Union found less CRA related community revitalization activity, and a strong need for greater involvement by bank lenders in redevelopment programs.

Consumers Union and the Austin Tenant's Council encourage consumers, regulators, policymakers, and lenders to work together to create a lending environment that ensures all communities will benefit from the state's strong economy and burgeoning growth. The following recommendations involve a shared approach to ensure fair access to financial services as well as new opportunities for home ownership.

State policymakers should:

· Create loan pools through TDHCA to help guarantee alternative mortgage loan products.

· Encourage insurance companies to purchase Texas low income mortgages (or mortgage securities) in order to expand the market for low income home loans.

· Invest state funds to buy up low income Texas home loans to encourage banks to do more affordable lending.

· Fully utilize and fund the state's Office of Access to Financial Services to ensure policymakers have adequate information about home lending in Texas.

State regulators should:

· Market and sell existing government programs to the presidents of small banks.

· Allocate the majority of "Balance of the State" HOME Block Grant funds to rural areas and small towns.

· Require Texas banks and thrifts to offer low cost accounts to low income families, and incorporate information about these accounts into their marketing literature.

Lenders should:

· Increase outreach and marketing efforts to low income and minority communities.

· Develop home loan programs with flexible underwriting and down payment assistance.

· Provide more grant funding to home buyer programs that help individual families become "credit-ready" before they apply for mortgage loans.

· Provide technical assistance in the creation of local community development organizations or create bank based CDCs.

· Invest in community development financial institutions (CDFIs)-private-sector, financial intermediaries with community development as their primary mission.

· Conduct regular fair lending training and testing for loan officers.

Federal regulators should:

· Raise the standard for an "Outstanding" or "Satisfactory" CRA rating.

 

· Work together to ensure that banks with affiliated "subprime" companies (often regulated by different federal entities) are acting in the best interest of low income communities.

 

· Notify community and development groups of the CRA exam schedule in their area to encourage more active participation in the exam process.

 

· Enforce existing HMDA reporting requirements, especially with respect to reporting the race of the applicant. Amend regulations to eliminate the reporting exception for "800" line mortgage companies.

Consumers Union's Southwest Regional Office