Discriminatory Effects of Credit Scoring / page 18 National Fair Housing Alliance
The payment history component of the score includes information about whether borrowers
make timely debt payments, including some subprime loans. As mentioned above, subprime
loans carry much higher default and delinquency rates
– not necessarily because of the
borrower traits, but more often because of the aspects and features of the loans themselves.
Because African-Americans and Latinos are targeted for subprime loans, the data suggest that
these groups will undoubtedly experience higher rates of poor performance in payment history.
A unique study that compared two similar groups of low- and moderate-income borrowers
demonstrates this point.
The study compared two mortgage loan portfolios, one comprised of
loans made through a program that provided low-cost fixed rate loans, and the other a portfolio
of subprime loans.
Using propensity score match methodology, the researchers were able to
isolate borrowers with similar characteristics in the two groups. The divergent variables
between the two groups were the loan terms and conditions, and the channel borrowers used to
obtain the mortgages. While the traits of both groups of borrowers were similar, the loan
performance outcomes were not. The default rate for the subprime portfolio was four times
higher than that for the lending program portfolio for low- and moderate-income borrowers.
Moreover, the study found compelling evidence that loan characteristics and origination
channel had a significant impact on loan performance. Specifically, the existence of prepayment
penalties, adjustable interest rates, and elevated costs negatively impacted the loans’
performance – even after controlling for credit score. Additionally, loans originated through
broker channels resulted in higher default rates.
These data conflict with the underlying assumption behind scoring mechanisms. This study
and others suggest that a borrower may well end up with a damaged credit score not because
the borrower was more risky or negligent but rather because the borrower obtained a loan
through a broker or received loan terms that increase the likelihood of delinquency and default.
Existing credit scoring systems do not distinguish between risk caused by borrower behavior
and risk caused by loan terms and conditions. Thus, risky loans are likely to have a negative
According to Mortgage Bankers Association National Delinquency Survey Data released 5/19/2010, the
seasonally adjusted delinquency rate was 6.17% for prime fixed loans, 13.52% for prime ARM loans,
25.69% for subprime fixed loans, 29.09% for subprime ARM loans, 13.15% for FHA loans, and 7.96% for
VA loans. Foreclosure starts rate was .69% for prime fixed loans, 2.29% for prime ARM loans, 2.64% for
subprime loans, 4.32% for subprime ARM loans, 1.46% for FHA loans, and .89% for VA loans. These
trends have held steady. The same data released 8/29/2009 revealed the following: the seasonally
adjusted delinquency rate was 6.41% for prime loans, 25.35% for subprime loans, 14.42% for FHA loans,
and 8.06% for VA loans. The foreclosure inventory rate was 3% for prime loans, 15.05% for subprime
loans, 2.98% for FHA loans, and 2.07% for VA loans.
Lei Ding, Roberto G. Quercia, Janneke Ratcliff, and Wei Li, Risky Borrowers or Risky Mortgages:
Disaggregating Effects Using Propensity Score Models, Center for Community Capital, University of
North Carolina at Chapel Hill, September 13, 2008.