The federal regulations that are in place to reduce mortgage discrimination include the Community Reinvestment Act, Home Mortgage Disclosure Act, and Equal Credit Opportunity Act. Individuals and families alike aspire to achieve the American Dream of owning their own home. To that end, it is often necessary to attain a loan for the purchase price of the desired property. The process of acquiring such financing is dependent upon the consumer must subject themselves to the scrutiny of a mortgage loan department. Mortgage underwriters are tasked with certifying the consumer is a valid mortgage loan risk.
Mortgage underwriters validate the application information by confirming the consumer is who they say they are, earn the income indicated, are employed where stated, and historically repay their former and current debts. The mortgage underwriters must compute the consumer’s income-to-debt ratio to ascertain the maximum amount of income the consumer can allot to repaying a mortgage debt. When the consumer selects the property of their dreams, the property is appraised to establish a reasonable purchase price, substantiate said cost is fair and satisfactory for the area, and confirm the property is habitable.
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If the consumer is proven a satisfactory credit risk, the mortgage underwriter approves the mortgage loan and the consumer is allowed to assume the mortgage loan to purchase the property from the buyer, reside in the property, and repay the lender the purchase price plus the agreed upon interest amount. The mortgage lending process is a daunting task. The successful consumer is the one who is equal to the task and perseveres. As stated by the late Dr. Martin Luther King, Jr. as cited in Barnes, 2001 , “the ultimate measure of a person is not where they stand in moments of comfort and convenience, but where they stand in times of hallenge and controversy’. Effects on the Neighborhood Lending may appear straight forward or black and white but it is not without its negativity. As with many other endeavors, it falls and has fallen victim to discriminatory practices. Much of the discrimination revolves around racial equality and redlining. One race determining their neighborhood should be devoid of any other races or of a particular race.
Not only determining but also having the social and business wherewithal to ensure it becomes a reality. Manuel B. Aalbers (2007) affirmed that “redlining is the process of not ranting mortgage loan applications from specific neighborhoods” (2007;p. 178). The original intent of redlining was to not racially motivated (Holmes, A. ; 2000). Through redlining, neighborhoods Were able to retain their separate but equal faqade. Redlining discriminated based on where the neighborhood was. Mortgage lenders utilized lines of demarcation to maintain segregation. M B.
Aalbers (2007) showed redlining as ‘the interaction between low income, unemployment, or ethnicity on the one hand, and the average value of sold units on the other hand” (2007, p. 177). Although the Supreme Court Civil Rights Cases of 1 883 deterred public segregation, neighborhoods employed the use of racial covenants as a means to discriminate (Durr, 2011). Several laws in concert with Supreme Court rulings were enacted to combat discrimination, such as the Equal Credit Opportunity Act (ECOA), the Community Reinvestment Act (CRA), the Home Mortgage Disclosure Act (HMDA), and Shelley v Kraemer.
The effect of the restrictive covenants was to ensure the neighborhoods remained segregated and reserved for the race or ethnic group it currently encompassed. While corporate America and schools integrated, cities and neighborhoods remained segregated. Contributor to Mortgage Crisis The mortgage crisis of 2008 is credited to creative financing programs, subprime lending and predatory lending. “Under the CRA banks must convince a set of bureaucracies that they are not engaging in discrimination” (Brook, 2008). Essentially, the opposite of discrimination caused the mortgage crisis.
The Community Reinvestment Act (CRA) was enacted to restrict mortgage discrimination and redlining. However, its effectiveness endures the most of fault for causing the mortgage meltdown by encouraging mortgage lenders to relax the stringency of their lending criteria to enable iskier consumers to purchase properties. NO doc and stated doc loans increased consumers buying power and facilitated purchases in more affluent and historically exclusive neighborhoods. Ethical Absolutism Detecting mortgage discrimination and redlining requires documentation throughout the mortgage lending process because such illegalities are not overt.
Regulations such as the Fair Lending Act and the Home Mortgage Disclosure Act were ratified as a means to associate mortgage discrimination and redlining with ethical absolutism – to present them as right and wrong concepts (Seaquist, 2012). In ethical absolutism, fair lending is always a right concept and discrimination is always a wrong concept. Whereas there may be gray areas in law, ethical absolutism allows for “concepts such as good and evil, right and wrong, and justice” (Seaquist, 2012). Discrimination oppresses a group and redlining discriminates against an area or neighborhood (Black, 1999).
