Borrowing While Black: Applying Fair Lending Laws to Risk-Based Mortgage Pricing
Alan M. White
CUNY School of Law
May 15, 2009
South Carolina Law Review, Vol. 60, No. 3, 2009
African-American families pay much higher interest rates on their mortgages than white families. Home Mortgage Disclosure Act reports reveal that even high-income Blacks are far more likely to pay subprime (high) mortgage rates than comparable whites. While federal enforcement agencies have been slow to take action under fair lending laws, individual and class action suits challenging mortgage price discrimination are rapidly bringing new issues before the courts and agencies.
Lenders protest that they are using mechanical pricing models, based on objective data, and that prices are often set without any face-to-face contact between a lender and borrower (particularly for mortgages originated through brokers.) Courts and agencies have struggled to apply disparate treatment and disparate impact analysis in this new context of seemingly neutral criteria producing hugely disparate results.
On closer examination, the pricing criteria used by subprime lenders expose some of the reasons that Blacks fared so poorly in so-called risk-based pricing structures. A review of the research literature and available empirical data reveals the means by which seemingly objective pricing factors allow implicit bias by brokers, appraisers and underwriters to infect the seemingly neutral risk-based pricing system to produce discriminatory results. These observations should prompt courts and bank supervisors to reconsider the disparate impact and disparate treatment principles and proof burdens applied in fair lending cases based on pricing. In particular, the burden must be on lenders to validate pricing models based on risk-associated costs, and not merely on the presence of various explanatory variables that may or may not justify price differentiation. Lenders must also account for product steering, i.e. racial segregation of borrowers into different product categories or internal lending divisions, and for pricing discretion provided to mortgage brokers.
On a deeper level, we need to consider the wisdom of permitting risk-based pricing that has the effect of redistributing income and wealth away from minority groups, and weigh the costs of risk-based pricing against its benefits to consumer welfare. This is particularly vital when it may be the higher prices that produce the risk, not the other way around, and the risk at issue is the stripping of wealth and foreclosure of homes for African-American families.
Number of Pages in PDF File: 30
Date posted: November 17, 2009