In October of next year, the Equal Credit Opportunity Act of 1974 will mark its 50th anniversary. This landmark legislation prohibits lenders from discriminating against a borrower on the basis of gender or marital status, and it was amended in 1976 to protect against other forms of discrimination, including race, age and religion.

“Mortgage professionals, as the face of the business, have a responsibility to champion equal access and financial literacy.”

The impact of the ECOA is evident today. Single women now outnumber single men as homebuyers. Women are earning more bachelor’s degrees than men and their average credit scores are identical. But obstacles still exist as women face pay gaps, sexism, harassment and a gender gap in financial literacy.

As women have evolved from second-class citizens to breadwinners, the mortgage industry also needs to evolve to serve and educate them with safety and respect. Mortgage professionals, as the face of the business, have a responsibility to champion equal access and financial literacy.

Financial history

In 1853, suffragist Susan B. Anthony wrote that a “woman must have a purse of her own, & how can this be, so long as the wife is denied the right to her individual and joint earnings.” By 1890, 20% of women were wage earners. And by 1900, all states had passed laws allowing married women to retain ownership of property and real estate.

This allowed them some control over their wages, but banking services were nearly impossible to access. A few banks ran so-called “ladies’ departments,” and in 1919, the First Woman’s Bank opened in Tennessee. Still, these services were available almost exclusively to upper-class white women, and it wasn’t until the 1960s that women were given legal access to banking products.

Hurdles continued. Even with legal access to bank accounts, lines of credit and loans, most institutions still required a male co-signer. This largely prevented independent women — single, divorced or widowed — from participating.

The 1970s were a turning point for women’s rights, including financial rights. In 1971, the Supreme Court unanimously ruled that “dissimilar treatment on the basis of sex” between men and women was unconstitutional. Amendments to the Civil Rights Act protected women from discrimination in hiring and firing. And in 1974, the ECOA was passed, barring lenders from requiring a male co-signer and limiting them to only consider creditworthiness when reviewing applications.

Financial literacy

To take advantage of access to financial products, including mortgages, clients must be educated about them. A TIAA Institute study found that women lag behind men in financial literacy while Black and Hispanic women lag behind their white peers. The study also found that financial wellness was higher among those with higher financial literacy — meaning that the more educated you are, the more creditworthy you’ll be.

Picture a divorced woman in the rapidly changing world of the 1970s and ‘80s. Most of her adult life was spent sharing finances with her husband, who had control of the accounts. She now has to figure out how to support herself for the first time, and despite the pain and hardship she experienced in her marriage, she asks her ex-husband for an alimony increase because she needs money.

 You might be confused by this approach. Why would she ask her ex-husband for money when she could start working or reach out to family for support? This woman had the means to overcome any financial hurdles she faced. The problem was, she didn’t know her options, and she was frozen in a certain mindset — almost as if financial independence wasn’t even an option to consider.

This perspective likely sounds foreign to a mortgage professional with extensive financial education, but it was a reality for millions of women, for many years. Women today make more money than ever, but they still earn less than men. They have improved their financial literacy, but that isn’t equal either. Mortgage originators can help bridge this gap so that women can take control of their financial destiny through education.

Response to misogyny

Recently, a video was posted to Instagram discussing the profound changes that occurred due to the passage of the ECOA. The video highlighted the liberation women experienced when they were no longer required to have a male co-signer for a credit card and mentioned the increase in single female homebuyers.

Responses to the video were far from expected. The comments section hosted an onslaught of derogatory remarks, rife with misogyny and offensive generalizations about women’s spending habits and financial means.

Women thriving in male-dominated industries are not strangers to what some consider socially acceptable misogyny. This manifests in meetings where men heavily outnumber women, with vague innuendos and/or outright sexist comments. It’s expected and tolerated, so women go into these situations prepared. The initial approach is observation — to look for contextual clues of who will regard them as an equal and who might not. Then they handle conversations accordingly and move on.

“When driven by a clear vision and purpose, external criticism loses its power. Focus on the betterment of your community.”

Although women often possess the resilience to handle such situations in a professional setting, more direct online vitriol — like the comments on that video — are not only personally hurtful but also a stark reminder of the misogyny still present in some circles. A woman not normally exposed to such toxicity may not be prepared to combat it. But she certainly would not want to perpetuate it either. Her first reaction might be to close the comments or take down the video altogether.

But she should not let this undermine the video’s message or erase positive responses to it. The video was a worthy history lesson highlighting the importance of financial equality. It was intended as encouragement to other women and its message shouldn’t be silenced by anonymous bullies. The creator left the video up, and decided to rebuke and refute. The disgusting comments finally stopped and the supportive ones started showing up. This reaffirmed the importance of the video’s message: advocate for financial equality and challenge stereotypes.

