When the door is locked to buying a home

By TED SICKINGER - The Kansas City Star
Date: 02/28/99

If you're an African-American or Hispanic seeking a home loan in the Kansas City area, expect lenders to welcome you with open arms.

But no matter how much money you make, you're still more likely than a comparable white applicant to leave empty handed.

Call it discrimination with a smile.

The Kansas City Star has analyzed more than a half million area mortgage applications taken by more than 500 banks and mortgage companies from 1992 to 1997, the latest data available.

That analysis uncovered consistent patterns:

• Banks and mortgage companies still do relatively little business among minorities and in minority neighborhoods. That applies to even the biggest banks, which under law must serve the entire area where they take deposits.

• Lenders still reject minority mortgage applicants far more frequently than whites. Even high-income minorities are rejected more frequently than whites with lower incomes.

• Minorities make up 19 percent of the population in the Kansas City area, but took home less than 9 percent of the mortgage money lent in 1997. For blacks, that ratio was even worse. They make up 13 percent of the area population, but received less than 5 percent of the mortgage money.

• Most loans made in minority neighborhoods refinance existing debt, and are made by companies that often charge higher interest rates and fees. In white neighborhoods, by contrast, most loans are made at market rates and go to buy homes -- the kind of lending that helps borrowers build wealth.

These patterns don't prove illegal discrimination. The numbers behind them don't say much about the properties being financed or the credit histories of the applicants.

But taken with interviews with dozens of loan applicants, bankers, community activists, regulators and researchers, they show that barriers to minority homeownership still stand.

Lending in minority neighborhoods has increased in the last five years. And in lenders' defense, they're in business, not charity. They say lending patterns reflect pervasive inequalities -- lower incomes, higher unemployment and blemished credit histories -- that they alone can't fix.

Lenders also point to their support of special loan programs, redevelopment projects and homeownership training classes. And they emphasize that they receive high marks for their efforts from regulators.

In the end, they say, minority applicants often fail to understand the complex process of buying a home and mistakenly blame discrimination when a lender denies an application.

Indeed, many minority homebuyers do find the process daunting and can't rely on family for advice or financial help in getting a loan.

Evidence in a study by mortgage giant Fannie Mae, however, shows that minority applicants are no bigger risks than similarly qualified whites.

Moreover, blind testing of lenders, government settlements and studies by two Federal Reserve banks show the lending gaps are still too large to be explained away so easily.

And complaints from minority applicants continue.

"The bank was no help in terms of trying to bend over and help us," said Marise Conley, an African-American in Kansas City who filed a discrimination complaint after her mortgage application was rejected by one large local bank but quickly accepted by another.

The first bank "flat turned us down. They acted like they didn't need our business."

Alarmed by the continuing flow of housing discrimination complaints -- nearly 50,000 since 1993 -- the U.S. Department of Housing and Urban Development recently announced a nationwide investigation of the problem.

"Housing discrimination is much more insidious today than it was two or three decades ago," said U.S. Housing Secretary Andrew Cuomo. "Minorities not only face slammed doors but revolving doors, as well -- doors that keep them moving in circles and lead nowhere but to confusion and frustration."

The issue is crucial because homeownership, propelled by that first mortgage, is still the foundation of the American Dream.

The keys to one's own home unlock a series of economic doors, including access to better schools, better jobs and safer neighborhoods.

Equity in a home can secure a business loan, lead to a more comfortable retirement, or help pay for a child's education or home purchase.

The benefits multiply across families, neighborhoods and generations.

Or not.

A tale of two cities

Blatant redlining -- where bankers drew lines around minority neighborhoods and refused to lend there -- is a thing of the past, most experts say.

But if you want to walk the line where the bucks stop in Kansas City, pull out a map and trace a line down Troost Avenue, south of the Missouri River.

Cross from the west to the east -- where most residents are African-American -- and the number of home purchase loans per 1,000 residents drops by 74 percent. Dollarwise, lending almost evaporates.

To a degree, that's logical. Fewer people own homes east of Troost. Fewer people apply for loans. And houses are cheaper.

But residents east of Troost who did apply for home purchase loans were far more likely to be rejected -- three times more likely -- than those to the west.

That gap shrinks when you include applicants for refinancing and home equity loans, but residents east of Troost were still 2 1/2 times more likely to be rejected.

