In late 1993, the Federal Reserve Bank of Cleveland joined with the Greater Cleveland Roundtable, the Cuyahoga County Department of Development, and the Ohio Civil Rights Commission in a groundbreaking effort to identify and eliminate potentially discriminatory practices in the home buying process.

Known as the Greater Cleveland Residential Housing and Mortgage Credit Project, the three-year effort involved nearly 140 representatives of various home buying industries, including real estate firms, lending institutions, appraisal companies, credit bureaus, and property and mortgage insurance firms.

Planning Committee
Cleveland Project Sponsors
Test Project: Appraising an Urban Home
Task Group Accomplishments
Task Group Members

While discrimination against minority mortgage loan applicants is clearly a national issue, the initiators of the Cleveland project shared the belief that America’s best prospect of eliminating discrimination lies in the development of local solutions.

By bringing together a group of multidisciplinary, racially diverse professionals, the project’s planners hoped to spark an open discussion that would spawn action steps for eliminating discrimination—whether inadvertent or intentional—in all phases of home purchasing. The project, through its seven task groups, produced 29 practical recommendations and strategies for combating potentially discriminatory actions. The Cleveland project’s most enduring achievement, however, may have been its success in fostering ongoing dialogue among its various and disparate constituencies.

As the project participants searched for solutions to the complex issue of discrimination, they occasionally found themselves in seemingly unresolvable conflict. At those times, the Cleveland Fed, positioning itself as a facilitator, was called upon to restore a positive, constructive atmosphere.

Jerry L. Jordan, president of the Federal Reserve Bank of Cleveland, explained that the Bank served as a catalyst for action. "In no way were we an architect or engineer of the project. We didn’t dictate the solutions. But we felt that our public/private role made it incumbent upon us to be part of the search for solutions. In a sense, we were like a gardener. We could prepare the soil, we could make sure there was adequate moisture, we could try to keep the crows out of the cornfield, but we couldn’t guarantee anything else. Beyond that, nature had to take its course."

Formally concluded in April 1997, the Greater Cleveland Residential Housing and Mortgage Credit Project has earned widespread national recognition. Malcolm Bush, president of the Chicago-based Woodstock Institute, a nonprofit group that promotes economic development in low-income communities, has called the Cleveland project "a major achievement in promoting debate and action about disparate treatment in the housing market." According to Bush, the project was unique because "it was the first time, in the absence of racial strife in the community, that the civic leadership of a major city decided to tackle the problems of discrimination. There are very few examples of such intensive voluntary debate in American civic life."

This essay examines the genesis, process, and outcomes of the Greater Cleveland Residential Housing and Mortgage Credit Project, a community-based approach to achieving equality and fairness throughout the home buying process.

Equal access to home mortgage credit is a fundamental economic goal in the United States. The proper flow of housing credit contributes significantly to the social and economic vitality of individual communities and to the health of the country’s economy.

Historically, the primary capital asset for most people has been the equity in their homes, which can be used to finance children’s college tuitions, fund retirements, and start businesses. In fact, the leading source of business start-up capital is loans against primary residences. Fair and equal treatment of all mortgage loan applicants is a precondition for a well-functioning marketplace. Lending bias, while patently unfair to individuals, is harmful in a much larger sense in that discrimination precludes a portion of our society from accumulating wealth in the form of home equity, thus hindering potential growth of our economy.

The presence of disparity in mortgage lending patterns has been documented in data made available through the Home Mortgage Disclosure Act. Recent data show that in 1995, 40.5 percent of all black and 29.5 percent of all Hispanic mortgage applicants were denied loans, compared with 20.6 percent of whites. And, in a 1992 study, the Federal Reserve Bank of Boston found that black and Hispanic applicants in the Boston area were more than 50 percent more likely to be denied a mortgage loan than whites, even if the minority applicants had the same income, wealth, and credit histories.

The controversial findings of the Boston study inspired housing advocates across the nation to call for similar studies in their cities. In Cleveland, representatives of the Greater Cleveland Roundtable and the Cuyahoga County Department of Development approached Donna Cotton, a community affairs director at the Cleveland Fed, about partnering with the Bank to replicate the Boston study.

