CHICAGO -- If the banking industry had a red "alert" button, it was pushed with a study by the Federal Reserve Bank of Boston that showed racial discrimination is a fact of life in home mortgage lending.
The Boston bank's one-year investigation, released late last month, concludes that, all other factors being equal, black and Hispanic mortgage applicants are roughly 60 percent more likely than whites to be denied loans.
The study, anticipated by the nation's banks, was the second of a one-two punch to an industry that has long denied that it discriminates. The Boston study, which a spokesman for the U.S. Office of the Comptroller of the Currency was quoted as calling "definitive," came on the heels of a mid-September settlement of a case by the Justice Department against Decatur Federal Savings and Loan Association, a major Atlanta-area mortgage lender accused of discriminating against minorities.
"The study puts to rest the doubts that racial discrimination has existed in lending," said Stephen Cross, deputy comptroller of the currency for compliance management, one of the nation's top banking regulators.
The Fed study was begun after the first national statistics gathered from the Home Mortgage Disclosure Act were released in October 1991. Those figures indicated that black applicants were rejected twice as often as whites for mortgages. But the conclusions were based entirely on race and income level. The data did not include such factors as credit and employment history, total debt and net worth, which are considered in making loans.
Bankers said the data were not meaningful because they did not take into account those key components in judging creditworthiness.
Alarmed that future data also would be so impugned, researchers at the Boston Fed took those factors into account. ++ Working with federal officials, including the comptroller of the currency, they tried to devise a more complete survey.
Using 1990 statistics, they went back to 131 financial institutions, including banks, thrifts and mortgage companies, in the Boston area to ask for more information. They studied more than 38 criteria used in lending and combed the records of 1,100 minority applicants and 3,300 white applicants.
The discrimination gap did narrow with the additional documentation, but it did not disappear.
When all other factors were equal, minority applicants were rejected 17 percent of the time, compared to 11 percent for whites, the researchers found.
"When you took all these things into account, it came down to race," said Lynn Browne, deputy director of research for regional affairs for the Boston Fed.
"One of the insights that came to us is the high degree of discretion in mortgage lending," Ms. Browne said. "We had been under the impression that this was just kind of a checklist they went down and you got a loan or you didn't."
Instead, Ms. Browne and her research colleagues discovered a great deal of flexibility in granting a loan. Only about 20 percent of those applying for a mortgage fulfill the requirement perfectly. The other 80 percent of applicants, whatever their race, have some blemish in their records that might be cause for denial.
"We came away with the feeling that there is a lot of judgment here," said Browne, "where the underwriters sort of go with their gut instinct."
When loan officers are dealing with people similar to themselves, they may see those imperfections as "not that big a deal," Mr. Browne said. When they see those same problems on another application, they may reject the loan.
"I don't think banks are doing this out of a racist motive," Richard F. Syron, president of the Boston Fed, said when the report was presented. "This is part of the deep and insidious difference in the way we look at people on the basis of race."
Mr. Cross agrees. As one of the nation's chief regulators, however, his office examines bank records to guard against such discrimination.
"The vast majority of people applying for a loan have some imperfections in the loan application," Mr. Cross said.
"The study found that disparities came in the treatment of applicants with imperfections and imply that white applicants are given more benefit of the doubt than minority applicants."
The results of the Boston study and Atlanta case did not surprise those active in promoting fair lending in Illinois.
"I think there is an issue of social distance between lenders and people who are asking for loans," said Malcolm Bush, executive director of the Woodstock Institute, a non-profit research group studying community lending. "We tend to lend to those like us. Now is the time for new urgency and new creativity on the part of banks."