Consumer Law & Policy Blog

Paper Finds Evidence of Redlining and Race-Based Discrimination in Subprime Loan Pricing

Andra C. Ghent

 of Arizona State University (ASU) - Finance Department and

Ruben Hernandez-

Ruben Hernandez-

Murillo and

Michael Owyang

, both of the Federal Reserve Bank of St. Louis have written Race, Redlining, and Subprime Loan Pricing.  Here's the abstract:

We investigate whether race and ethnicity influenced subprime loan pricing during 2005, the peak of the subprime mortgage expansion. We combine loan-level data on the performance of non-prime securitized mortgages with individual- and neighborhood-level data on racial and ethnic characteristics for metropolitan areas in California and Florida. Using a model of rate determination that accounts for predicted loan performance, we evaluate the presence of statistical and taste-based discrimination, as well as disparate impact and disparate treatment discrimination, in mortgage rates. We find evidence of redlining as well as adverse pricing for blacks and Hispanics.

Important Columbus Dispatch Investigation of Credit Report Errors

Here.  They have conducted an extraordinary investigation, reviewing nearly 30,000 consumer complaints.  Some highlights from the article, which is worth reading in its entirety:

Nearly a quarter of the complaints to the FTC and more than half of the complaints to the attorneys general involved mistakes in consumers’ financial accounts for credit cards, mortgages or car loans. Houses sold in bank-approved “short sales,” at less than the value of the mortgage, were listed as foreclosures. Car loans that had been paid off were reported as repossessions. Credit cards that had been paid off and closed years earlier showed as delinquent.

More than 5 percent complained to the FTC and more than 40 percent to the attorneys general that their reports had basic personal information listed incorrectly: names, Social Security numbers, addresses and birth dates. An Ohio man said his report identified him as having been a police officer since 1923. He was born in 1968. A woman in her 60s said that her credit report listed her as 12 years old.

More than 5 percent complained to the FTC that their reports contained an account that did not belong to them. Many of those accounts involved debts that had been turned over to collection agencies. A woman in Georgia complained about a medical-collection account on her report. It was for treating prostate cancer.

Nearly 200 people told the FTC that their credit reports listed them as deceased, cutting off their ability to access credit.

More than half of all who filed complaints with the FTC said that despite their best efforts, they could not persuade the three major credit-reporting agencies to fix the problems.

Littwin Paper on Repairing Credit Reports Damaged by Domestic Violence

Angela K. Littwin

 of Texas has written Escaping Battered Credit: A Proposal for Repairing Credit Reports Damaged by Domestic Violence, forthcoming in the University of Pennsylsvania Law Review.  Here's the abstract:

Debt and domestic violence are connected in ways not previously imagined. A new type of debt – which I have labeled “coerced debt” – is emerging from abusive relationships. Coerced debt occurs when the abuser in a violent relationship obtains credit in the victim’s name via fraud or coercion. It ranges from secretly taking out credit cards in victims’ names to coercing victims into signing loan documents to tricking victims into relinquishing their rights to the family home. As wide-ranging as these tactics can be, one consequence consistently emerges: ruined credit ratings.

Coerced debt wreaks havoc on credit scores, which is particularly problematic because the use of credit reports is no longer confined to traditional lenders. Employers, landlords, and utility companies all make extensive use of credit scores in screening. Thus, a credit score that has been damaged by coerced debt can make it prohibitively difficult for victims to obtain employment, housing, or basic utilities, all of which are requirements for establishing an independent household.

In this Article, I propose amending the Fair Credit Reporting Act to enable victims of coerced debt to repair their credit reports. My proposal would enable family courts to rule on whether alleged coerced debt is, in fact, coerced. The victim could then submit the court’s certification to the credit reporting agencies, which would block the coerced debt from her credit report to the extent that the block did not unduly harm her creditors. My proposal would build a bridge between the decision-makers already making determinations about issues related to coerced debt and the credit reports victims need reformed in order to move beyond the abuse.

David Lazarus Interview with Richard Cordray on Proposed Rules for CFPB to Supervise Large Credit Bureaus and Debt Collectors

by Jeff Sovern

Here.  Lazarus has an interesting quote from Cordray: "Unlike most services or products where consumers can shop around among different providers, consumers can't do that with these businesses," Cordray said. "Consumers don't get to choose their debt collector, and they don't get to choose whether to have the consumer credit reporting agencies keep track of their credit history."

That's an important point.  Free-marketers argue that government regulation is generally unnecessary because the free market will discipline poorly-performing businesses.  But there is no free market as to debt collectors or credit bureaus, with the result that the market cannot be expected to address such businesses when they misbehave.  That's another reason we needed the CFPB as well as the Fair Credit Reporting Act and the Fair Debt Collection Practices Act.

 

CFPB Proposes Oversight of Larger Credit Reporting Agencies and Debt Collectors

by Jeff Sovern

The proposal is to cover debt collectors with receipts exceeding $10 million and credit bureaus with receipts over $7 million.  As for the credit bureau piece of the proposal, here's an excerpt from an article in the Washington Post:

[L]ittle attention has been paid to the so-called “Fourth Bureau” firms that target the 30 million consumers outside the mainstream financial system. Often they are students, immigrants or low-income consumers who do not qualify for traditional loans or choose not to use them. Instead, they rely on a makeshift system of payday lenders, check cashers and prepaid cards — none of which show up in the Big Three. Without a paper trail of credit, these consumers are virtually shut out of the traditional banking system.