Similar patterns are repeated on the West Side, in the Northeast area of Kansas City and in the Quindaro neighborhood in Kansas City, Kan. -- all areas with a high percentage of minority residents, few loan applicants and higher loan rejection rates.

Those are also Kansas City's lowest-income neighborhoods. But lending gaps are not simply a question of income.

In 1997, lenders rejected 22 percent of high-income black mortgage applicants in the Kansas City area, almost three times the rejection rate for high-income whites, and far more than the 13 percent rejection rate of middle-income whites.

In fact, high-income black applicants were rejected at about the same rate as low-income whites.

And it's not just the neighborhood. Areawide, lenders rejected black loan applicants more than twice as often as whites in 1997.

Among applicants for conventional home purchase loans -- the group of applicants typically cited in national studies -- the disparity was the 11th highest among the 40 largest metro areas in the country.

For blacks, the rejection rate for conventional home purchase loans was 30 percent, vs. 14 percent of whites. Among Hispanics, the rejection rate was 26 percent.

High rejection rates alone don't add up to discrimination. But they do speak to the chronic inability of minorities to build wealth, and they form a potent psychological barrier.

"A lot of the people we see are afraid to go to the banks," said Sandra Rayford of the Black Economic Union, a nonprofit real estate developer on the East Side. "They fear rejection."

The first time Donna and Michael McCarty applied for a home loan, they waited four months for an answer. After assurances from their loan officer, they put a contract on a house. Then they got rejected.

"When we see something now, we hold back 'cause we don't want to go through that pain again," she said.

Community activists acknowledge that income, debt and credit problems account for much of the lending gap.

But not all of it.

"There just aren't that many banks willing to lend in the 'hood," said Emmet Pierson of the Community Development Corp. of Kansas City, a nonprofit developer.

Only a third of the lenders who did business in Kansas City in 1997 made a home purchase loan in a minority neighborhood.

Mortgage companies have no obligation to serve specific areas. And those that buy loans from small banks and brokers often spurn loans below an established dollar amount, said Cary Valentine, a local mortgage broker. He calls that "a camouflage way to redline a neighborhood."

Banks and savings banks are obligated by the Community Reinvestment Act of 1977 to make loans in the communities where they take deposits, but only a handful of small banks have branches in or near minority neighborhoods.

Even the city's largest institutions -- those that do business everywhere -- make few loans in minority neighborhoods. Capitol Federal Savings, the largest mortgage lender in the city and the biggest lender to minorities, took only 2 percent of its 3,542 applications in minority neighborhoods in 1997, and made just 42 home purchase loans.

NationsBank, the city's largest commercial bank, made 35 home purchase loans in minority neighborhoods. Commerce Bank made 10. UMB Bank made two. By contrast, Douglass National Bank, the city's only black-owned bank, and one with less than 1 percent of the assets of UMB and Commerce, made 17 such loans.

Janice Perkins has sold homes in the Kansas City area for 20 years. She says many lenders give the impression that they're reaching out to minority neighborhoods -- and a few truly are. But in her experience, few banks are prepared to process these borrowers' applications in a timely fashion.

And for many applicants, a loan delayed is a loan denied.

Yvette Richards spent seven months getting 'application-ready' for a local bank, with regular help from a loan officer.

When she applied for the loan, however, the bank took nearly five months to approve her application. By that time, she lost the East Side home she had contracted to buy.

When she asked for $3,000 more to purchase the home being built on the next lot, the bank took another three months to approve that loan. Richards ultimately got the loan and bought the house, but she's still incensed about the experience.

"I don't think they cared," she said. "They live in the suburbs, and they think I live in some kind of shack in the inner city."

A cultural gap

According to a 1997 survey by Fannie Mae, nine in 10 African-Americans still feel they suffer from lending discrimination at least some of the time.

But discrimination is different today, minorities say. Instead of overt bias, applicants say they face subtle discouragement, delays and additional requirements -- discrimination with a smile.

"They'll go through the motions of providing you with the information and letting you fill out an application," said Thomas Randolph, executive director of the nonprofit Kansas City Fair Housing Center. "But behind the scenes, there are other things going on that prevent you from getting the loan."

Many Americans have some blemish on their credit reports, such as a late pay or collection. Minorities, however, say they rarely get the benefit of the doubt.

The Federal Reserve Bank of Boston tested that suspicion in a landmark study that examined complete loan files for more than 4,000 applicants.

