Minorities with marginal credit ratings are more likely to have their home loan applications rejected by both minority-owned and white banks, according to a national study by a University of Southern California economist. Raphael Bostic, director of the Casden Real Estate Economics Forecast at the USC Lusk Center, compared lending patterns of 75 minority-owned banks with those of white-owned banks in the same areas. "This study sought to debunk a widely held belief that lenders have a preference for members of their own race. We showed that bank underwriting standards are consistent across lenders and are not influenced by the lender's ethnic background," Bostic said. "But the results did show that minorities steer their applications to same- ethnicity banks. Consequently, the loan rejection rates at minority-owned banks are higher than those of white-owned banks," he added. The study was based on data reported to the U.S. Treasury Department by banks having a majority black or Asian ownership. Hispanic and Native American- owned banks are much fewer in number, thus precluding their inclusion in the study, Bostic said. The study suggests that banks might want to develop more flexible ways of judging loan applications because ability to pay and maintain credit varies among different populations. "A smaller down payment is not always a red flag for lower-income applicants. They often make sacrifices to stay in the home, curtailing spending so they can make the house payment. "In fact, low-income borrowers prepay less frequently and don't refinance as often, providing steady streams of income for banks," Bostic said. E-mail Richard Paoli at rpaoli@sfchronicle.com. ©2002 San Francisco Chronicle
June 13, 2002