As a result, fourth bureau firms are increasingly using non-traditional and, at times, unreliable data, including auto warranties, cellphone bills and magazine subscriptions to come up with credit scores.

* * * [The proposal would cover] not only the three major credit bureaus but also roughly 30 smaller firms in the Fourth Bureau. The rule would give the CFPB authority over about 94 percent of the industry by receipts.

But the debt collection industry would receive less attention under the proposal.  The Bureau explains: "the proposed threshold would likely bring within the Bureau’s scope of supervision approximately 175 entities out of approximately 4,500 firms engaged in debt collection . . . . Thus, approximately 4 percent of all collection firms would be covered by the proposed threshold." Put another way, 96% of debt collector firms will not be subject to the Bureau's supervision.  Will that drive unscrupulous individual collectors to work for the 96% to evade the Bureau's oversight?  If so, is that a good thing?

Comments on the proposal will be due within 60 days of publication of the notice in the Federal Register; instructions for commenting can be found here and should refer to Docket No. CFPB-2012-0005.

 

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Another Paper on Discrimination in Mortgage Markets

R. Glenn Hubbard

 of Columbia Business School and the National Bureau of Economic Research (NBER), Darius Palia of Rutgers Business School, and

Wei Yu

 of California State Polytechnic University, Pomona have written Analysis of Discrimination in Prime and Subprime Mortgage Markets.  Here's the abstract:

This paper examines evidence of lending discrimination in prime and subprime mortgage markets in New Jersey. Existing single-equation studies of race-based discrimination in mortgage lending assume race is uncorrelated with the disturbance term in the loan denial regression. At the individual loan-level, we show that race is correlated with both observable and unobservable risk variables, leading to biased coefficient estimates. To mitigate this problem, we specify a system of equations and use a full information maximum likelihood (FIML) method that does not need to identify instrumental variables for system identification. We find that minorities are less likely to be rejected than whites in the subprime market. The individual loan-level FIML results are robust to using two-stage least squares when we examine discrimination at the neighborhood-level. We also find that the reduction in rejection rates to minority neighborhoods from 1996 to 2008 cannot be fully justified by risk, suggesting a relaxation of lending standards to minority neighborhoods. Using the methodology of Mian and Sufi [2009], we also find evidence for strong credit supply effects.

 

Fed Researchers Find Subprime Loan Discrimination and Redlining

Ruben Hernandez-Murillo

 of the Federal Reserve Bank of St. Louis,

Andra C. Ghent

 of Baruch College (CUNY) - Zicklin School of Business, and

Michael Owyang

 also of the St. Louis Federal Reserve have written Race, Redlining, and Subprime Loan Pricing.  Here is the abstract:

We investigate whether race and ethnicity influenced subprime loan pricing during 2005, the peak of the subprime mortgage expansion. We combine loan-level data on the performance of non-prime securitized mortgages with individual- and neighborhood-level data on racial and ethnic characteristics for metropolitan areas in California and Florida. Using a model of rate determination that accounts for predicted loan performance, we evaluate the presence of statistical and taste-based discrimination, as well as disparate impact and disparate treatment discrimination, in mortgage rates. We find evidence of redlining as well as adverse pricing for blacks and Hispanics.

Will the Supreme Court Do Away with the Disparate Impact Test in Lending Discrimination?

The Court has granted cert in Magner v. Gallagher, where the issues are described as "(1) Whether disparate impact claims are cognizable under the Fair Housing Act; and, if so (2) what test should be used to analyze them."  The SCOTUS blog, from which the issue statement just quoted is taken, has helpful links, while the American Banker has coverage here (paid subscription may be required).  If the Court rules that disparate impact is not usable under the FHA, it may lead to a similar rule for the Equal Credit Opportunity Act, which would obviously make it harder to bring such cases, especially in the Seventh Circuit, which has rejected the other main test for ECOA cases, disparate treatment.

Call for Papers for Research Symposium on Credit Scoring and Credit Reporting

Suffolk Law School and the National Consumer Law Center are convening a Research Symposium on Credit Scoring and Credit Reporting in Boston on June 6-7, 2012.

The goal of the Symposium, which is invitation-only, is to bring together the nation’s top experts, including academics, private attorneys, industry representatives, consumer advocates, and government officials, to discuss research and policy related to credit scoring and credit reporting, including their impact on communities of color and other protected groups. They invite paper proposals that are empirical, qualitative, theoretical or policy-oriented. 

Honda Pitchman Has Difficulty Getting Deal He Advertised

by Jeff Sovern

One of my students, Andre Pascariu pointed me to this story about an actor who appeared in a Honda commercial and then decided to take advantage of the leasing offer he had pitched.  The first dealership said his 709 credit score qualified him for the offer, but they didn't have the car he wanted.  The second dealership had the car, but told him his credit score--which they said was 663--was too low for the special offer; they said he could lease the car only at a higher rate.  Because each credit bureau uses a different algorithm for calculating FICO scores, and might also have different information in its files, it's possible that both dealers were telling the truth.  Still, suppose the second dealer was attempting to inflate its charges by choosing to use the lowest credit score it knew of for the borrower.  Would that violate any laws?  Because the actor was African-American, it's natural to wonder if the dealer regularly played such games with people of color; if so, it would probably have violated the Equal Credit Opportunity Act, but if it treated everybody that way, would there be a violation of any law?  I'm not aware of any laws that require lenders to use the lowest credit score they know of, so my answer would be no.