Mortgage denials for minorities have different reasons than whites

Even after adjusting for various characteristics, the reasons lenders give for denying mortgages to people of color differ from those for white applicants in Home Mortgage Disclosure Act data, a Federal Reserve Bank of Minneapolis study found.

Equal treatment of mortgage applicants has long been a focal point for regulators as the recent settlement with First National Bank of Pennsylvania and the accusations against Navy Federal Credit Union show.

This latest report builds on the work of a 2022 Minneapolis bank study as well as other work that found that an applicant of color is more likely to get denied than a white person. This report looks at data from applicants with the same income and credit score who apply for a conventional mortgage of the same size for a similar home.

After that 2022 study, the Minneapolis bank interviewed loan officers and underwriters, most of those local to the Twin Cities area and found two common themes in their responses, said Libby Starling, senior community development advisory, community development and engagement at the bank and a co-author of the study, in an interview. The first reason is that employment and credit histories are also used during the approval process and those may vary by race. 

"Second, our interviewees suggested that mortgage officers might not provide the level of service that applicants of color sometimes need, resulting in more denials for procedural reasons," the report said.

But when the denial rates were examined, employment was not a big driver, except for Asian applicants, Starling said. The researchers looked into the whys of this and the data was adjusted for credit score, wealth and age. 

"We're trying to understand what's driving denials and we're trying to understand what's driving the variations in denial rates," Starling continued.

Under HMDA, lenders can choose from eight reasons for a denial as well as "other," for which an explanation is needed.

"There was an element of surprise at how much disconnect there seemed to be between the explanations that people gave us relative to the reasons that reported in the HMDA data," Starling said, "You're telling us about credit history, you're telling us about issues of collateral. We're not seeing this when we actually look at what is reported in HMDA."

For example, among denied applications, Black, Latino, and Asian applicants are less likely than or about as likely as similar white applicants to have incomplete credit application listed as a reason for denial, after the data was adjusted for controls.

While HMDA does not require the lender to report credit and employment history, the entity might have retained such records on its own."A next step for such lenders, if they are interested in decreasing any racial disparities in their own mortgage practices, may be to examine their own pool of rejected applicants," the Minneapolis bank recommended. "Our analysis suggests there may be important lessons to learn."

One lender who Starling was unable to name undertook that process. They asked why they were denying households of color, and one of the ones that popped up for this particular mortgage company was immigration status. Immigration status is likely to have some racial and ethnic implications, because fewer white borrowers are impacted.

But the effect of those other denial reasons are what this research is trying to understand, Starling said.

"Is it issues of other debt that is being brought into the mortgage process?" she said. "In a process that is largely conducted remotely, without having significant face to face contact, how is race continuing to drive these variations?"

"Understanding what is behind the denials gives an opportunity for addressing those challenges."