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Executive Summary
When first-time homebuyers begin shopping for a house, they need to learn about mortgages for which they can qualify and about house prices they can afford. This information can be provided by a variety of different sources, including mortgage lending institutions, real estate agents, and mortgage brokers. But if potential homebuyers cannot obtain full and fair access to information about mortgage financing, they may give up on their pursuit of homeownership, their housing search may be restricted, or they may be unable to negotiate the most favorable loan terms. Thus, pre-application inquiries about mortgage financing options represent a critical phase in the homebuying process.
The U.S. Department of Housing and Urban Development contracted with the Urban Institute to rigorously assess the effectiveness of paired testing for determining whether minority homebuyers receive the same treatment and information as whites at the pre-application phase of the mortgage lending process, and to produce rigorous measures of the incidence of unequal treatment in two metropolitan areas. The mortgage lending process consists of a complex series of stages, including advertising and outreach by lending institutions, responses to pre-application inquiries from potential borrowers, approval or denial of loan applications and determination of loan terms and conditions, and finally, loan administration. Discrimination may occur at any of these stages and may take different forms at different stages.1
In a paired test, two individuals—one white and one minority—pose as homebuyers and inquire about the availability and terms for home mortgage loans. Because the two members of a tester team present themselves as equally qualified borrowers in every respect except their race or ethnicity, systematic differences in the treatment they receive provide direct evidence of adverse treatment discrimination. Paired testing has been used widely to detect and measure discrimination by rental and sales agents, but only a few, relatively small-scale investigative studies have been applied to mortgage lending.
This study consisted of two major stages—a pre-test stage and a pilot stage. The pre-test stage was used to experiment with a fairly wide variety of paired testing scenarios, and to assess the feasibility of testing several different sources of mortgage financing information. More specifically, we conducted tests of mortgage lending institutions, mortgage brokers, real estate agents, new construction sales agents, and mobile home sales agents. This pre-test experience informed the design of the pilot stage, in which conducted approximately 250 paired tests of a representative sample of mortgage lending institutions in Los Angeles, California and Chicago, Illinois, using a standardized set of protocols in order to yield statistically rigorous measures of discrimination against African Americans and Hispanics in these two metropolitan housing markets.
Paired Testing Can Be an Effective Tool for Research and Enforcement
In the first stage of this study, a total of 78 tests were conducted in two markets—Orange County, California and New Orleans, Louisiana. Because the format of these tests, and the information sources they targeted were so varied, they cannot be used to produce statistical measures of the extent of discrimination. Nevertheless, the pre-tests do provide important insights about the forms that mortgage lending discrimination may take and about methods for conducting effective testing.
The intensive pre-testing effort found that rigorous paired testing is feasible—though difficult—for all the information sources we considered. The pilot stage focused on mortgage lending institutions, because of the central role they play in the sector. But future research and enforcement efforts can and should explore other information sources, including mortgage brokers and referrals by real estate agents. More research is also needed to fully understand how homebuyers search for mortgage financing, including racial and ethnic differences in information sources and search strategies.
The pre-test effort also found that one of the most serious forms of discrimination that can be discerned by paired testing at the pre-application stage is differential estimates of home price and total loan amount. These estimates potentially play a major role in determining where people search for housing and whether they decide they can afford to become homebuyers. Therefore, the pilot phase of the Homeownership Testing Project was explicitly designed to measure this form of differential treatment rigorously.
Finally, pre-testing highlighted the complexity and difficulty of mortgage lending testing. This type of testing demands more from both testers and testing organizations than routine rental testing, and great care must be taken with tester training, supervision, and record keeping, as well as with the actual conduct of the tests themselves in order to achieve credible test results. Not all local fair housing organizations necessarily have the capacity to effectively conduct lending tests.
African Americans Experience Unequal Treatment from Lending Institutions in Los Angeles and Chicago
The pilot phase of the Homeownership Testing Project focused on a single, clearly defined scenario: A first-time homebuyer visits a mortgage lending institution requesting help in figuring out a price range for housing, a loan amount for which he or she might qualify, and loan products that might be suitable, to answer the basic research question: Do minorities receive the same treatment and information as whites at the pre-application phase? All the tests conducted in the pilot phase of the Homeownership Testing Project consisted of individuals visiting offices of mortgage lending institutions (including both conventional and sub-prime lenders). Testers posed as first-time homebuyers, making a general uninformed request for information about how much house they could afford and what loan products might be available to them. All of the testers were assigned financial profiles that qualified them for products targeted to borrowers with A- credit in their respective housing markets. Their income and asset levels qualified them to purchase a median-priced house in their metropolitan area, but they were asset constrained and had minor problems with their credit history. The two members of each tester pair were assigned virtually identical financial and household characteristics, with the minority partner always slightly better qualified than the white.