Redlining endeavors to maintain less risky loans in affluent and exclusive neighborhoods while approving riskier loans in lower income neighborhoods. Redlining was not historically illegal but always unethical or immoral or wrong. Right is always right and wrong is always wrong. Justice Ethics Because of concepts such as mortgage discrimination and redlining, the government enacted regulations such as the Community Reinvestment Act, Fair Lending Act, Equal Credit Opportunity Act, and Home Mortgage Disclosure Act. These Acts sought to generate fairness in the mortgage lending process.
Fairness is akin to Justice Ethics. Whereas mortgage discrimination strove to render homeownership an elusive dream to citizens who were deemed inferior, the concept of Justice Ethics injected fairness into a racially and ethnically biased process. The Home Mortgage Disclosure Act “rules were refined to require lending institutions … to report on home loan pricing to begin reporting higher-rate loans . on the race and ethnicity of the recipient” (Cocheo, 2005). The Home Mortgage Disclosure Act infuses the mortgage loan process with fairness or Justice Ethics.
Given a choice between right and wrong, and justice or fairness, justice wins. As a business, right is not always legal or ethical and wrong IS not always illegal or unethical. Justice is fair and impartial. Justice pursues the fair and equitable solution to an unfair condition. In mortgage lending, all the consumer aspires to receive is a decision based on fairness. To be assured that any denial is for concrete reasoning and not due to any racial or ethnic biases. Contract Law Governance Mortgage discrimination and redlining, as aforementioned, are governed by various regulations and acts.
In total, they seek to incorporate fairness, justice, and equality in the mortgage lending process. As stated by Jo Ann S. Barefoot, “public policy now views unintentional discrimination just as seriously as the overt, intentional kind” (1999; p. 24). Mortgage lenders must e cautious in every step of the mortgage loan process as any misstep can be construed as discriminatory. Whether it is during application, appraisal, underwriting, or closing, any misstep could be viewed discriminatorily. Jo Ann S. Barefoot (1999) outlined seven risks that the Community Reinvestment Act endeavors to mitigate.
Compliance risk is due a weak compliance program (Barefoot, 1999). Poor compliance programs lead to improper monitoring of fair lending, incomplete or incorrect data storage and quality, and an inability for the business keep up with others in the marketplace and any changes Barefoot, 1999). Overt risk is exhibited when “a reasonable person who knows the market would see them as referring to racial characteristics” (1 999; p. 27). A business is in violation of the Community Reinvestment Act if someone in the mortgage industry (I. e. processor, appraiser, underwriter, closer) could easily determine an item in terms of race.
Underwriting risks are noticed “if lending criteria are vague or subjective, if the bank lacks clear guidance on making exceptions or overrides, if there is poor documentation of lending decisions, and if compensation programs reward high volume” 1999; p. 27). Underwriters must be certain each decision is sound and justified by lending guidelines. The risks associated with pricing include “compensating loan officers or brokers for charging higher rates, using risk based pricing that is not empirically and statistically based, and allowing lenders broad discretion in pricing” (1999; p. 7). pricing affects the interest rate on the loan. The rates assigned by the underwriters must be justified by the set policies for the company. Steering is connected to suggesting or directing the consumer to a specific product that may not be in their best nterest. A product with unfavorable terms could be construed as discriminatory. Redlining is directing the lending dollars away from areas or neighborhoods determined by the institution to be higher risk and lower probability of repayment.
Finally, marketing risk is advertising bank products only in specified areas. The Home Mortgage Disclosure Act provides “the tracking of loans made and denied” (Phillips, 2003). It is the precursor to the Community Reinvestment Act and is in place to ensure that qualified consumers receive adequate financing with reasonable terms and conditions (Phillips, 2003). The Home Mortgage Disclosure Act collects data on all loans to judge the consistency with which mortgage lenders analyze the creditworthiness of borrower regardless of their racial or ethnic background.
Robert M. Silverman (2005) remarked that ‘the proportion of the population (Detroit) that was African American remained a significant predictor of the ratio of mortgages originated to mortgages denied” (2005; p, 537). However, research by Harold A. Black (1999) found “HMDA data do not contain information on data that are important in the lending decision making process such as financial characteristics of the borrower” (1999; p. 5). In and of itself, the Home Mortgage Disclosure Act data is an ineffective means to prove mortgage discrimination.