Jerry Jordan, however, was not certain that replicating the Boston study in Cleveland would be particularly useful. "Many people, especially neighborhood and community groups, were saying that we needed to have a Cleveland study," Jordan recalled. "But we didn’t need any more Boston-type studies. We needed action. It was obvious we had similar issues to address in Cleveland. I didn’t want our economists to go out and spend a lot of time collecting and torturing data. All that would do is shift the focus from the real issue and delay the resolution of our problems. Rather than commission a similar study, I believed it made more sense to move forward and develop methods of identifying and eliminating discriminatory practices in our community."

Bolstered by Jordan’s pledge of support, the Cleveland project’s four sponsors came together in a unique alliance of free-market advocacy, corporate civic responsibility, and community activism.

In designing the Cleveland project, the sponsors recognized that there are numerous steps in the process of buying a house, and that discrimination at any step of the process could negatively impact a loan request. The project leaders, therefore, decided to address all aspects of the home buying process, not just the mortgage loan origination.

"One of the problems of the discrimination issue is that there are a lot of players in the home purchase process besides the lenders," said Andrew "Bud" Burkle, Jr., a vice president at the Cleveland Fed. Burkle, who managed the Bank’s community affairs function when the Cleveland project was conceived, noted, "Since banks are highly regulated, they most often get the blame for discrimination."

While many industries are involved in the purchase of a home, only lending institutions are overseen by federal regulators. During the 1970s, housing policy advocates became concerned that mortgage lenders were not adequately serving all segments of their markets. Addressing this problem, Congress passed the Home Mortgage Disclosure Act (HMDA) in 1975, which requires certain lenders to report, census tract by census tract, the number and dollar value of home loans they make in their communities each year.

Legislators next enacted the Community Reinvestment Act of 1977 (CRA), which encourages banks, through regulation, to meet "the credit needs of their entire community, including low- and moderate-income neighborhoods."

In 1989, HMDA was amended to require certain urban-based lenders to collect and report loan applicants’ annual income, loan amount requested, gender, race, and census tract of the desired property. This expanded information is used to prepare public disclosure reports and to monitor lenders for compliance with both CRA and fair lending laws.

While annual HMDA data routinely show disparities in mortgage lending to minority neighborhoods versus white neighborhoods, HMDA data alone are inadequate to draw any meaningful conclusions about the presence of discrimination in the mortgage markets. Nevertheless, banks are often targets of criticism by community activists, who argue that HMDA data are evidence that banks neglect minority neighborhoods. In response, banking defenders attribute disparities in credit flows to differences in applicants’ creditworthiness.

To attract the participation of lenders, as well as other industry professionals who might be especially sensitive to criticism, the sponsors resolved to maintain a nonjudgmental atmosphere throughout the project. "One of the project’s key elements was that we were going to concentrate on solving issues, instead of placing blame and pointing fingers at individual industries or entities," said Burkle. "We couldn’t let it turn into a blame process. It had to be an improvement opportunity where everybody would win. If we got into shouting matches or finger-pointing, people would have walked away from the table."

One lending professional, David Fynn, of National City Bank, commended the project organizers for their astute assessment of lenders’ sensitivity to criticism. "We wouldn’t have participated if we thought that we were going to be backed into a corner," stated Fynn. "Discrimination is a complex issue involving various industries. It’s a problem that banks can’t solve by themselves. The organizers had exactly the right idea in inviting a wide range of industry representatives."

For assistance in garnering broad-based participation, the project’s planning committee turned to the chief executive officers of Cleveland-area banks, real estate firms, mortgage companies, and other home-buying-affiliated industries. "From our standpoint, it was important to get the senior-level executives on board, because that would send an encouraging signal down through the rank and file," said Melvin Pye, Jr., who was the executive director of the Greater Cleveland Roundtable during the Cleveland project.

Barbara Grothe, Greater Cleveland Roundtable program manager, organized a breakfast meeting for 65 Cleveland-area CEOs. At the meeting, which was led by Lyman Phillips (at the time, chair of the Roundtable’s race relations committee), project planners explained the economic merits of addressing bias in mortgage lending. "We needed to sell the goals of the project in a pro-business light," said Grothe. "We made a strong case that reducing discrimination would free up the marketplace, thus creating more opportunities and business for everybody."

