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Discrimination in Financial Services & Real Estate

Financial Services and Real Estate Discrimination

In the wake of the collapse in the subprime mortgage market, government agencies and private fair housing organizations are increasing their scrutiny of participants in financial services and residential real estate markets. The US Department of Justice has established a new Fair Lending Unit, private fair housing groups are receiving increased funding, and HUD is giving more attention to fair housing issues in its administration of community development grants

More About Discrimination In Financial Services & Real Estate

Case Insight: Redlining in Homeowners Insurance

 

An insurance company was sued by a fair housing group over the underwriting criteria it had used in the past to determine which applicants would get access to homeowners policies with replacement cost. These policies would insure the homeowner against losses up to the replacement cost of the home, as opposed to market value policies, which covered losses only up to the market value of the home. Plaintiff alleged that the restrictions violated the Fair Housing Act in that they had a disparate impact on minority homeowners in five metropolitan areas.

In the past, the defendant had a number of restrictions on access to replacement cost policies. For example, it had required that homes be insured for at least $60,000 and be under 30 years of age. The defendant removed these restrictions in stages, and the last were removed three years before the filing of the suit. Nevertheless, plaintiff argued that the restrictions had a disparate impact on minority homeowners. Plaintiff supported this claim with statistical evidence indicating that the defendant insured a lower percentage of homes in neighborhoods with high minority representation than in neighborhoods that were predominately white.

One of the counterarguments to this claim was that economic factors were primarily responsible for the disparity in policies sold in high-minority versus primarily white neighborhoods. Replacement cost policies cost more than market value policies. On average, minority homeowners had less income and wealth than white homeowners and would therefore prefer to purchase lower-cost insurance.  

To test this proposition, we compared the percentage of policies in minority neighborhoods before and after the removal of the underwriting restrictions at issue. The change in each of the five metro areas is shown in the chart below. The results show no consistent pattern of increases in business in minority neighborhoods after the removal of the challenged guidelines. Only in MSA 1 did the percentage of policies in minority neighborhoods increase to a statistically significant degree. In MSA 4 the percentage decreased significantly.  In the other MSAs the changes were not statistically significant.

We did similar comparisons for 19 other MSAs that were comparable to the five identified by the plaintiff.  In only two of those did we find a statistically significant increase in the percentage of business in minority neighborhoods. Thus, we concluded that the criteria challenged by the plaintiff did not have a systematic effect on minority purchases of homeowners insurance from the defendant.

Financial Services Representative Engagements

In a national class action, plaintiffs alleged that use of credit scores to price homeowners insurance had a disparate impact against minorities. Welch Consulting was retained by the defendant to provide statistical support for the business justification portion of the defense. In our review of the claims history of policies in five metropolitan areas, we found a strong and statistically significant correlation between the credit score and claim activity. This relationship, which took other factors used in pricing and underwriting into account, was observed for every type of coverage in each of the metropolitan areas studied.

 Welch Consulting was retained by counsel for a suburban county when a local fair housing group alleged that municipalities in that county were not “affirmatively promoting fair housing,” as required of recipients of Community Development Block Grants. The plaintiffs cited residential segregation in the county as evidence of discrimination. Welch economists challenged the index used to measure segregation and produced studies showing that choice, preferences, and wealth explained the distribution of families across neighborhoods.

Welch Consulting was retained by counsel for an insurance company to address allegations of redlining by a fair housing group, which charged that the company’s eligibility criteria disproportionately restricted the availability of full replacement cost homeowners coverage in minority neighborhoods. Our economists showed that the distribution of replacement cost policies was actually higher in minority neighborhoods than white neighborhoods. He also pointed out that in the absence of the restrictions the company would be vulnerable to elevated losses arising from moral hazard and adverse selection.  In the order granting summary judgment the judge cited the economists' discussion of moral hazard. 

Welch Consulting was retained by attorneys for a national insurance company to address a fair housing group's allegations of disparate impact and redlining. The plaintiff alleged that certain guidelines reduced the numbers and quality of policies sold in minority neighborhoods in five metropolitan areas. Our studies found that removal of these guidelines did not result in significant changes in the types of policies purchased in minority neighborhoods. We also showed that there was not a consistent pattern in the disparities between white and minority neighborhoods that was common to all five metropolitan areas.  

The US Department of Housing and Urban Development (HUD)retained Welch Consulting economists to conduct studies on the government sponsored enterprises (GSEs) that support the residential mortgage market. Our economists contributed to reports on the Federal Home Loan Bank System and on Freddie Mac and Fannie Mae. These reports were published by HUD in 1994 and 1996, respectively.  

Beginning in the late 1990s, Welch Consulting was retained to conduct a series of analyses for a government sponsored enterprise. In one study, Welch economists analyzed how HUD defines “underserved areas” in its goals for lending to minority and low-income borrowers by GSEs. In another, Welch economists used Home Mortgage Disclosure Data (HMDA) and Census data to analyze the effect of increased lending goals for underserved areas set by HUD. Another report, which was coauthored by former OMB Director James C. Miller, III and was distributed to congressional staff and the financial media, assessed the relative costs and benefits of federal sponsorship of the GSEs.