CRA*NC says Freddie Mac drew faulty conclusions in minority credit study

PRESS RELEASE from CRA*NC - 9/27/99

A press release issued by Freddie Mac on September 2, 1999 draws faulty conclusions about the credit ratings of African-Americans. This press release was picked up by most major news outlets, which reported from the press release that African-Americans have worse credit than white are more likely than white borrowers to experience credit problems: 47 percent of African-American borrowers have 'bad' credit records and 34 percent of Hispanic borrowers have 'bad' credit records, compared to 27 percent of white borrowers."

The press release stated that "poor credit is especially a problem in the African-American community," and that it is a "leading factor" in the differential between white homeownership rates (72%) and black homeownership rates (47%).

Although the study has not yet been written (we were told it would not be available until January) the Executive Summary of the report is available. Contrary to the press release, the Executive Summary of the actual report states that the percentages reported are survey respondents' perceptions of their credit, not their actual credit ratings. The report justifies using respondents' perceptions of their credit as reality by stating: "The
[survey] shows that, in general, people have a reasonably accurate sense of their credit records," and provides examples of this fact.

However, in the next paragraph, the report states that "22 percent of African-American respondents with 'good' credit self-assess their own records as either 'bad' or 'very bad.'" This fact is not taken into account anywhere else in the report. If it had been, the percentages of African-Americans with bad credit would be more in line with white borrowers.

The CCS Executive Summary goes on to imply that the cause of American-American credit problems is due mostly to poor spending habits and lack of financial knowledge. There is no mention anywhere in the report of the effects of historic or current discrimination on credit ratings or ability to buy a home.

Freddie Mac recently performed a different study of the subprime loans in its portfolio that showed that 63% of subprime borrowers had A-minus credit ratings, and at least half of these could have gotten an A-credit conventional loan. Giving an A-credit borrower a subprime loan is a predatory lending practice. When borrowers are overcharged this way because of their race, sex, national origin, handicap, or age, it is a
violation of the fair lending laws.

Although presumably Freddie Mac had the ability to look at race as a factor in their research on subprime borrowers, they did not include race as a part of their report. However, CRA*NC's research on subprime lending leads shows that most of these subprime borrowers with good credit are African-American. Because of a history of redlining and discrimination against minorities by mainstream financial institutions, as well as the reality that discrimination still exists, African-Americans often go directly to subprime lenders for loans, even if they are qualified for A-credit products.

Unfortunately, these borrowers are trapped into the subprime market. Even if they have never had a late payments, merely having a subprime loan lowers their credit score. Also, many subprime lenders do not report the good payment history of their borrowers to credit bureaus, in order to prevent their customers being targeted with advertising by other lenders.

Greentree Financial, a subprime lender that has the largest market share of American-American borrowers in the state of North Carolina, recently admitted publicly that it does not report the good payment.

This press release was meant to be an announcement of a new Freddie Mac Consumer Credit Initiative in partnership with five Historically Black Colleges and Universities (HBCUs). Freddie Mac is launching a consumer education campaign to boost minority homeownership. While we applaud the goal of financial literacy, we have serious concerns about the racial stereotypes Freddie Mac is reinforcing with this press release.

Peter Skillern, Executive Director
Jeanette Bradley, Program Director
Community Reinvestment Association of North Carolina (CRA*NC)