After controlling for neighborhood, employment and credit, the study found that lenders rejected minorities 60 percent more often than whites, and that "lenders seem to be more willing to overlook flaws for white applicants."

The lending industry and various academics condemned the study. But later research by the Federal Reserve Bank of Chicago affirmed the results and blamed them on a "cultural gap between white loan officers and marginal minority applicants."

Danny Macias, a local real estate agent with a large Hispanic clientele, has stopped sending applicants to banks without Spanish-speaking officers. He says loan officers need to be able to communicate directly with the borrowers and put their background in a cultural context. Otherwise, applicants face skepticism, delays and denials, and may abandon the process altogether.

Richard Lazen says he fell into that gap when he applied for a mortgage pre-approval at Norwest Mortgage Inc. He says the loan officer refused to come to his Midtown home and declined his offer to come to her office.

Instead, she insisted they meet at a local McDonald's restaurant.

A Chilean immigrant, Lazen had changed his name when he became an American citizen and once worked under a different Social Security number. He knew that might make the loan officer uneasy, but says he wasn't prepared for the skepticism he faced when he volunteered the information.

He also was shocked when the loan officer found fault with his English and reprimanded him for an unpaid phone bill on his credit report.

Lazen filed a discrimination complaint with the local office of Fair Housing and Equal Opportunity.

"They asked me if I was seeking financial compensation," Lazen said. "I just wanted to be treated fairly. All I wanted was a loan."

Lazen's application was eventually handled personally by Norwest's branch manager. He has high praise for her courtesy and professionalism. When Lazen was asked to drop the complaint, he agreed.

The branch manager, Marion Mills, said she can't discuss specifics because of Lazen's privacy concerns. But she emphasized that the complaint was withdrawn and that Lazen was ultimately pre-approved for a loan.

Lazen still is convinced, however, that his original loan officer was sending a signal. Minorities say those signals still abound.

A glaring deficiency

Take the lack of bank branches in minority neighborhoods. There are only seven widely scattered branches between Troost, Interstate 435, Independence Avenue and 85th Street, none on the West Side, and only two in the Northeast area.

"It's a glaring deficiency," said Sylvester Holmes, president of the Black Economic Union, which is helping redevelop the 18th and Vine Jazz District and several residential projects. "Bankers no longer have the excuse they did 25 years ago. There are businesses here."

Lenders also do little advertising in minority neighborhoods or in minority media, a point underscored by local advocates.

"Anyone who does retail sales knows that if you're going to sell a product, you've got to sell it," said Michael Duffy, a lawyer at Legal Aid of Western Missouri.

At the largest banks in the area, blacks and Hispanics make up a small percentage of bank employees -- less than 8 percent of the professional and managerial staff at NationsBank, Commerce Bank, UMB Bank, Capitol Federal and Bank Midwest in 1996 and 1997, according to documents filed with the U.S. Department of Labor. Together, blacks and Hispanics make up about 16 percent of the area population.

"When you go into a bank and see people who look like you, you're more comfortable," said Terry Hendricks, a former banker who now runs an assistance program at Community Development Corp. of Kansas City.

Most large banks do employ a 'community reinvestment' loan officer. But that's typically just one officer among many who solicit business in more affluent areas.

Even people who find the right loan officer, enter a special program and follow the guidelines can slip through the cracks.

Deborah Smith went through homeownership training. She painstakingly repaired her credit record, budgeted and saved. The city pre-approved her for its subsidized loan program.

And when she went to NationsBank in May 1997, she says she explained her past credit problems in great detail.

The loan officer assured her that her application looked approvable, and that she should have an answer in two to three weeks, according to the discrimination complaint she filed with HUD.

Five months later, her application was rejected. Weeks after that, Smith learned why in a letter from the bank with several boxes checked -- insufficient credit references, insufficient credit file, limited credit experience, credit problems. "After carefully reviewing your application," it said, "we are sorry to advise you that we cannot grant you a loan."

"I wasn't making a ton of money, but I was making enough," she said.

Commerce Bank's mortgage company thought so. Smith's application sailed through in less than a month.

Lenders typically offer little comment on individual complaints.

NationsBank, however, blames Smith's denial on credit problems. The delay, bank officials said, was probably due to processing bottlenecks following NationsBank's merger with Boatmen's Bancshares.

