A national consumer group has just lobbed a bombshell at the mortgage brokerage industry -- a charge of "pervasive" discrimination against African-American and Hispanic loan applicants.

After a 28-month investigation in six metropolitan areas using "paired testers," or mystery shoppers, the National Community Reinvestment Coalition (NCRC) says it documented widespread and costly unequal treatment of minority loan applicants compared with whites.

As a result of the investigation, NCRC has begun filing a series of federal fair lending complaints. The first complaint was filed last Wednesday against the largest brokerage network in the country -- Houston-based Allied Home Mortgage Capital Corp.

The paired tester investigation took place between February 2004 and early June 2006 in Baltimore, Washington DC, Los Angeles, Chicago, St. Louis and Atlanta. A significant portion of the funding for the study was provided by the U.S. Department of Housing and Urban Development (HUD), which has federal oversight authority in the fair housing area.

In paired tests, minority shoppers -- couples and single individuals -- visit mortgage companies seeking rate quotes and fees. White testers visit the same brokerage firms, shopping for the same size loan. The minority shoppers in this investigation were assigned slightly stronger credit, income and employment-tenure credentials compared with paired white applicants, according to David Berenbaum, executive vice president of NCRC.

Despite higher credit scores and incomes, however, minority shoppers often were quoted higher rates and presented fewer loan options than whites. Specifically the investigation found that:

• Brokers didn’t discuss their fees -- a key expense in any mortgage transaction -- as often with minority shoppers as they did with white shoppers. Nearly 74 percent of white shoppers received information about fees, but only 31 percent of minority shoppers received disclosures.

• Brokers offered twice as many loan alternatives to whites than to minorities. Ninety percent of whites were offered a fixed-rate first mortgage, compared with 56 percent of minorities.

• Twice as many white shoppers were offered lower-cost conventional mortgages, while minorities more often were steered to subprime loan deals.

• Brokers spent more time discussing loan options and terms with whites -- 39 minutes on average -- compared with 27 minutes with minorities.

The net effect, said Berenbaum in an interview, was to "deprive (minority) applicants of full and equal access to mortgage credit opportunities" in spite of their superior credit and income profiles.

The complaint against Allied, filed with HUD’s fair housing and equal opportunity office, charged that the company’s brokers in multiple cities quoted "different interest rates and fees on the basis of race and steered African-American borrowers toward nonprime products despite being qualified for prime products." The complaint also alleged that "Allied brokers did not treat African-American mortgage applicants as seriously" as their white counterparts. African-American testers experienced "differential treatment in loan recommendations and the quality of information provided by Allied brokers."

Allied’s general counsel, Tony Musgrave, said the firm had not yet had an opportunity to study the complaint and had no comment about the investigation. Nonetheless, said Musgrave, if found to be accurate, "any such discriminatory practices would be an absolute violation of company policy."

HUD had no immediate comment on the allegations.

Published: June 19, 2006

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.