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Notes from the Field

Reflections on Discriminatory Lending: Past and Present

What have we learned about discriminatory lending practices 50 years after the Fair Housing Act was passed? For one, it’s very important to have complete data to make a conclusive claim.

The views expressed in this report are those of the author(s) and are not necessarily those of the Federal Reserve Bank of Cleveland or the Board of Governors of the Federal Reserve System.

Fair Lending panel
L-R: Hal Martin, john a. powell, Henry Stoudemire

I recently had the pleasure of attending Progress & Challenges: 50 Years after the Fair Housing Act, a panel discussion hosted by the Ohio Fair Lending Coalition at Cleveland State University. The panelists were john a. powell, executive director of the Haas Institute for a Fair and Inclusive Society at the University of California Berkeley; my colleague Dr. Hal Martin, a policy economist here at the Cleveland Fed; and Henry Stoudemire, president of McMullan Realty, Inc. and chair of the board for the Cleveland Realtist Association. Overall, despite some progress made during the past 50 years on the fair housing front, challenges remain.

Mr. powell began by describing his parents’ home buying experience in 1950 to illustrate two points about structural racism in the housing market. First, in order to buy a $10,000 house, his parents needed to use contract-for-deed financing1 because they could not get a mortgage. Unfortunately, we’re still seeing this type of financing used today in Cleveland and across the country in other weak-market cities, such as Detroit, because of challenges in obtaining traditional mortgage credit. Second, he noted that even though most Americans are able to create wealth via homeownership, his parents were unable to create wealth despite owning their home for almost 50 years. powell contends that “housing policy is wealth creation policy” and that because of segregation in the housing market, “no wealth was being created in the black community.” He noted that, by some measures, segregation is worse today than it was in 1950, and that segregated housing is directly linked to one’s ability to access quality schools and economic opportunity in general. powell suggested the need for more studies on the functioning of the secondary mortgage market as it relates to fair housing because the model for housing finance has drastically changed over the years such that the secondary market is now driving discrimination in the mortgage market. Mr. powell concluded his remarks with a call to action: “Unless we do something...segregation and economic isolation will not only persist, but it will get worse.”

Dr. Martin provided some evidence that some progress addressing racial discrimination in the mortgage process has been made. He described his research on determining if discrimination was taking place when a borrower first inquires about a mortgage loan. To do so, Dr. Martin and his coauthors set up an experiment to see how mortgage loan officers replied to emails coming from financially similar but racially different candidates. The researchers mined birth records from 1990 to compile a list of typically Caucasian and typically African American names, and they used these names to signal race to a mortgage loan officer. They also used hypothetical credit scores to see what role credit plays in the response rates of mortgage loan officers. The experiment’s findings showed that overt racial discrimination does exist, but it was limited to 2 percent of the mortgage loan officers in the study. Moreover, the researchers found that borrowers with higher credit scores were more likely to get a response, regardless of race.

Mr. Stoudemire wrapped up the session by describing his experiences working as a real estate agent for primarily African American homebuyers in the Cleveland market for the last 20 years. His stories further confirmed that difficulties obtaining mortgage financing and navigating the home buying process remain today.

This discussion reminded me that many of the discriminatory issues that we in the community development function of the Federal Reserve System continue to study have a long history. In many cases, what started out as overt racial discrimination in the mortgage lending and home buying process in 1950s has evolved alongside advancements in the financial system, such that teasing out discriminatory practices requires a complete set of information. What on the surface may look like a clear example of discrimination is not always the case because we are often lacking important factors such as credit scores that limit the ability of researchers to conclusively say whether or not discrimination is taking place. While we do not discount personal experiences or deny that some degree of discrimination is taking place (it probably is), we need more complete data before we can make such definitive claims. As you continue to encounter reports or other studies about discrimination and discriminatory practices, ask yourself this: Do the researchers have all the pertinent information?

  1. A contract-for-deed is a private contract between a buyer and a seller consisting of installment payments, including a down payment and regular monthly payments, paid directly to the seller until the full property price is paid—typically a period of 15 to 30 years. After the final payment, the property owner transfers the deed to the borrower. Return to 1