However, the commitment of business leaders was not finalized until the planning committee agreed to eschew publicizing the Cleveland project during its early phases. "There was a concern among the business sector that informing the media could have been risky," said Burkle. "If we went out and tooted our own horn, the community might view the project as a self-promoting sham, and it would die a quick death from the resulting skepticism."

By design, the Cleveland project had three phases. The initial phase began in October 1993 with a two-day conference facilitated by Malcolm Bush and attended by nearly 100 representatives of housing-related industries. During the conference, attendees—through plenary sessions and breakout groups—discussed likely areas of discrimination throughout the home buying process. Participants then established task groups to examine potentially discriminatory business practices in the following four home buying steps: The home purchaser’s initial contact with the real estate agent; the home purchaser’s initial contact with the lender; the lending institutions’ interface with the secondary market; and the appraisal process.

Each task group was responsible for developing recommendations to reduce the occurrences of discrimination in its respective stage of the home buying process. The project’s first phase concluded in mid-1994 when the four task groups reported their findings and recommendations to the full group of participants.

In the project’s second phase, three additional task groups were formed. These groups developed strategies for eliminating potentially discriminatory business practices in the areas of property insurance, private mortgage insurance, and purchasers’ interaction with credit bureaus. Like the original four task groups, these groups comprised representatives from various housing-related industries, including the industry targeted for scrutiny.

In November 1995, after the second set of task groups released its strategies for eliminating discrimination, the project leaders reviewed the recommendations of the seven task groups and initiated the final phase of the project: the cross-industry adoption and implementation of the strategies.

On day one of the initial two-day conference in 1993, participants gathered to watch the video "True Colors," a hidden-camera investigation of racial discrimination. Produced by the ABC newsmagazine Prime Time Live, "True Colors" tracks two young men—one white and one black—as they set out to establish themselves in St. Louis. The documentary reveals the vastly different treatment each received when applying for a job, buying a car, shopping in a mall, and renting an apartment.

The video’s unabashed portrayal of discrimination markedly altered the tone of the conference. "Before the presentation of 'True Colors,’ participants were engaged mainly in small talk," said Mary Davis, fair housing officer for the Cuyahoga County Department of Development. "After seeing the tape, people began to open up and share their thoughts about this sensitive issue."

Marie Gerace, an account executive with Prospect Title Agency, added, "When the conference began, I suspected it was going to be just another boring two-day meeting. But after viewing the video, my attitude changed. As I looked around the auditorium, I saw that some people were shocked. The tape was very effective in showing that discrimination is often subtle. People rarely come right out and say, 'I’m not going to rent to you because you’re black.’"

After the video presentation, conference participants broke into multi-industry, racially diverse groups to discuss disparate treatment of minorities. "By showing 'True Colors,’ we opened the door to a discussion of unfair treatment," Burkle recalled. "The tape was a wake-up call. There was no longer a need to explain what the issues were."

Although some individuals seemed unwilling to acknowledge the existence of unfair business practices, several black participants spoke openly about specific instances of racial discrimination. "Although I’ve experienced some discrimination as a woman in a corporate atmosphere," said Gerace, "I was both surprised and sad to hear a black person say, 'This is what happens all the time to me.’"

The openness and candor of the minority participants was crucial to the project’s success, noted Malcolm Bush. "Because the minorities spoke honestly about the issue of discrimination, the other participants, in turn, responded with openness and honesty. This was very important because it was the first time, that I was aware of, where different ethnic groups came together to discuss discriminatory actions in terms of their own behavior and their own business practices. In a sense, they were putting their bread and butter on the line."

As Gerace listened to accounts of discrimination and disparate treatment, she began to understand that, "We all are guilty of discrimination. I used to think it was other people who discriminated, but now I realize that everyone does. Sometimes in the lending process, applicants are judged by their clothes or looks. A lot of discrimination is unintentional. If a lender is insensitive, then 'business as usual’ could be discriminatory.’"

