Tag Archives: ECOA

The Long-Term Effects of Redlining

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Daniel Aaronson et al. have posted The Effects of the 1930s HOLC “Redlining” Maps to SSRN. The paper provides empirical support for the argument that discriminatory government policies have consequences that can last for decades, including increased segregation. The abstract reads,

In the wake of the Great Depression, the Federal government created new institutions such as the Home Owners’ Loan Corporation (HOLC) to stabilize housing markets. As part of that effort, the HOLC created residential security maps for over 200 cities to grade the riskiness of lending to neighborhoods. We trace out the effects of these maps over the course of the 20th and into the early 21st century by linking geocoded HOLC maps to both Census and modern credit bureau data. Our analysis looks at the difference in outcomes between residents living on a lower graded side versus a higher graded side of an HOLC boundary within highly close proximity to one another. We compare these differences to “counterfactual” boundaries using propensity score and other weighting procedures. In addition, we exploit borders that are least likely to have been endogenously drawn. We find that areas that were the lower graded side of HOLC boundaries in the 1930s experienced a marked increase in racial segregation in subsequent decades that peaked around 1970 before beginning to decline. We also find evidence of a long-run decline in home ownership, house values, and credit scores along the lower graded side of HOLC borders that persists today. We document similar long-run patterns among both “redlined” and non-redlined neighborhoods and, in some important outcomes, show larger and more lasting effects among the latter. Our results provide strongly suggestive evidence that the HOLC maps had a causal and persistent effect on the development of neighborhoods through credit access.

The paper’s conclusion is just as interesting:

That the pattern begins to revert starting in the 1970s is at least suggestive that Federal interventions like the Fair Housing Act of 1968, the Equal Credit Opportunity Act of 1974, and the Community Reinvestment Act of 1977 may have played a role in reversing the increase in segregation caused by the HOLC maps. . . . We believe our results highlight the key role that access to credit plays on the growth and long-running development of local communities. (33)

No Mortgages for New Moms

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photo by tipstimes.com/pregnancy

Realtor.com quoted me in Mom on Maternity Leave Denied a Mortgage: Could It Happen to You? It opens,

Hopeful home buyers can be denied loans for all kinds of reasons, from a poor credit score to low income. It sucks, but it makes sense: Lenders prefer giving cash to people who can pay them back. (Can you blame them?) Yet, sometimes people are turned away for dumb reasons. Take, for instance, the recent case of a Philadelphia mom who was denied a mortgage because she was on maternity leave. It was even paid maternity leave, with a firm date to return to her job. What’s up with that?

According to the Washington Post, the mom in question (who remains anonymous) had applied for financing with her husband to fund renovations on a house in Philadelphia. But due to her maternity leave, her pay stubs showed she was on “short-term disability,” which prompted the loan’s underwriter to surmise she might not resume working full time—even though her employer was happy to submit a letter indicating the day she’d return to the office.

And this mom is hardly alone: Over the past six years, the Department of Housing and Urban Development has documented over 200 cases alleging maternity-related discrimination against women seeking mortgages. In one case, a lender in Arkansas allegedly told the applicant that she’d have to be back at work before her loan could close!

And this is a shame, because housing discrimination—based on gender, familial status, disability, race, and other factors—has been illegal since the Fair Housing Act of 1968. Yet apparently it still exists even at prominent mortgage companies, as evidenced by the cases against Wells Fargo, Bank of America, PNC Mortgage, and others.

As for why this happens, experts surmise it’s because some lenders have outdated notions of women in the workplace, presuming most will bail or scale back on their jobs once kids enter the picture, permanently reducing the family’s income and eligibility for a loan. But it’s hardly the norm: Census data suggest that more than half of first-time mothers return to work within three months. Another study by the Department of Health and Human Services’ Maternal and Child Health Bureau found that the average maternity leave lasted a mere 10 weeks.

Bottom line: These days, many moms return to the office—yet some mortgage companies have missed that memo. But luckily, some moms are fighting back—like the Philadelphia woman above, who has recently reached a “conciliation agreement” with the lender, Citizens Bank of Pennsylvania. Although the company denied discriminating against her, it also agreed to conduct fair lending training sessions with staff.

And more should follow, Shanna Smith, president and chief executive of the National Fair Housing Alliance, told the Post: “There needs to be much better training for [lenders] about how to deal with interrupted income for loan closings when a woman is pregnant and [on] paid maternity leave.

All of which may have women everywhere wondering: If they hope to buy a home, might maternity leave get in their way? And if so, what should they do? Probably the first step is just knowing that it’s wrong: Maternity leave—paid or unpaid—is not a legitimate reason to refuse a loan.

