Topic 7: Federal Housing Policies – Fair Housing and Related Laws

(Suggested textbook reading: Chapter 9)

In this topic we discuss laws designed to promote fairness in access to housing and credit.

I. Fair Housing Act of 1968: part of the Civil Rights Act of 1968. This law makes it illegal to discriminate with respect to a buyer’s or renter’s race, color, national origin, religion (religious groups can give preference to their members if they do not discriminate in other ways), gender (through 1974 amendment), or having children or being handicapped (through 1988 amendments).

in activities involving selling, renting, advertising, or financing real estate.

The Fair Housing Act does not apply to individuals selling their own single-family homes without broker assistance. But their brokers clearly are bound under the law. Also, through the Civil Rights Act of 1866 no one (not even an individual selling his own house) can discriminate based on race. So while the Fair Housing Act would permit an individual selling his own house to discriminate based on age or gender, this individual could not discriminate against a buyer (or renter) based on race.

Interesting Illinois case occurred in west-suburban Bellwood in 1979. Plaintiffs

felt that two real estate brokerage firms were trying to maintain a certain racial breakdown in the town, by “steering” white buyers to white neighborhoods and minority buyers to an integrated neighborhood. Defense claimed that no harm had been done, because those steered to minority areas were merely “testers,” who did not really want to buy and were not actually denied equal access to housing, and therefore had no standing to sue. But U.S. Supreme Court ruled that the testers who lived in the integrated neighborhood did have standing to sue, because their community had been harmed by effort to interfere with housing opportunities.

But an equally interesting Illinois case occurred in the south-suburban area in 1991. Several suburbs enacted ordinances that required “affirmative marketing,” which means trying to encourage whites to move into certain integrated neighborhoods (while discouraging blacks). Realtors® sued the communities,

on the grounds that complying with these laws would require them to engage in illegal steering. But a federal appellate court in Chicago upheld these “integration maintenance plans,” and the U.S. Supreme Court declined to hear an appeal.

Fair Housing provisions in Illinois state law, last updated in 2010, a seller or landlord can not discriminate against someone based on ancestry, age, marital status, sexual orientation, military status (including unfavorable discharge from the armed forces), or being covered under an order of protection against another individual (legislators felt that landlords might otherwise fail to rent to someone whose presence might attract a violent stalker).

II. Equal Credit Opportunity Act (ECOA) [1975]

Prohibits discrimination, in decisions to grant credit, based on age, race, national origin, religion, sex, or marital status. Requires lenders to count all reliable income (including alimony or public assistance received) in determining whether a potential borrower meets income requirements. Those who are denied loans must be told the reason, in writing, within 30 days.

In determining whether discrimination has occurred, the government can look at:

A. Intent – did the lender attempt to discriminate?

Problem: Intent would be very difficult to prove. Therefore, government examinations into alleged discrimination tend to focus on practices.

B. Practices – did the lender follow procedures designed to prevent discrimination from occurring?

Problem: Economics of information – discrimination may come about because an analyst finds it too expensive to look at individuals, and therefore must make decisions based on group affiliation. (A commonly-cited example involves teenagers and auto insurance.) If we prevent lenders from analyzing information in an efficient manner, we increase their costs of operating and thereby reduce the amount of credit made available.

C. Effects – does discrimination appear to have occurred?

Problem: “Taste for Discrimination” arguments can be hard to justify. While it would be possible for some lenders to discriminate because they enjoy discriminating, it would be irrational for them to do so because it would deny them profitable opportunities. In a competitive market they would ultimately be driven out of business. (This logic can also be applied to Fair Housing concerns; a landlord who refuses to rent to minorities gives monopoly power to white tenants as a group.) So these arguments emerge:

  • A lender that has been around for any length of time in a competitive environment must not have been irrationally discriminating, even if there appear to be discriminatory effects.
  • But if the lending marketplace is heavily regulated, then there may not be enough competition for wasteful activity to be punished.

