PART I: OVERVIEW.

1. Introduction.

   This study examines the issue of racial redlining by major mortgage lenders in the nation's larger metro areas. Racial redlining is the practice whereby mortgage lenders figuratively draw a red line around minority neighborhoods and refuse to make mortgage loans available inside the red lined area. Broadly defined, racial redlining encompasses not only the direct refusal to lend in minority neighborhoods, but also procedures that discourage the submission of mortgage loan applications from minority areas, and marketing policies that exclude such areas.

   In direct economic terms, racial redlining reduces housing finance options for borrowers in minority neighborhoods and weakens competition in the mortgage market. This often results in higher mortgage costs and less favorable mortgage loan terms. More subtly, racial redlining discourages minorities from pursuing home ownership opportunities and in the broadest sense further entrenches the debilitating sociological effects of racial discrimination.

   Focussing on 16 large metropolitan areas, this study identified 49 major mortgage lenders whose geographic lending patterns in 62 separate instances substantially excluded or underserved minority neighborhoods. (Several mortgage lenders were responsible for patterns of exclusion or underservice in two or more of the 16 metro areas.) Of the these 62 patterns, 46 involved lending activity in 1991, while another 16 involved lending activity in 1990 and 1991. A listing of these lenders can be found in Table A.

   This study recommends that the five federal agencies with primary Fair Lending enforcement responsibility for these mortgage lenders initiate prompt investigations of their lending activities. These agencies are the U.S. Department of Housing and Urban Development (HUD); the Office of Thrift Supervision; the Comptroller of the Currency; the Federal Reserve Board; and the Federal Deposit Insurance Corporation.

   This study also found that even though racial redlining has been prohibited by federal civil rights laws for many years, federal authorities have failed to adopt effective regulations and enforcement procedures thereby condoning both the serious and subtle injuries to minority neighborhoods. This is a systemic failure, not a matter of occasional lapses. The report therefore recommends that the federal agency with broad rulemaking authority under the Fair Housing Act, HUD, adopt regulations that would establish new standards and procedures to be followed by all the primary federal enforcement agencies in enforcing the ban on racial redlining.

   In preparing this study, Essential Information's Banking Research Project conducted an extensive computer-assisted analysis of the large database on home mortgage loan activity maintained by the Federal Reserve Board (FRB) pursuant to the Home Mortgage Disclosure Act (HMDA). This federal statute requires mortgage lenders to disclose information on their mortgage loan applications at the census tract level. A total of 1,256,982 home purchase loan applications received by mortgage lenders in the 16 metro areas during 1990 and 1991 were analyzed. The purpose of this analysis was to identify major home purchase loan originators which had made comparatively few loans within minority neighborhoods in 16 of the nation's largest metro areas.

   An indispensable tool for this study was the Banking Research Project's computerized mapping techniques, which translate mortgage lending statistics into color-coded maps. This visual depiction of the mortgage lending patterns, when combined with demographic data, brings into sharp focus important dimensions of racial redlining that have not been adequately explored to date: how lenders control the shape of their lending territories, how upscale marketing policies have discriminatory effects, and how there are significant variations in worst case lending patterns.

   In conducting this study, the Banking Research Project proceeded as follows. First, we computed HMDA statistics for each mortgage lender in the 16 metro areas in order to identify and select any lenders that were major home purchase loan originators within a metro area but made comparatively few loans within the metro area's minority neighborhoods. Then we mapped the home mortgage lending patterns of these selected lenders at the metro area level. When a given map revealed that the lender had excluded minority neighborhoods from its effective lending territory or substantially underserved such neighborhoods, we printed the map with a color-coding system depicting lending activity at the census tract level. (An effective lending territory is the geographic area within which the lender originates most of its mortgage loans.) As noted above, 62 patterns of exclusion or underservice in minority neighborhoods -- referred to as "worst case lending patterns" in this study -- emerged from the HMDA data. The maps provide powerful evidence that a lender has engaged in racial redlining in violation of federal civil rights law.

   To our knowledge, this study represents the single most geographically diverse analysis of mortgage lending to minority neighborhoods yet conducted. We commend to the federal Fair Lending enforcement agencies the computer-assisted mapping techniques used to prepare this study.

