Inner City Press/FFW: Watchdogging and Taking Action Since 1987

Updated April 19, 2006

Racial Disparities Grew Worse in 2005 at Largest Banks, Study Finds: Citigroup Confined African Americans to Higher Cost Loans Seven Times More Frequently than Whites; HSBC Was Worse to Latinos, and Made Over 5000 Super High Cost HOEPA Loans

New York, April 10 -- In the first study of the just-released 2005 mortgage lending data, the watchdog organization Inner City Press / Fair Finance Watch has found worsening disparities by race and ethnicity in the higher-cost lending of some of the nation's largest banks. The trend raises concerns: 2005 is the second year in which the data distinguishes which loans are higher cost, over the federally-defined rate spread of three percent over the yield on Treasury securities of comparable duration on first lien loans, five percent on subordinate liens.

            Citigroup in 2005, in its headquarters Metropolitan Statistical Area of New York City, confined African Americans to higher-cost loans above this rate spread over seven times more frequently than whites -- worse than Citigroup's record in 2004.

            Redlining and continued disproportional denials to people of color are also evidenced by the new 2005 data. Nationwide for conventional, first-lien home purchase loans, Citigroup denied the applications of African Americans 2.69 times more frequently than those of whites, and denied the applications of Latinos 2.02 times more frequently than whites, both disparities worse even than in 2004. Bank of America in 2005 was more disparate to Latinos, denying their applications 2.38 times more frequently than whites, and denying African Americans 2.27 times more frequently than whites.

            While comprehensive income comparisons will not be possible until the aggregate data is released in September, ICP and its academic support team have designed an innovative way to consider income correlations, by calculating upper and lower income tranches based on each lenders own customers. Nationwide at Citigroup for conventional first-lien loans, 37.73% of upper income African Americans were confined to higher cost loans over the rate spread, versus only 11.46% of upper income whites. Income does not explain the disparities at Citigroup. Nor at HSBC, where less than half of upper income white borrowers were confined to rate spread loans, versus 61.87% of upper income African Americans and an even higher percentage of Latinos, 62.82%.

            HSBC, which bought Household International in 2002 just after its predatory lending settlement, has increased the interest rates changed by its former Household units. Over eighty percent of HSBC's home purchase loans to African Americans and Latinos were higher-cost loans over the rate spread, much higher than in 2004 at these ex-Household units. In Buffalo, HSBC's long-time headquarters, HSBC in 2005 confined African Americans to higher cost rate spread loans 2.15 times more frequently than whites. 

            In 2005, HSBC made over five thousand super high-cost loans subject to the Home Ownership and Equity Protection Act (HOEPA) -- that is, at least 8% over comparable Treasury securities.  Wells Fargo made 795 HOEPA loans in 2005. Keycorp, which has said it had discontinued HOEPA loans, made 755 such loans in 2005. [April 19 update: Keycorp today notes that it made its commitment to cease HOEPA loans in July 2005, and states that all but two of the 755 HOEPA loans it reported for full-year 2005 were made prior to then and that "you will find that there were two loans made after that time frame that we are adjusting appropriately." Duly noted.]

            Using its unique method of analyzing income correlations, by calculating upper and lower income tranches based on each lenders own customers, ICP / Fair Finance Watch has found that nationwide at JP Morgan Chase for conventional first-lien loans, upper income African Americans were confined to higher cost loans over the rate spread 3.34 times more frequently than whites. At Royal Bank of Scotland's U.S. units, upper income African Americans were confined to higher cost loans over the rate spread 4.01 times more frequently than whites. And at Washington Mutual and its higher-cost affiliate, Long Beach Mortgage, upper income African Americans were confined to higher cost loans over the rate spread fully 4.19 times more frequently than whites.

            Washington Mutual was also among the most disparate when considering conventional first-lien loans without regard to income, confining African Americans to rate spread loans 3.70 times more frequently than whites. Wells Fargo was nearly as disparate, confining African Americans to rate spread loans 3.31 times more frequently than whites.  Royal Bank of Scotland U.S. units came in at 3.11, and JP Morgan Chase at 2.98.  The disparity at Wachovia was 2.58, and at Atlanta-based SunTrust it was 2.40. The disparity at GMAC was 2.92, while at Countrywide it was 2.86.

            Countrywide’s disparity between pricing to African Americans and whites was even worse when considering conventional first lien home purchase loans: Countrywide confined African Americans to rate spread loans 3.53 times more frequently than whites. Countrywide was topped, however, by Milwaukee-based M&I, with a disparity of 3.78, and by Bank of America's MBNA unit, with a disparity of 4.23.

            Bank of America also enabled other subprime lenders in 2005 by securitizing loans through its generically-named Asset-Backed Funding Corporation unit for, among others, Ameriquest, which earlier this year settled predatory lending charges with state attorneys general for $325 million. The settlement only required reforms at Ameriquest Mortgage and two affiliates, but not its largest affiliate, Argent Mortgage. The 2005 data show that Argent made 220,069 loans over the rate spread, while Ameriquest Mortgage made 122,868 such loans. The reforms announced in support of the predatory lending settlement with the attorneys general cover barely 35% of ACC's high-cost lending. 

            Like ACC / Ameriquest, Citigroup and HSBC, other large subprime lenders also increased the percentage of their loans that were over the rate spread, from 2004 to 2005. At New Century in 2005, fully 215,579 of the company's 268,101 loans were over the rate spread, a much higher percentage than in 2004.  National City / First Franklin made 177,526 higher cost loans over the rate spread in 2005. Countrywide in 2005 made 190,621 loans over the rate spread. 199,249 of 237,700 loans were over the rate spread at H&R Block, which also in this season offers problematic high-cost tax refund anticipation loans. Further on fringe finance, the study notes that Citigroup helped Dollar Financial to go public, and since continued to lend to and assist this pawn and payday lender.