“It always helps when you know your rights,” says David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. “If your lender appears to be violating fair lending laws, you may want to raise the issue directly with your banker and ask to speak to the supervisor to ask the bank to clarify its policy. If your lender continues to enforce a discriminatory policy, you can reach out to the relevant regulators, including HUD and the Consumer Financial Protection Bureau.”

Bank Settlements and the Arc of Justice

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Ron Cogswell

MLK Memorial in DC

Martin Luther King, Jr. said that the “arc of the moral universe is long, but it bends towards justice.” A recent report by SNL Financial (available here, but requires a lot of sign-up info) offers us a chance to evaluate that claim in the context of the financial crisis.

SNL reports that the six largest bank holding companies have paid over $132 billion to settle credit crisis and mortgage-related lawsuits brought by governments, investors and other financial institutions.

In the context of the litigation over the Fannie and Freddie conservatorships, I had considered whether it is efficient to respond to financial crises by allowing the government to do what it needs to do during the crisis and then “use litigation to make an accounting to all of the stakeholders once the situation has stabilized.” (121)

Given that the biggest bank settlements are now in the rear view window, we can now say that the accounting for the financial crisis comes in at around $132 billion give or take. Does that number do justice for the wrongs of the boom times?  I don’t think I have my own answer to that question yet, but it is certainly worth considering.

On the one hand, we should acknowledge that it is a humongous number, a number so big that that no one would have considered it a likely one at the beginning of the financial crisis. This crisis made nine and ten digit settlement numbers a routine event.

On the other hand, wrongdoing (along with good old-fashioned boom mentality) during the financial crisis almost sent the global economy into a depression.  It also wreaked havoc on so many individuals, directly and indirectly.

I look forward to seeing metrics that can make sense of this (ratio of settlement amounts to annual profits of Wall Street firms; ratio to bonus pools; ratio to home equity lost), but I will say that I am struck by the lack of individual accountability that has come out of all of this litigation.

Individuals who made six, seven and eight figure paychecks from this wrongdoing were able to move on relatively unscathed.  We should think about how to avoid that result the next time around. Otherwise the arc of justice will bend in the wrong direction.

 

Buying A Home After Retirement

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HSH.com quoted me in Buying A Home After Retirement Is Possible, but Challenging. It reads, in part,

The ideal situation is to enter your retirement years without any monthly mortgage payments. But what if you’ve finally found your dream home at the same time that you’re leaving the working world? What if you’re ready to buy a home in a new city in which you’ve always wanted to live, but you’re approaching your 70th birthday?

The good news is that the federal Equal Credit Opportunity Act law prohibits lenders from denying potential borrowers because of their age. The bad news is that you’ll have a mortgage payment and the burden of caring for a house in your retirement years.

“It can be bad to have a mortgage payment in your 80s,” says Keith Baker, professor of mortgage banking at North Lake College in Irving, Texas. “All sorts of things can happen to you, unfortunately. What if you develop Alzheimer’s? What if your children aren’t financially sophisticated and can’t take over handling your mortgage for you? There are all kinds of reasons not to have a mortgage when you’re that age. But if you can afford a mortgage payment when you’re in your 60s and early 70s and you’re in good health, why not buy that home that you’ve always wanted?”

If you want to buy a home after you’ve retired, you’ll need to first consider several factors, and you’ll need to overcome a variety of hurdles both to qualify for a mortgage loan and to find a home that fits your changing needs as you get older.

*     *     *

Many borrowers apply for 30-year loans because they generally come with the lowest monthly payments. But such a long-term loan might not make sense for borrowers who are already in their retirement years, says David Reiss, professor of law and research director for the Center for Urban Business Entrepreneurship at Brooklyn Law School in New York City.

“If you are 62, you will not have paid [the loan] off until you are 92,” says Reiss. “Retirees should look at their expected incomes over those 30 years to ensure that they have sufficient income to cover the mortgage over the whole period.”

Income can fluctuate during the retirement years. Maybe payments from a legal settlement run out. You might struggle to find renters for your investment properties. Royalties can dwindle. At the same time, expenses — especially medical ones — might rise.

Reiss says that it makes sense for retirees to take out a loan with a shorter term, such as a 15-year fixed-rate loan, if they can afford the higher monthly payments that come with such loans.

Protecting Homeowners During Mortgage Servicing Transfers

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The Consumer Financial Protection Bureau has issued a Compliance Bulletin and Policy Guidance on Mortgage Servicing Transfers (Bulletin 2014-01). Mortgage Serving Transfers have been receiving a lot of attention (also here) recently from regulators as the servicing industry is going through many changes.

The CFPB is right to focus on the impact of the transfer of mortgage servicing rights on homeowners. Many complaints made directly to regulators and seen in foreclosure cases relate to the Kafkaesque treatment that homeowners receive as their servicer point-of-contact changes from interaction to interaction.

