Overview:
Pricier loans add up to tens of thousands of dollars more in costs than for white borrowers, according to an analysis of Bank of America, Citibank and Chase lending.
Three major banks charged Black homeowners in New York City more interest on their mortgages than they did white borrowers, according to a new analysis of loan data by The New Economy Project, a racial and economic justice advocacy group.
At Bank of America, Citibank and JP Morgan Chase, white borrowers received interest rates of 3.77% on average compared to 4.13% for Black borrowers between 2018 and 2023. Other non-white borrowers received an average interest rate of 3.83% during that time period.
(JP Morgan Chase is a corporate sponsor of THE CITY; see our ethics guidelines here.)
The discrepancies will result in Black homebuyers paying an estimated $31,200 more in interest on average over a 30-year mortgage compared to white buyers, the analysis found.
The analysis crunched data lenders provide to comply with the federal Home Mortgage Disclosure Act, which shows home lending activity for each census tract by race of the borrower. Since the data does not include information about borrowers’ credit scores, a key factor affecting interest rates, the analysis considered income and debt levels, and found the disparities still existed: White borrowers who earned less than $100,000 had an average interest rate of about 3.93%, compared to 4.20% for Black borrowers who earned more than $100,000.
Further, the analysis found that the three banks denied Black homeowners refinancing almost twice as often as white homeowners. Nearly a quarter of Black homeowners were rejected when they tried to refinance, compared to just under 13% of white homeowners.
“Black borrowers are getting stuck with those higher interest rates during times of generally higher interest rates, and then interest rates fall and they try to refinance, but they can’t, while white borrowers can,” said Will Spisak, a senior program associate with the New Economy Project.
The three banks in the analysis hold most of New York City’s government deposits, and Spisak suggested the city could use its leverage to hold the banks to task.
Bank of America and Citibank declined to comment. JP Morgan Chase criticized the analysis.
“We agree that equitable home lending is non-negotiable,” a spokesperson said in a statement, “but this analysis misrepresents the situation by ignoring key factors like borrowers’ credit scores or properties’ loan-to-value ratio.” (The loan-to-value ratio reflects how much of the purchase price has to be financed by borrowing — the bigger the down payment, the more favorable the ratio.) Lenders take credit scores and loan-to-value ratios into account when determining whether to lend and the terms of the loans.
Redlining and Banking Deserts
The Consumer Financial Protection Bureau has pointed out that Black and Hispanic borrowers overall have lower credit scores than white borrowers, which may help explain certain disparities in lending rates and decisions. Lower credit scores may lead to higher interest rates and rates of refinancing denial for borrowers of color.
But some scholars and economists have argued the scoring ignores a history of discrimination that helps account for why people of color may have lower scores. Redlining by lenders in the 20th century prevented many non-white people from building home equity, a significant source of generational wealth that can help future generations make substantial down payments. Employment discrimination and “banking deserts” also play into financial disadvantages and a lack of resources for non-white people.
For individuals navigating the home lending market, it can be hard to understand what they may be up against or compare their interest rates to others’.
A first-time homebuyer and management consultant, Vicky Morgan said she had “excellent” credit and a great job when it was time to purchase a house in Cypress Hills, Brooklyn. She secured a 4.25% rate on a mortgage in 2020.
“I’ve always suspected that I had a higher rate than everybody else at that time, but I couldn’t prove it,” said Morgan, who is Black.
Average rates at the time hovered just over 3%, according to Freddie Mac data.
Previous reports, news articles, and research have also found discrepancies among races in mortgage interest rates and mortgage denials.
“It’s really embedded in the system that we perceive higher risk for non-white borrowers and higher risk in non-white communities, and that tracks whether it’s in the form of an interest rate, lower origination rates, great, higher denial rates,” said Charu Singh, CEO of Just Value, a company that uses technology and alternative data models to more accurately appraise homes, correcting for racial bias that can prevent borrowers from accessing financing.
One 2023 paper showed Black and Hispanic borrowers tend to pay higher interest rates on mortgages than white and Asian borrowers, in part because Black and Hispanic borrowers are less likely to refinance their mortgages when interest rates fall.
“The fact that non-white households aren’t capturing the benefits of lower rates to the same extent as white households is definitely exacerbating inequality,” said Kristopher Gerardi, a research economist at the Federal Reserve Bank of Atlanta and one of the paper’s authors.
Banks set their own mortgage interest rates, taking into consideration a borrower’s income, debt and credit score, but those collectively rise or fall with federal rates. In September, the Federal Reserve Bank slashed its interest rate by half a percentage point. More cuts may follow.
The racial wealth gap could become even more yawning if homeowners do not — or cannot — refinance at the lower rates created by the recent federal rate cut. Prospective borrowers can keep an eye on mortgage rates using tools like Bankrate’s history tracker and Freddie Mac’s survey.
The New Economy Project advocates for the creation of a public bank to hold municipal deposits and facilitate lending at affordable rates in lower-income, majority non-white neighborhoods. Already some lenders are beginning to employ credit rating systems that incorporate data about rental and utility payments, which some have argued can provide greater opportunities to establish a payment history for those with low or no credit.
Some banks run programs designed to support interested non-white homebuyers through the lending process. JP Morgan Chase, for instance, employs advisors who work with underserved communities and offer mortgages with small down payments to prospective homeowners with limited assets.
“What we really need are new models and new tools that we should be testing in the market,” Singh said.