            Another of the top four banks which enables predatory lenders is North Carolina-based Wachovia. Most recently, the U.S. District Court for the Southern District of New York denied a motion by the Federal Reserve Board to get reconsideration of a decision won by Inner City Press, requiring the disclosure of Wachovia's connections with a range of subprime lenders, including payday as well as mortgage lenders.  Inner City Press v. Federal Reserve Board, 380 F. Supp. 2d 211. On the Federal Reserve Board's motion, the Court ruled that:

"The Board made absolutely no showing in its summary judgment submissions, however, that the disclosure of data regarding Wachovia’s aggregate exposure and loan outstandings to the [subprime lending] clients listed in Exhibit 3 would cause competitive harm to Wachovia or that the public disclosure of this information would make it difficult for the Board to elicit similar information in the future... The Board points to portions of a document entitled 'Subprime Lending and Related Activities' that Wachovia submitted in the public portion of the Merger Application as a ‘glimpse into the conclusory statements [regarding due diligence practices] defendant can expect in future filings’ if merger applicants know such information is to be released to the public. This argument was not made in the Board’s original submission. In any event, without more specific testimony from Wachovia’s representative regarding why Wachovia would not wish its due diligence practices with regard to its subprime lending clients to be made public, it cannot be said that this document represents the limits of what Wachovia would willingly reveal at the Board’s request."

            There is a need for more information, including the credit score information that the lending industry opposed being included in Home Mortgage Disclosure Act data. In fact, some lenders resist providing even the data required by law, at least in an analyzable form.

            Several lenders have sought to avoid being scrutinized by refusing to provide their data in computer analyzable form.  Institutions insisting on providing their data in paper or PDF form include Lehman Brothers, Delta Funding, Fremont Investment & Loan and other large subprime lenders, as well as banks like New York Community Bancorp, Whitney Bank and Fifth Third Bank. The latter institution is widely reported to be suffering a crisis in corporate governance, which might explain the intransigence. Another company surrounded by corporate scandal, American International Group (AIG), grew more secretive in 2005 -- all data in PDF -- than in 2004, when at least its savings bank's data was provided in analyzable form.

            Inner City Press / Fair Finance Watch is demanding action on all of these issues from the relevant regulatory agencies, including the Office of Thrift Supervision (responsible for AIG and Lehman Brothers Bank, among others), the FDIC (considering giving a bank charter to Wal-Mart), the Office of the Comptroller of the Currency (which since suing to New York last year to block fair lending enforcement has done little to none of its own) and also the Federal Reserve Board.

            While the Federal Reserve will wait, as it did last year, until September to release its own study, it has had the 2005 data since March 1, 2006. "Now that a second year of data is out, with worsening disparities at the largest bank in the nation and many of its peers, there is no more time for the Federal Reserve and other regulatory agencies to equivocate," concludes the Inner City Press report. "The time for enforcement actions to combat this discriminatory and predatory lending is now."

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The report also casts its glance local. The nation's largest bank, Citigroup, was disparate in Metropolitan Statistical Areas all over the country in 2005.

In Los Angeles, Citigroup confined African Americans to higher cost rate spread loans 2.13 times more frequently than whites; its disparity for Latinos was 2.02.

Citigroup's African American to white disparity was 2.27 in the Washington DC MSA, and 2.72 in Chicago. 

In Philadelphia, Citigroup confined African Americans to higher cost rate spread loans 3.43 times more frequently than whites; its disparity for Latinos was 2.50.

Definition: the Federal Reserve has defined higher-cost loans as those loans with annual percentage rates above the rate spread of three percent over the yield on Treasury securities of comparable duration on first lien loans, five percent on subordinate liens.

Last September, the Federal Reserve announced the availability of final and aggregate 2004 Home Mortgage Disclosure Act data.  www.ffiec.gov/hmcrpr/hm091305.htm The Fed also put forth its spin on the data, in the form of 51-page study by staff members Bob Avery, Glenn Canner and Robert Cook.  www.federalreserve.gov/pubs/bulletin/2005/3-05hmda.pdf  While the prose of the Fed's study is typically dense, here's the conclusion the Fed reaches on the final page of its study:

…”black and Hispanic borrowers taken together are much more likely than non-Hispanic white borrowers to obtain credit from institutions that report a higher incidence of higher-priced loans. On the one hand, this pattern may be benign and reflect a sorting of individuals into different market segments by their credit characteristics. On the other hand, it may be symptomatic of a more serious issue. Lenders that report a lower incidence of higher-priced products may be either less willing or less able to serve minority neighborhoods. More troubling, these patterns may stem, at least in part, from borrowers being steered to lenders or to loans that offer higher prices than the credit characteristics of these borrowers warrant. Reaching accurate determinations among these alternative possible outcomes is one goal of the supervision system.”

   What the Fed doesn’t say in this is that these disparities are most stark some of the largest conglomerates in the country, including in their headquarters cities (where they have Community Reinvestment Act duties).  As two example, with the largest bank and thrift in the United States: Citigroup in the New York City Metropolitan Statistical Area in 2004 confined African Americans seven times more frequently than whites to higher cost, rate spread loans. The largest savings bank in the country, Washington Mutual, confined African American couples to high cost loans 4.5 times more frequently than white couples, on nationwide basis. How could such patterns be plausibly described as “benign” or as reflecting “a sorting of individuals into different market segments”?

  Where the rubber will meet the road will be in how the Federal Reserve and other agencies act on specific disparities at specific lenders, including as these are formally raised to them in timely comments on merger applications. See, Inner City Press / Fair Finance Watch's other studies of the 2004 HMDA data: first   second   third fourth fifth. For or with more information, contact us.