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Study Says Pricing Not Abusive

Traiger & Hinckley compare rate spreads with minorities, nonminorities

June 14, 2005


A recent study comparing rates between minorities and nonminorities among several major lenders dismissed conclusions drawn from previous findings that minorities and women are treated unfairly by lenders.

In analyzing Home Mortgage Disclosure Act 2004 data from 10 leading lenders, there were no essential differences by race, ethnicity, or gender in the pricing of first lien purchase loans, announced the study's conductor Traiger & Hinckley LLP.

Among the reasons first lien purchase loans were reviewed was because these represent the most vulnerable borrowers, according to the report, and surveys indicate first-time homebuyers account for 40 percent of all home purchases, 25 percent of all first time homebuyers are minorities, and a little more than half are single women.

HMDA requires lenders to report the spread between a first mortgage's APR and comparable U.S. Treasury security yield if it is at least three points. The law firm, which says it advises financial institutions on complying with federal and state anti-discrimination laws, analyzed 90,298 loans with rate spreads by Bank of America, Citigroup, Countrywide, GMAC, JPMorgan Chase, National City, PHH, Washington Mutual and Wells Fargo.

"So far, analyses of 2004 HMDA data have been largely limited to comparing the extent of loans with and without rate spreads for different borrower groups," commented law firm partner Warren Traiger in a written statement. "The value of such analyses is hotly contested, since without information on borrower qualifications and loan characteristics, there is no way to assess the appropriateness of an APR. However, if, as some have alleged, minorities and women are being overcharged for loans, that disparity should carry over into loans with reported rate spreads."

The findings of the New York-based firm revealed that African American and white borrowers paid essentially the same average rate spread -- 4.032% and 4.023%, respectively -- and that Hispanics -- with a 3.872% spread -- paid less on average than whites, according to the report. In other words, the average rate spread for Hispanic borrowers was 15 basis points lower than the average for whites, and the average rate spread for African American borrowers was less than one basis point higher than the white average.

The study also showed that whites held the highest number of loans with rate spreads -- 49,704 -- followed by African American's 14,824 and Hispanics' 13,304. Men held more than 55,466 of the loans studied, while women borrowers represented nearly 31,622.

Additionally, it found the average rate spreads for men and women were almost identical -- respectively at 3.992% and 4.006%.

Contrasting Traiger & Hinckley's findings are those by the National Community Reinvestment Coalition, which said it analyzed lending activity in 331 U.S. metropolitan areas using 2003 home loan data and found women were more likely to get subprime loans, than lower-cost prime, in all of those areas.

In analyzing data within the five most populous states, Traiger & Hinckley reported, the conclusion that borrower race, ethnicity, and sex were not factors in the pricing of first lien home purchase loans with reported rate spreads was reinforced.

Another study released early this year by the Center for Responsible Lending concluded that borrowers living in minority neighborhoods were more likely to receive abusive prepayment penalties on subprime loans than borrowers living in mostly white neighborhoods. The findings were based on an analysis of 1.8 million loans originated from January 2000 to July 2004.

The center additionally found that subprime purchase borrowers with prepayment penalties actually paid higher interest rates -- about 40 basis points higher -- than would otherwise be expected, based on an examination of 30-year fixed-rate loans originated during a three-year period.

But the Traiger & Hinckley study concluded that many homebuyers paid higher APRs due to "inferior or non-traditional credit histories," not because of predatory lending by "unscrupulous lenders."

The Florida Association of Mortgage Brokers commended the study.

"A first time homebuyer closing is always a joyous event," association President Van Johnson said. "It is all Floridians that have awarded us 70% of the residential mortgages in our State. This association pledges, through our complete dedication to integrity and hard work, that these joyous events will continue," he said.

Coco Salazar is an assistant editor and staff writer for MortgageDaily.com.

email: [email protected]

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