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Here’s Why Big Banks Are Lending to Fewer Blacks and Hispanics

Long Term Mortgage Rates Fall To Historic LowsLong Term Mortgage Rates Fall To Historic Lows
A pedestrian is reflected in a window as he walks by a sign displaying mortgage rates inside a Citibank office on June 7, 2012 in San Francisco, California. Justin Sullivan — Getty Images

It’s hard to get a mortgage today, particularly if you are black or hispanic.

That’s according to an analysis by the Wall Street Journal, which looked at more than 38 million mortgage loan applications filed between 2007 and 2014, finding that during that time the percentage of overall mortgages issued to African Americans fell to 5% from 8%, while the overall percentage of mortgages issued to Hispanics fell to 9% from 11%. During the same period, the share of loans going to whites increased by 5 percentage points, while Asians also saw their share of mortgages increase.

The data, which was culled from reports filed to the government under the Home Mortgage Disclosure Act, may come back to haunt America’s banks as they try to grapple with the dual government mandates to both make their balance sheets less risky as well as not discriminate against potential customers based on race. One strategy large banks have taken in order to reduce their risk is to increase the share of “jumbo” mortgages they issue, or loans that are too expensive to be bought by Fannie Mae and Freddie Mac. These loans have been popular with lenders since the financial crisis because the wealthy borrowers who use these products have seen their incomes rise of late, while the vast majority of American workers have been struggling to improve their financial situations.

Federal legal doctrine dictates that even if a bank applies the same standards to all it’s customers, it can still breaking the law if that standard results in fewer loans on average to a particular group. For instance, a bank cannot refuse to lend to anybody who earns less than $200,000 per year if the effect of that policy is racially discriminatory.

These regulations, combined with other post-crisis regulations, have created a conflict between trying to meet obligations to not be discriminatory and trying to have a safer balance sheet by lending to less risky borrowers. “It’s one of those damned if you do, damned if you don’t situations,” Stu Feldstein, president at SMR Research Corp., a mortgage-research firm in Hackettstown, N.J, told The Wall Street Journal.

At the same time, not all banks are showing the same results. Wells Fargo (WFC) was able to increase the share of hispanics it lent to between 2007 and 2014. The Journal also cited the example of Luther Burbank Savings of Santa Rosa, Calif., which has increased its outreach to hispanic communities and was able to increase the share of its loans to that group to 22% from 12%.