This experience is not unique: According to the Pew Research Center, 41% of Americans have experienced online harassment. Sixty-one percent of women polled thought it was a major problem, with 48% of men in agreement. Social media platforms have even been called out by international governmental organizations as a “conveyers of sexist hate speech.”

If this can affect something as simple as a financial education video, it should serve as a call to action for mortgage professionals who don’t conform to dated gender norms. You are a front-line resource for equal access, education and financial literacy.

What’s next?

Although many originators serve a diverse clientele, female clients appreciate working with someone who understands their unique challenges. In a 2013 Insured Retirement Institute study, 70% of women said they prefer to work with a female financial adviser.

A 2022 survey by Edelman Financial Engines shed more light on this statistic. In the Edelman study, 82% of people said they prefer to work with a financial adviser who shares a common background or beliefs. Women want to work with women because they feel safer. They aren’t placed in yet another situation where time and energy are spent deciding whether a person’s smile is genuine, or if it’s hiding opinions like those in the Instagram comments section.

Women are mothers, sisters, wives, daughters and friends. They make up roughly half of every community, they are breadwinners, and they deserve the same rights and privileges as men. Any mortgage originator can make their business a safe and comfortable place for women by actively advocating for them. Explore your own biases and thoroughly educate your female clientele to help them get approved. Ally yourself professionally with women’s groups, or host workshops for young, single people of all genders.

Many originators already contribute to this transformation by sharing their knowledge on platforms like social media. As your influence grows, however, so may the backlash from those invested in maintaining the status quo. Standing out invites scrutiny and attempts to diminish your voice, but you cannot be silenced.

When driven by a clear vision and purpose, external criticism loses its power. Focus on the betterment of your community. Your voice matters and your community needs your insights. By embracing authenticity and refusing to conform, you ensure that your message of financial empowerment reaches those who truly need it.

Resist the urge to shrink back. You deserve to be heard and your community needs to hear what you have to say. The journey to financial equality continues and you, as financial professionals, must not let bullies deter you from the path of progress. ●

The post Viewpoint: Path of Progress appeared first on Scotsman Guide.

People can debate the impact of the federal law for banks — whether it has any teeth or whether it makes any difference with respect to mortgages. What seems clear, however, is that it makes no sense to try to adapt the same law — which was specifically designed for banks with branches and deposits — for independent mortgage banks (IMBs). This is the epitome of trying to fit a square peg in a round hole.

The Community Reinvestment Act was designed to prevent banks from taking federally insured deposits from underserved communities and diverting them to provide credit in wealthier communities. But independent mortgage banks don’t have access to insured deposits, to Federal Home Loan Bank advances or to the Federal Reserve’s discount window.

“Year after year, (independent mortgage banks) decisively outperform banks in originating mortgages to minorities.”

Independent mortgage banks don’t take money out of underserved communities. They bring mortgage credit into underserved communities by accessing Ginnie Mae mortgage- backed securities, cash windows from Fannie Mae and Freddie Mac, or by selling loans to aggregators. Unlike banks, only a small fraction of the mortgage business for these institutions is generated through physical offices.

Most importantly, there is no evidence that IMBs fail to work with underserved and minority borrowers. Year after year, these financial companies decisively outperform banks in originating mortgages to minorities (e.g., see the annual reports from The Greenlining Institute) and to underserved borrowers (e.g., see the monthly reports from the Urban Institute).

Unlike banks, independent mortgage banks generally do not impose credit overlays, or additional guidelines to prevent default, which in effect limit loans to wealthier borrowers. And unlike correspondent lenders such as Wells Fargo, independent mortgage banks don’t exit the mortgage market when times get tough.

Simply put, CRA statutes for independent mortgage banks are solutions in search of problems. Still, with states like New York and Illinois joining Massachusetts in adopting legislation, this seems to be a trend. So, let’s take a look at what these states have done and what the likely impact will be.

Massachusetts experiment

Advocates of CRA for independent mortgage banks point to Massachusetts, which adopted its law in 2007. Let’s take a look at how this turned out. Home Mortgage Disclosure Act data for Massachusetts since it adopted CRA for nonbanks (2020 versus 2008) showed that growth in nonbank lending within the state significantly trailed the national average.

When Massachusetts adopted its CRA, the 26% independent mortgage bank share of mortgages in the Bay State in 2008 was above the national average of 24%. Twelve years later, however, the IMB share of mortgages in Massachusetts (55%) had fallen significantly below the national average of 63%.

In these 12 years, the IMB share of mortgages to low- and moderate-income borrowers in Massachusetts increased from 27% in 2008 to 62% in 2020, while the national average of IMB lending to such borrowers increased at a faster pace, from 29% to 67%. The IMB share of mortgages to borrowers of color in Massachusetts increased by the same percentage (from 27% in 2008 to 62% in 2020). But the national average of IMB lending to minority borrowers increased even more rapidly, from 33% to 71%.