In both Chicago and Los Angeles we conducted tests for a representative sample mortgage lending institutions in the metropolitan area that report under the Home Mortgage Disclosure Act (HMDA),2 accept at least 90 mortgage loan applications per year, and had offices in the region that a first-time homebuyer could realistically find and visit. Lending institutions with very large application volumes not only had a high probability of selection, but could appear in the sample more than once. This sampling strategy allows us to make statements about the incidence of differential treatment by large lending institutions in Chicago and Los Angeles that are directly accessible to first-time homebuyers.3
The pilot test results show that in both Los Angeles and Chicago, African American and Hispanic homebuyers face a significant risk of receiving less favorable treatment than comparable whites when they visit mortgage lending institutions to inquire about financing options. In the majority of cases, minorities and whites received equal treatment, or when differences occurred, they were equally likely to favor the minority as the white.4 But in both metropolitan areas, paired testing reveals statistically significant patterns of unequal treatment that systematically favor whites.5
Unequal treatment takes different forms in the two metropolitan areas and for the two minority groups.
In Los Angeles —
- Blacks were offered less coaching than comparable white homebuyers, and were more likely to be encouraged to consider an FHA loan.
- Hispanics were denied basic information about loan amount and house price, told about fewer products, and received less follow-up compared to Anglo homebuyers.
In Chicago —
- Blacks were denied basic information about loan amount and house price, told about fewer products, offered less coaching, and received less follow-up than comparable white homebuyers.
- Hispanics were quoted lower loan amounts or house prices, told about fewer products, and offered less coaching than comparable Anglo homebuyers.
These patterns of unequal treatment occurred regardless of whether the two members of a tester pair met with the same loan officer or with different loan officers.
| Adverse Treatment of African American and Hispanic Homebuyers |
| Treatment Categories |
Los Angeles |
Chicago |
| Blacks |
Hispanics |
Blacks |
Hispanics |
| Information Requested |
-- |
Y |
Y |
-- |
| Loan amount and house price |
-- |
-- |
-- |
Y |
| Number of products |
-- |
Y |
Y |
Y |
| Coaching |
Y |
-- |
Y |
Y |
| Follow-up contact |
-- |
Y |
Y |
-- |
| FHA encouraged |
Y |
-- |
-- |
-- |
Y Unequal treatment favors whites or Anglos over blacks or Hispanics at a 90 percent level of statistical significance or higher
-- No statistically significant differences in treatment |
The frequency of unfavorable treatment varies considerably from one category to another. For some categories, equal treatment occurred in the vast majority of cases, but when differences occurred, the white tester was dramatically more likely to be favored than his or her minority partner. For other treatment categories, differences in treatment occurred much more often, but again were substantially more likely to favor the white than the minority tester. The series of charts below illustrate the levels of unfavorable treatment for each treatment category where statistically significant differences were observed.
| Two female testers, one white and one black, visited the same Los Angeles area lender two days apart and met with the same loan officer. The testers told the loan officer that they were first-time homebuyers and needed assistance in figuring out a home price range and a loan amount for which they might qualify. The loan officer requested and obtained detailed information on household income, debts, and assets from both testers and asked about their respective credit situations. He then estimated that the white tester would qualify for a $332,500 loan to purchase a $350,000 home and, estimated that the black tester would qualify for a $237,500 loan to purchase a $245,000 home. The loan officer told the white tester that a seller would likely pay some of the closing costs, but no mention was made about seller assistance to the black tester. The loan officer also told the white tester that it was a good idea to have a home inspection conducted prior to purchase, while the loan officer did not mention anything about the value of a home inspection to the black tester. The loan officer provided a complete loan application package to the white tester, but not to the black tester. |
Despite the variations in the forms that differential treatment takes, these findings demonstrate that African American and Hispanic homebuyers in both Los Angeles and Chicago face a significant risk of unequal treatment when they visit main-stream mortgage lending institutions to make pre-application inquiries. Discriminatory treatment at this early stage in the mortgage lending process has the potential to discourage some minorities from continuing their housing search, to limit their search to lower cost homes than they could actually afford, and to prevent them from choosing the most favorable loan products.
Therefore, we conclude that paired testing at the pre-application stage of the mortgage lending process is feasible and effective for both enforcement and research purposes. Additional testing should be conducted, including systematic studies that focus on other sources of information about mortgage products and on homeseekers who are less well-qualified as borrowers. However, because of the complexity of this kind of testing and the differences between metro area results, we do not recommend a large-scale national study of discrimination at the pre-application stage of the mortgage lending process. Instead, systematic studies should be conducted on a site-by-site basis, with ample time and resources for effective training, test coordination, and quality control.
Notes from Executive Summary
1. For more information on existing evidence about discrimination at other stages in the mortgage lending process, see Margery Austin Turner and Felicity Skidmore.1999. Mortgage Lending Discrimination: A Review of Existing Evidence. Washington, D.C.: The Urban Institute.
2. HMDA requires all independent mortgage companies and mortgage lenders owned by depository institutions that make at least 100 home purchase and/or refinancing loans in a given year to report on the demographic and locational characteristics of all applications and loans.
3. Levels and patterns of discrimination may be different for smaller lending institutions or when inquiries are made by telephone or Internet rather than in person.
4. It is important to recognize that even when we do not observe a statistically significant pattern of systematically unequal treatment, discrimination may have occurred in individual cases. For some treatment variables, differences in treatment occurred quite frequently but favored minorities just as often as whites. These differences may result from random variations in the behavior of loan officers, but they may also include cases of discrimination on the basis of race or ethnicity.
5. Results are reported as statistically significant when the difference between the rate of white/Anglo-favored treatment and the rate of minority-favored treatment is significant at a 90 percent confidence level or higher.
Note: This report is available in its entirety in the Portable Document Format (PDF).
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