"Our main objective in this community is to make loans," said Bill Nelson, president of NationsBank in Kansas City. "We do not turn down any (borrowers) for any reason other than credit problems or insufficient income."

To eliminate possible bias, many lenders have adopted review policies for rejected minority applications.

NationsBank reviews rejected minority applications three times -- twice in Memphis, Tenn., and once in Dallas, Nelson said. "We don't do that for someone who is not a minority."

A question of profit

Most large area banks can point to a long list of programs that satisfy the Community Reinvestment Act, a federal law that obligates banks to serve their entire community.

Even then, making the loans isn't easy.

"Nobody is applying in certain areas," said Turner Pettway, who directs homeowner education at the Kansas City Neighborhood Alliance, a nonprofit developer. "The desperation for lenders is that, 'I've got to have these dots on the map. I've got to have loans in this neighborhood.'"

Responding to pressure from community groups, UMB Bank committed two loan officers specifically to low-income and moderate-income lending in 1995 and 1996, said Reggie Smith, senior vice president in UMB's residential lending department.

"The volume we got didn't justify two people," he said."It was nowhere near what you'd get from the same two people in another area."

Moreover, lenders say many of the low-income applicants they do get are one paycheck away from a credit crisis. Those kinds of borrowers are poor risks.

Banks also must consider the neighborhood risk. When a bank lends in a distressed neighborhood -- even if the home is new -- the value of its collateral might fall over the long term.

Also, many borrowers are making low down payments or getting grants for their closing costs. If something goes wrong, they have little of their own money committed to the home.

Even if the borrower pays like clockwork, the loan may not be profitable. "The paperwork for a $20,000 loan and a $200,000 loan are the same," said Dwight Johnson, president of Creative Capital Investment Bancers, a minority-owned mortgage firm. "But a broker makes $400 on the $20,000 loan and $4,000 on a $200,000 loan."

"It's no mystery which one everyone wants to do," he said.

Commerce Bank of Kansas City has pushed hard to increase its low-income and minority lending through citywide partnerships.

But it costs $1,600 to originate even a $40,000 mortgage loan, according to industry surveys. When Commerce sells that loan on the secondary market, it might receive just $450.

"This is not considered a profit-making area of the bank," said Jonathan Kemper, chairman of Commerce Bank of Kansas City.

Nor is the proposition to put branches in distressed neighborhoods, said Nelson.

According to NationsBank's analysis, it would take 10 years for a new inner-city branch to break even.

"We like to see a branch turn a profit in three years," he said. "We could live with five. It's difficult when you're looking at 10 years."

Kicking doors open

From 1992 to 1997, the number of home purchase loans made annually to African-Americans in Kansas City has almost tripled. But that amounted to just 1,622 loans in 1997, compared with 25,243 made to white borrowers.

Community groups praise banks for the lending increases, but say banks can't take all the credit, or rest on their past performance.

"They don't do these reinvestment programs of their own volition," said Jefferson Edwards, head of the banking committee at the Concerned Clergy Coalition in Kansas City.

After watching several local lenders backslide on verbal commitments to increase inner-city lending, Edwards said, the clergy group started issuing annual "report cards" that grade lenders' reinvestment performance.

"If you don't keep the pressure on," he said, "they go back to business as usual."

For many borrowers, the doors to homeownership have been kicked open by public loan programs that reduce lenders' exposure and risk on inner-city loans.

The Housing and Economic Development Financial Corp. has helped banks make about 800 such loans in Kansas City since 1992 -- loans that have shown strong performance and generated profits for lenders.

"We've made a dent," said Joe Egan, chief operating officer. "But when you look at the volume of lending in this city, it isn't much."

Consequently, decades after fair lending and community reinvestment laws were instituted, community groups say their basic concerns have not changed.

The homeownership rate among African-Americans in the Kansas City area remains anchored at 45 percent, vs. 71 percent for whites.

Those numbers have long-term implications for the urban core as it struggles to retain residents and rebuild its tax base.

Moreover, community groups bemoan the megamergers and consolidations that are remaking the lending industry. They fear it will ultimately amount to a loss of local control and a lack of commitment to community reinvestment.

Said Roy Fowler, a consultant for the Urban League of Greater Kansas City, "Until an African-American or Hispanic consumer can walk into a major financial institution and be treated as a serious consumer, versus one they're forced to work with, you're going to keep seeing what you've got."