On the second day of the conference, participants identified areas of the home buying process where discriminatory acts were most likely to occur. Typically, the purchase of a home involves the actions of about 20 allied industries. Because each of the industries has a role in gathering and sharing information with the others, discrimination and disparate treatment at any stage of the transaction can impact the outcome of the loan application. During their work sessions, participants considered potential areas of discrimination within their respective industries, as well as the consequences of discriminatory practices. After prioritizing the problem areas, participants selected seven of the areas for investigation by the task groups of phase 1 and phase 2.

 Among the seven task groups, the Appraisal group members were especially successful at identifying potential areas of discrimination in their industry. When the group first met, several participants expressed uncertainty about the existence of discrimination in the appraisal process. To address this issue, the members decided to conduct a test project to determine if properties in low-income neighborhoods were appraised accurately. Group members commissioned lending institutions to solicit four appraisals for a single-family house in Cleveland’s Hough neighborhood. The results of the test project were startling: The appraised value of the property ranged from $36,000 to $83,500.

"This experiment revealed that appraisers may make mistakes because of perceived notions and lack of knowledge about Cleveland’s neighborhoods," said Tony Willis, chair of the Appraisal task group. "Appraisers must be in touch with the neighborhoods they are appraising. The appraisers must also know which cycle a neighborhood is in. Vacant houses don’t necessarily mean that a neighborhood is in dire shape. Next month, those houses may be gone, and a community rehabilitation project may have begun."

In Donna Cotton’s view, a fair and consistent appraisal process is a crucial element of wealth creation. "If I can get the true value for my home, then I can pass that value on to whoever may come after me. But if I can’t get a fair appraisal, then you have, in effect, taken away from my wealth."

 Several Cleveland project leaders, when queried, said that their most difficult challenge—and most gratifying accomplishment—was facilitating discussions between feuding representatives of Cleveland’s minority and white real estate agencies.

There are two major associations of real estate professionals in the Cleveland area: The Cleveland Area Board of Realtors (CABOR), comprised mostly of white real estate agents, and the Cleveland Association of Real Estate Brokers (CAREB), which represents mainly minority agents. Historically, the two groups have maintained a discordant relationship. At the start of the Cleveland project, the members of CAREB (who are known as "realtists") were involved in a lawsuit against CABOR over access to the Multiple Listing Service (MLS), which is controlled by CABOR and lists all properties currently for sale by members of the Board of Realtors.

The minority agents were displeased because, in order to receive the MLS, the CAREB members (who pay dues to that organization) also had to become dues-paying members of CABOR. (The two associations have since resolved their dispute, and the MLS is now available to members of CAREB.)

In addition to this conflict, the two groups clashed over the minority real estate agents’ practice of pulling the credit reports of prospective home buyers before showing them properties. In discussions at the two-day conference, several nonminority real estate agents expressed their view that pulling a potential buyer’s credit report at an early stage in the buying process was potentially discriminatory. The nonminority agents claimed that the practice could be used to identify and screen out financially undesirable house seekers. Minority agents, however, argued that they use the credit reports to provide credit counseling to prospective buyers who may have infrequent contact with lending institutions. Saying that their actions were being misconstrued as racist, the minority agents decided to boycott the task group sessions.

In response to the boycott, Bud Burkle, along with Mary Davis and Barbara Grothe, visited Robert Morgan, who was then president of CAREB. "Morgan felt that the nonminority agents were unfairly judging the African-American agents," explained Burkle. "I assured him that, 'If you come to the next task group meeting and anybody becomes accusatory or confrontational, I’ll walk out of the meeting with you and we’ll never go back.’ Well, he and his group came back. And immediately, the meetings became extremely productive. He had a lot of experience with discriminatory issues, and I think he felt that the Cleveland project was a vehicle where he could finally express those frustrations."

When the Cleveland project was conceived in 1993, the sponsors realized that its success would require a concerted effort by the city’s private and public sectors. "Without this partnership, the Cleveland project could not have worked," said Malcolm Bush. "One of the impressive things about the project was that the Cleveland Fed was in genuine participation with the Greater Cleveland Roundtable and Cuyahoga County. The Fed and the County brought the power of regulatory authorities, and the Roundtable brought the practice of activism. It was a very good combination. There was some good work done."

In terms of deliverable products, the Cleveland project’s accomplishments are noteworthy: The seven task groups have overseen the development of continuing education programs for appraisers, real estate agents, and lenders; as well as four consumer education brochures and a reference directory for appraisers. The task groups also generated 29 recommendations for reducing discrimination in the housing market.