2. What the Fair Lending laws require.
   1. Prohibition on racial redlining.

      Congress has enacted two major pieces of legislation that seek to eliminate racial discrimination in residential mortgage lending. The Fair Housing Act, enacted in 1968, broadly prohibits discrimination in all aspects of housing sales and rentals and housing finance. The Equal Credit Opportunity Act, first enacted in 1974 to prohibit discrimination based on sex in all types of credit transactions, was amended in 1976 to reach discrimination based on race or national origin. Collectively, these two statutory schemes, which overlap in the area of mortgage credit, are often referred to as the Fair Lending laws.

      The Fair Housing Act declares unlawful any conduct that makes housing "unavailable" to any person on the basis of race [Section 3604(a)] or which discriminates on the basis of race in "the provision of services or facilities in connection" with the sale of housing [Section 3604(b)].[1] The Act also makes it unlawful for any person engaged in a real estate-related business to discriminate on the basis of race in making available housing credit of any type or to discriminate in the terms or conditions of such credit [Section 3605].[2]

      The federal courts have held that both Section 3604 and Section 3605 of the Fair Housing Act prohibit racial redlining -- the refusal to make home purchase loans available because of the racial characteristics of the surrounding neighborhood.[3] Moreover, the federal agencies charged with administering the Fair Lending laws have recognized that the prohibition against racial redlining encompasses not only the denial of mortgage loan applications from minority neighborhoods, but also the failure to market mortgage credit in such neighborhoods. According to the Office of Thrift Supervision's Guidelines on Fair Lending enforcement:

      Discrimination in lending is not limited to loan decisions and underwriting standards; an institution does not meet its obligations to the community or implement its equal lending responsibility if its marketing practices and business relationships with developers and real estate brokers improperly restrict its clientele to segments of the community.[4]

      In a more general vein, HUD regulations state that the failure to provide "information regarding the availability of loans" because of racial factors violates Section 3605 of the Fair Housing Act.[5]

   2. The Justice Department's lawsuit against Decatur Federal S&L.

      In September, 1992, the Justice Department brought the first "pattern and practice" suit by the federal government under the Fair Housing Act and the Equal Credit Opportunity Act for racial discrimination in mortgage lending. In this case, the Justice Department charged Decatur Federal Savings & Loan Association of Atlanta, Georgia with two kinds of lending discrimination: (1) discrimination against actual mortgage loan applicants, which centered on disparate treatment of black and white applicants; and (2) discrimination against potential mortgage loan applicants, which involved marketing policies that excluded black neighborhoods.[6]

      The Justice Department's lawsuit against Decatur was resolved by a court approved consent decree under which Decatur agreed to provide $1 million in damages to applicants and to adopt a comprehensive affirmative marketing plan in Atlanta's neighborhoods. This consent decree described Decatur's exclusionary marketing strategy as follows:

      More specifically, the United States alleges that Decatur Federal has for many years engaged in lending practices that discriminate on the basis of race by conducting its home mortgage loan marketing in a manner that excludes potential black borrowers; by originally defining its customer service area under the Community Reinvestment Act (CRA) in 1979 so as to exclude most black residents of Fulton County; by opening virtually all of its branch offices in neighborhoods that were predominantly white at the time and closing branches in neighborhoods that were or became predominantly black; by advertising primarily to potential white customers; by focusing its solicitation efforts in white neighborhoods; by avoiding origination of loan products with particular appeal to black borrowers, such as Federal Housing Administration (FHA) and Veterans Administration (VA) loans; and by engaging few blacks in key mortgage loan origination positions such as account executive, staff appraiser, and underwriter.[7]

      In developing its marketing discrimination claim against Decatur, the Justice Department employed similar mapping techniques to those used in this report. Specifically, the Justice Department created a lending pattern map for Decatur in the Atlanta metro area that was based on the market share approach.[8]

3. Key findings.
   1. The 62 worst case lending patterns are prima facie evidence of unlawful discrimination in mortgage lending.

      The 62 worst case lending patterns identified in this report demonstrate that the 49 major mortgage lenders responsible for these patterns have excluded minority neighborhoods from their effective lending territories or substantially underserved such neighborhoods. These lending pattern maps and the corresponding HMDA statistics provide strong prima facie evidence of marketing policies and other lending policies that discriminate against minority neighborhoods in violation of the federal Fair Lending laws -- the Fair Housing Act and the Equal Credit Opportunity Act.

      In the Justice Department lawsuit against Decatur Federal S&L of Atlanta, Georgia Decatur's exclusion of Atlanta's Black neighborhoods from its effective lending territory was central to government's case. Many of the 62 worst case lending patterns identified in this study reveal more severe patterns of excluding or underserving minority neighborhoods than exhibited by Decatur.