You can’t pinpoint cause and effect here. But clearly, the Massachusetts experiment has not lived up to its billing. And it is possible that the Massachusetts CRA was a factor in discouraging IMBs from coming into the state to make mortgages.

Plaguing questions

New York’s CRA law was enacted in 2021 and went into effect one year later on Nov. 1, 2022. It directs the superintendent of the New York Department of Financial Services (DFS) to assess the performance of a mortgage banker in helping to meet the credit needs of their entire community, including low- and moderate-income neighborhoods.

Specific factors to consider in this assessment include efforts taken by the mortgage banker to ascertain the needs of their community; marketing to members of their community; community outreach and educational programs; participation by management; any practices intended to discourage applications; and the geographic distribution of loan applications and denials. The New York state law also requires DFS to monitor the mortgage banker’s record of opening and closing offices; its participation in government-insured, guaranteed or subsidized loan programs; and the mortgage banker’s ability to meet community credit needs based on their company’s financial condition, size, legal impediments and local economic conditions.

The law provides for the assessment and all communications by DFS to be available to the public upon request. Furthermore, the superintendent may conduct public hearings when an objection to an application has been submitted. Therefore, in addition to the normal risks associated with noncompliance, there is a substantial reputational risk for failure to meet the department’s standards.

A fundamental question raised by this law is what constitutes the “community” of the mortgage banker. Under the federal Community Reinvestment Act, regulators such as the Office of the Comptroller of the Currency have defined the assessment area of a bank based in part on the location of its principal office, branch office or another deposit-taking facility. 

A mortgage banker who is licensed in New York is not required to maintain an office in the state — and many do not. What is the “community” in New York for an out-of-state mortgage banker? The industry will look to DFS for clarity in areas such as this, as this is the sort of question that plagues any state-based effort to apply CRA to independent mortgage banks.

Recipe for retreat

The Illinois CRA was signed into law in March 2021. In December of last year, the state released draft regulations on how to implement the law. This draft exemplifies the problems of applying CRA to independent mortgage banks. The proposed regulations show a fundamental lack of understanding of these financial companies’ business models.

For example, one assessment criteria is “innovative or flexible lending.” So, will an independent mortgage bank that overwhelmingly originates Federal Housing Administration (FHA) or U.S. Department of Veterans Affairs (VA) loans — which include low- or zero-downpayment terms designed for underserved and first-time homebuyers — be penalized because they are not “innovative” or “flexible”?

“For states determined to adopt CRA, it matters how they do it. There should be appropriate volume-exemption levels to avoid deterring nonbanks in nearby states from deciding to lend in that state.”

The same goes with requirements for loss mitigation. Independent mortgage banks predominately originate FHA, VA and conventional loans that have the strongest loss-mitigation requirements — much stronger than banks typically have. As long as an IMB follows these requirements, it makes no sense to have an additional test.

The regulations show a bias toward banks and against IMBs. They disallow credit for loans that independent mortgage banks originate and sell to banks, if a bank claims federal CRA credit for the same loan. This is backward. The loan would not have been made if the IMB didn’t originate it. And if a specific bank didn’t buy an FHA, VA or conventional loan, another bank would have done so.

Finally, like in New York, the Illinois regulations are unclear as to whether they impose a requirement that if a lender enters a state, it has to serve all geographic parts of the state. Combined with low loan threshold for CRA applicability, and new CRA exam costs and burdens, this is a recipe for discouraging lenders in adjoining states from expanding into Illinois.

Sensible alternatives

There are more effective ways for states to encourage mortgage lending to minority and underserved borrowers. For example, one way to generate more mortgages to minority borrowers is simply to have more minority loan originators. 

The Secure and Fair Enforcement for Mortgage Licensing (SAFE) Act creates high qualifications standards for independent mortgage bank originators. This is fine, even though for some reason the standards are much lower for bank-based originators.

But states should also look at ways to lower the hurdles for a nonbank originator to become licensed. States should waive SAFE Act exam fees and subsidize these courses for minority and low-income originator candidates. Additionally, states should not deny licenses to loan originators who have blemishes on their credit reports, which have nothing to do with their qualifications to be an originator.

For states determined to adopt CRA, it matters how they do it. There should be appropriate volume-exemption levels to avoid deterring nonbanks in nearby states from deciding to lend in that state.

The CRA process should be streamlined with appropriate safe harbors. If an IMB has loan statistics showing they are adequately serving low- and moderate-income borrowers, they should not have to undergo extensive and costly exams. And these institutions should not be forced to contribute to community development funds of nonprofits, because that is not their mission.

Finally, to other states considering the adoption of CRA for independent mortgage banks, consider one thing: Look before you leap. This all sounds like a good idea. But you will discourage the very thing you want to encourage. ●

The post This Fix Fails to Solve the Problem appeared first on Scotsman Guide.