The Bulletin indicates that servicers will have to do a fair amount of planning to ensure that consumers are not harmed by the transfer of servicing rights. In particular, the CFPB will be watching to see that servicers are (WARNING:  Boring and Technical Language Alert!):

  • Ensuring that contracts require the transferor to provide all necessary documents and information at loan boarding.
  • Developing tailored transfer instructions for each deal and conducting meetings to
    discuss and clarify key issues with counterparties in a timely manner; for large transfers, this could be months in advance of the transfer. Key issues may include descriptions of proprietary modifications, detailed descriptions of data fields, known issues with document indexing, and specific regulatory or settlement requirements applicable to some or all of the transferred loans.
  • Using specifically tailored testing protocols to evaluate the compatibility of the
    transferred data with the transferee servicer’s systems and data mapping protocols.
  • Engaging in quality control work after the transfer of preliminary data to validate that the data on the transferee’s system matches the data submitted by the transferor.
  • Recognizing when the transfer cannot be implemented successfully in a single batch and implementing alternative protocols, such as splitting the transfer into several smaller transactions, to ensure that the transferee can comply with its servicing obligations for every loan transferred. (3)

As a bonus, the Bulletin provides an overview of statutes and regulations that govern the transfer of mortgage servicing.

Duties to Serve in Housing Finance

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Adam Levitin and Janneke Ratcliffe have posted Rethinking Duties to Serve in Housing Finance to SSRN (also on the Harvard Center for Housing Studies site here). The paper states that

an important question going forward concerns the role of duties to serve (DTS) — obligations on lending institutions to reach out to traditionally underserved communities and borrowers. Should there be DTS, and if so, who should have the responsibility to serve whom, with what, and how? (2)

These are, indeed, important questions as regulators chart a course between requiring safe underwriting by lenders and ensuring access to credit for communities that have historically had little access to sustainable credit. The authors distinguish fair lending from duties to serve, with the former being an obligation not to discriminate and the latter being an affirmative duty to address the “disparity of financial opportunity.” (2) The paper describes two main DTS regimes,the Community Reinvestment Act and the Fannie/Freddie housing goals, as well as their limitations.

The paper concludes that the “aftermath of the housing bubble presents an opportunity to rebuild DTS” and proposes a set of reforms. (29) I highlight the first two here:

  1. “DTS should apply universally to the entire primary market,” covering both depositories and non-depositories in order to avoid incentives to engage in regulatory arbitrage. (30)
  2. “DTS should apply equally for all secondary market entities,” not just the Fannies and Freddies of the world. (30)

This paper has a lot to offer thoughtful policymakers. As with everything to do with our massive housing finance system, however, the devil is in the details of any regulatory regime. Mandatory duties to serve must be drafted to so that they are consistent with safe underwriting practices. This paper starts a conversation about doing just that.

CFPB Highlights: Leviathan Heeled

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The CFPB issued its Winter 2013 Supervisory Highlights.  Here are some mortgage highlights from the Highlights:

  • CFPB examiners found that two servicers had engaged in unfair practices in connection with servicing transfers. Specifically, these servicers failed to honor existing permanent or trial loan modifications after a servicing transfer. . . . These servicers also engaged in deception in connection with this practice by communicating to borrowers that they should have made the payments required by the original note, instead of acknowledging that the borrowers were to make reduced payments set by their trial modification agreements with the prior servicer. (5-6)
  • The Home Mortgage Disclosure Act (HMDA) is intended to provide the public with loan data that can be used: (i) to help determine whether financial institutions are serving the housing needs of their communities, (ii) to assist public officials in distributing public-sector investment to help attract private investment to areas where it is needed, and (iii) to assist in identifying possible discriminatory lending patterns and enforcing antidiscrimination statutes, such as the Equal Credit Opportunity Act (ECOA). The CFPB considers accurate HMDA data and effective HMDA compliance management systems to be of great importance.  . . . However, several HMDA reviews at financial institutions found error rates over the resubmission thresholds and Supervision directed the financial institutions to resubmit their HMDA data and improve their HMDA compliance systems.In October, the CFPB entered into Consent Orders with two lenders to address violations of HMDA. One entity, Mortgage Master, Inc., is a nonbank headquartered in Walpole, Massachusetts. The other entity, Washington Federal, is a bank headquartered in Seattle, Washington. (10-11, footnote omitted)

I’d have to say that the CFPB enforcement actions described in the Highlights are relatively small potatoes. One can read that in a couple of ways:

  • The industry is taking consumer financial protection far more seriously than it had before the CFPB was created; or
  • the CFPB is looking in the wrong place for regulatory noncompliance in the industry.

I think that the evidence bears out the former explanation. But I think that these highlights also demonstrate that the CFPB is not behaving like some out of control Leviathan, destroying all of the financial institutions in its grasp. Rather, it is taking very discrete actions based on documented misbehavior. Seems like a reasonable approach.