   2. Mortgage lenders control the shape of effective lending territories, and thus bear responsibility for excluding or underserving minority neighborhoods.

      Most of the lending pattern maps prepared for this study indicate that a mortgage lender has a clearly defined "effective lending territory." Such lending territories are shaped by marketing strategies that target particular neighborhoods and classes of borrowers, while avoiding other neighborhoods and borrower classes. This indicates that the exclusion or underserving of minority neighborhoods is a consequence of decisions and conduct on the part of the lender, rather than an outcome determined by the underlying preferences and choices of mortgage loan applicants. For this reason, lending pattern maps should be regarded as prima facie evidence of unlawful discrimination.

   3. The lack of applications from minority neighborhoods is the principal cause of worst case lending patterns.

      In the great majority of the worst case lending patterns identified in this study, a lack of loan applications from minority neighborhoods, rather than a low loan application approval rate, is the immediate cause of the lender's low level of mortgage lending in such neighborhoods. This indicates that the principal cause of the worst case lending patterns lies in marketing policies that have excluded minority neighborhoods or pre-screening tactics that have discouraged the submission of applications from minority neighborhoods.

   4. There is a substantial market for home purchase loans in minority neighborhoods.

      While the volume of home purchase loans in minority neighborhoods is on average significantly less than in white neighborhoods, there is, nonetheless, substantial effective demand. For the 16 metro areas examined in this report, the flow of home purchase loans in minority neighborhoods (areas having minority populations of 50 percent or more) was on average 44 percent of the flow in white neighborhoods. It is simply incorrect for mortgage lenders to claim that the size of the mortgage loan market in minority neighborhoods is too small to provide them with lending opportunities.

   5. Major conventional lenders can actively serve the home financing needs of minority neighborhoods.

      Several major lenders were actively engaged in mortgage lending in minority neighborhoods, and some of these "affirmative" lenders emphasized conventional loans, rather than government-insured loans (FHA and VA). For example, 100 percent of the 2,386 home purchase loans originated by Citibank in the minority neighborhoods of the New York metro area during 1990-91 and were conventional loans, not government-insured loans. Similarly, 100 percent of the 1490 home purchase loans originated by Great Western in the Los Angeles metro area during 1991 were conventional loans. This shows dramatically that conventional financing can play a major role in minority neighborhoods. The notion that minority neighborhoods require government-insured home financing is a stereotype that is both false and damaging to minority neighborhoods.

   6. Upscale marketing policies have discriminatory effects.

      A number of the major lenders responsible for the 62 worst case lending patterns have limited their effective lending territories to include primarily upscale neighborhoods. In the 16 metro areas under review, such an upscale marketing strategy has a stark, disparate impact on minority neighborhoods. The Fair Lending Laws prohibit policies and practices that have a disparate impact on minority neighborhoods, as well as those that involve direct discrimination.

   7. Upscale lending criteria have discriminatory effects.

      Major lenders that adopt restrictive lending criteria that exclude low and moderate income borrowers are frequently responsible for worst case lending patterns. Prime example of this link between restrictive lending criteria and racial redlining are Prudential Home Mortgage Company, Chase Home Mortgage Corporation, and Chemical Bank in New York; Nationsbank Mortgage Corporation and B.F. Saul Mortgage Company in Washington, DC; NBD Mortgage Company in Chicago; and Citibank Federal Savings Bank in Los Angeles.

   8. Types of minority neighborhoods excluded vary among lenders.

      The level of minority population concentration that triggers the exclusion of minority neighborhoods from effective lending territories can vary considerably from one lender to the next within the same metro area and more systematically between lenders in different metro areas. Worst case lending patterns frequently involve exclusion of neighborhoods in which minorities comprise 50 percent or more of the population, but in some situations a lender may not begin to exclude neighborhoods until the minority concentration level reaches 75%. In some cases, the pattern of exclusion will vary depending on whether a minority neighborhood is predominantly Black or Hispanic.

      The Fair Lending laws obligate mortgage lenders to make housing loans available without regard to minority concentration levels or the composition of the minority population (e.g., Black or Hispanic). In monitoring for racial redlining, it is not adequate to employ a single, generic definition of minority neighborhood, since such a generic definition may obscure discrimination against a particular type of minority neighborhood.