The project’s final phase—implementation of the 29 recommendations—is a work in progress. "At this point, 16 of the recommendations have been implemented," said Barbara Grothe. "It’s important that Cleveland civic and business organizations step forward to adopt the remaining recommendations and monitor their implementation. It’s clear to me that we’ve started a process, but now that the Cleveland project has ended, we need some entities to follow through. I think that the individuals who participated in the Cleveland project took ownership of the issues, but that’s a small percentage of all the people who are involved in the process of allocating mortgage credit. That’s why it’s so important for these recommendations to be integrated into the agendas of corporations and trade associations."

While acknowledging the Cleveland project’s tangible accomplishments, many participants said the project’s most significant benefit may have been its actual process. "There was tremendous value in the amount of discussion and learning that took place," said David Fynn. "Some participants had been business partners for years, but had never talked about how they did business. Overwhelmingly, the project was about gaining insight and understanding discrimination."

Robert Morgan credited the project with opening the lines of communication between Cleveland’s minority and white real estate agents. "We’re in the same industry, but we have different philosophies," said Morgan. "The Cleveland project brought us together for the first time. It created a situation where there was a consistent dialogue. It’s important for real estate professionals to be proactive and deal with industry problems on our own, rather than having the solutions mandated to us by a governmental authority. But there are regulatory issues, economic issues, and political issues. We need to have the Federal Reserve involved in the process of eliminating discrimination. The Fed can help with its resources, expertise, and ability to create dialogue among the lending community that it regulates."

Anne Lulow, director of career development at Realty One, concurred with Morgan, saying, "We definitely need to sustain the dialogue that was started three years ago if we truly hope to eliminate discriminatory practices from our industry. The Cleveland project was a big step forward in the process of bringing real estate agents together. Now it’s up to industry professionals to continue educating ourselves on the important issue of discrimination."

 The Cleveland project participants recognized early on that the project’s success could not be measured in quantifiable terms. Given its often-subtle and complex nature, discrimination is sometimes difficult to detect, let alone eliminate.

Ruth Clevenger, who participated in the Cleveland project first as a representative of a commercial bank and then in her role as manager of the Cleveland Fed’s Community Affairs function, explained, "We all knew that we couldn’t assess the project’s accomplishments in a quantifiable way because there were too many variables. The only way to measure our success is by how many recommendations have been implemented, by how many new relationships have been formed, and by what we learned about each other. And one of the most important things we learned is that many of the participants were willing to stick with this project all the way to its conclusion."

Applauding the participants’ commitment, Cuyahoga County Commissioner Tim Hagan called the project "an unqualified victory." According to Hagan, "Our goal, as a community, is to make mortgage credit and affordable housing available to all creditworthy individuals. The Cleveland project, by reducing discriminatory practices in the home buying process, will help us to reach that goal. If America is going to live up to its ideals and eliminate discrimination, then we will need more community-based efforts such as this."

When the Cleveland project formally ended, Jerry Jordan was asked if its accomplishments would endure. After a pause, Jordan said, "That’s always been a critical question: Whether this would be a one-time, flash-in-the-pan sort of thing, or whether our efforts would be sustaining. At this point, it looks like the project’s achievements will be sustaining. But we will have to help ensure that the momentum is maintained."

If the Cleveland project has a permanent legacy, stated Jordan, it will be the participants’ success in breaking down the barriers of communication. "The greatest value is in the community dynamics that were created. People got to know each other and communicate with each other in a different way. The Cleveland project enabled that process of interaction to occur, and, clearly, that process will be enduring."

As of this writing, the Greater Cleveland Residential Housing and Mortgage Credit Project is being emulated by Federal Reserve Banks in Chicago, Boston, St. Louis, San Francisco, and New York. The Cleveland project is being used as a model for a similar program in Greater Cincinnati/ Northern Kentucky. And in Akron, Ohio, a public/private partnership is planning to use the Cleveland project’s methodology to identify and remove the impediments to small business financing.

Planning Committee
Cleveland Project Sponsors
Test Project: Appraising an Urban Home
Task Group Accomplishments
Task Group Members

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