Boston Fed Study

A 1992 Federal Reserve Bank of Boston study of lender activities received a lot of attention in the press. Using 1990 data from the Northeast, some Fed analysts found strong evidence of racial discrimination by home lenders.

There would, in theory, be 5 possible loan-related activities in which lender discrimination could occur:

1. Defined lending territory under the Community Reinvestment Act, so as to exclude certain groups of borrowers. Under CRA a lender’s choices include:

a. Metropolitan Statistical Area (MSA)

b. Radius around lender’s home office

c. Any reasonably chosen area

2. Advertising – e.g., running ads that always show borrowers as white. This one is interesting in that some lenders are charged with discrimination because they

do not advertise to minorities. Yet others claim to have high rejection rates for minorities precisely because they advertise and, in the process, attract some unqualified minority applicants.

3. Prescreening – e.g., making unfavorable comments regarding minority borrowers’ chances for loan approval (since measures of discriminatory effect would relate only to those who actually submit loan applications).

4. Product steering – e.g., directing minority borrowers to FHA loans, for which default would affect the government rather than the lender.

5. Application processing – the only one of these activities addressed in the Boston FRB study.

Types of discrimination that could arise:

  • Blatant discrimination – using race, sex, etc. explicitly in lending guidelines.

Two interesting points:

a. Lenders used to openly charge higher interest rates to black borrowers, and black veterans of WWII were not permitted to get VA loans.

b. The original use of “redlining” was by the government, not by private lenders.

  • Disparate treatment – for example, treating certain information in a credit report as acceptable if the borrower is white, but not if the borrower is minority

[Blatant discrimination and disparate impact seem not to really have been big problems since passage of Fair Housing Act & Equal Credit Opportunity Act.]

  • Adverse impact – no intent on the lender’s part to discriminate, but minorities end up being more likely to be denied for reasons like job histories, credit histories. But even here there are theoretical problems. For example, does the borrower’s income affect the profitability of a loan? Hard to say; there is a downward effect because of higher likelihood of default, but an upward effect because of lower likelihood of prepayment.

Ways to measure discrimination:

Matching applicants (white vs. minority)

Comparing default rates (lower for minority suggests discrimination)

Regression analysis – as was done in Boston FRB study.

Probability of rejection of applicant i = f(L/Vi, Incomei, Loan Typei, Racei)

The Boston FRB study found disparate treatment in application processing. The rejection rate for black & Latino applicants was 55% greater than that for whites (17% of minorities rejected vs. 11% of whites rejected). But the study has been criticized because of:

  • Omitted explanatory variables (one was job history)
  • Data problems (one observation showed a L/V ratio of 5)
  • Wrong interpretation

After all this background, we might make a few general statements:

  • Economic theory tells us that discrimination should not occur in a competitive market, and the lending marketplace has been increasingly competitive since passage of deregulatory laws of the 1980s.
  • There is not overwhelming empirical evidence that lenders have discriminated, although the Boston FRB study and much anecdotal evidence suggest that discrimination has recently occurred, and there is much anecdotal evidence that minority borrowers have been discriminated against.
  • ECOA does provide guidelines for fair lending practices, and therefore is probably of value even if it has not directly reduced discrimination.

III. Home Mortgage Disclosure Act (HMDA) [1975; beefed up ’89 & ’91]

Any lending institution with more than $10 million in assets must report, to the federal or state government, the number and dollar amounts of its mortgage and home improvement loans (even those submitted by loan brokers) by MSA and census tract. Must also report acceptance and rejection rates based on borrower age, race, and income.

IV. Community Reinvestment Act (CRA) [1978]

All federally insured depository institutions must lend in the area from which they take deposits. One penalty to violators is the denial of regulatory permission to complete mergers. Concerns of lawmakers had been “redlining” (figuratively,

or even literally, drawing red lines on a map to show areas off-limits for lending) and “FHAing” (advancing the institution’s own funds to strong borrowers while channeling weaker borrowers into FHA loans, which might cause the neighborhood to decline if local lenders failed to make needed loans and keep defaults in check). Lenders might counter that areas of older homes with less-affluent borrowers pose high default risks.

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