   9. African Americans bear the brunt of racial redlining.

      While marketing policies that exclude minority neighborhoods injure the broad spectrum of the minority population, they fall most heavily on the African American community. Within the 16 metro areas under review, 70 percent of each metro area's total Black population, on average, lived within neighborhoods that had a minority concentration of 75 percent or greater. An average of 80 percent of each metro area's total Black population lived within neighborhoods that had a minority concentration of 50 percent or greater.

   10. Mortgage companies are responsible for two-thirds of worst case lending patterns.

       The 62 worst case lending patterns identified in this study are distributed by type of lender as follows:

       • Independent mortgage companies (mortgage companies that are not subsidiaries of banks, savings institutions, or bank holding companies): 23
       • Mortgage company subsidiaries of bank holding companies: 7
       • Mortgage company subsidiaries of savings institutions: 6
       • Mortgage company subsidiaries of commercial banks: 4
       • Savings institutions: 14
       • Commercial banks: 8

       Thus mortgage companies (both independent mortgage companies and those directly affiliated with banking organizations) account for 40 of the 62 worst case lending patterns, or 65 percent of all such instances.

4. Recommended agency enforcement actions.
   1. Federal Fair Lending enforcement agencies should begin prompt investigations of the lenders responsible for the 61 worst case lending patterns identified by this report.

      The federal agencies with primary enforcement responsibility in the area of mortgage lending discrimination should begin immediate investigations of the lenders responsible for the worst case lending patterns identified in this report. These investigations should determine the marketing and lending policies and practices and other lender conduct that resulted in exclusion and underserving of minority neighborhoods. The 62 occurrences of worst case lending patterns and the 49 mortgage lenders responsible for these patterns are listed in Table A.

      A large share of the responsibility for investigating these worst case lending patterns will fall on HUD. HUD has primary Fair Lending investigation and enforcement authority with respect to 30 of the 62 worst case lending patterns identified in this study -- 23 patterns involving independent mortgage companies and 7 patterns involving mortgage company subsidiaries of bank holding companies.

      Decatur Federal Savings and Loan's lending pattern in Atlanta during 1991 was one of the 62 worst case lending patterns identified in this study. In view of the Justice Department's lawsuit and the ensuing consent decree, the Banking Research Project is not asking for an investigation of Decatur.

      Comparison of Decatur's lending pattern in Atlanta with the 61 other worst case lending patterns identified in this study indicates that the great majority of these worst case lending patterns are comparable to, and in many cases worse than, Decatur's in terms of excluding or substantially underserving minority neighborhoods. Thus, at a minimum, the primary Fair Lending enforcement agency for each of the worst case lending patterns identified in this study should either through negotiation or administrative enforcement proceedings seek the adoption and implementation of affirmative marketing plans on the part of the responsible lenders.

      The primary Fair Lending enforcement agencies should promptly provide the Justice Department with all information obtained in their investigations of the worst case lending patterns. The Justice Department has broad authority under the Fair Housing Act to initiate lawsuits in situations that involve a "pattern or practice" of discrimination in housing finance.[9]

   2. The Civil Rights Division of the Justice Department should review the lenders with the 61 worst case lending patterns for civil prosecution and issue a report that examines the causes of these lending Patterns and evaluates the adequacy of the investigations performed by the primary enforcement agencies.

      The Civil Rights Division of the Justice Department should review the lenders with the 61 worst case lending patterns (excluding Decatur) as potential candidates for pattern and practice prosecution under the Fair Housing Act. As part of this review, the Justice Department should examine all information collected by the primary Fair Housing enforcement agencies in their investigations of the 61 worst case lending patterns.

      The Civil Rights Division of the Justice Department should issue a report within six months that would examine in depth the specific marketing and lending policies and practices and other conduct that resulted in the worst case lending patterns. One of the greatest barriers to enforcement of the Fair Lending laws has been the lack of public information on the specific marketing and lending practices that result in discriminatory mortgage lending patterns. Thus, it is vital to make a part of the public record the specific causes of the worst case lending patterns.

      The report of the Civil Rights Division should also focus on the scope of the investigations of the worst case lending patterns conducted by each of the primary Fair Housing enforcement agencies and assess the adequacy of these investigations. There are compelling reasons to monitor the effectiveness of Fair Lending investigations conducted by HUD and the federal banking agencies. Congressional hearings have repeatedly demonstrated the inadequacy of such investigations and the unwillingness of the agencies to take either informal or formal enforcement action.[10]

      The federal agency with primary administrative enforcement authority with respect to mortgage lending discrimination varies depending on the type of mortgage lending institution involved.[11]