Bank Mortgage Lending Practices Questioned

Residents of Cambridge's richer neighborhoods are more likely to be pursued by mortgage lenders than residents of the city's poorer neighborhoods, and some say it's just not fair.

Fair lending advocates and some community leaders argue that banks have a responsibility to aggressively seek out and encourage creditworthy borrowers from all corners of Cambridge--without excluding the areas most in need of investment. They say that area banks may be engaging in a subtle form of discrimination.

The lenders say they are fair, and they explain the disparity in lending by saying they get fewer loan applications from residents of the city's poorest neighborhoods.

The Cambridge-based banks--Cambridge Trust Company, Cambridgeport Mortgage, East Cambridge Savings Bank and Cambridge Savings Bank--make fewer loans to low income areas than to other areas in the city, a Crimson analysis of federal statistics found.

The Association of Community Organizations for Reform Now (ACORN), which investigates lenders to ensure that they provide capital to low income areas, says banks may practice a form of "pre-screening" by failing to pursue loans in certain neighborhoods.

According to ACORN, this is a violation of the Community Reinvestment Act of 1988, which was intended to eliminate bias in lending.

Deepak Bhargava, ACORN legislative director, says such "prescreening" discourages applicants from initiating a mortgage application process.

While regulators keep a close watch on fairness once borrowers actually complete a loan application, Bhargava says institutions often discriminate in more subtle ways--by not marketing their mortgages in certain areas. The practice, claims Bhargava, is a violation of the spirit if not the letter of the law.

"The extent to which institutions aggressively seek applicants is difficult to monitor," Bhargava says. "[Banks] are supposed to be seeking out credit worthy applicants from low income areas. That is the law."

Local lenders all say they pursue loans in all areas of the city. But the numbers tell something of a different story.

Cambridge Savings Bank, headquartered in Harvard Square, was the city's third-largest lender in 1992, according to statistics published by the Federal Deposit Insurance Corporation (FDIC).

The bank received 164 mortgage loan applications in Cambridge in 1992, and completed 149 of these loans, according to copies of data the banks must report to the FDIC.

Only one of these loans went to census tract 3531, the East Cambridge area which had the city's lowest per capita income ($9,923) in the 1989 census.

The bank also received one application (which it approved) from tract 3525, and no applications from tract 3524, an East Cambridge neighborhood that had the third lowest per capita income in 1989.

Cambridge is divided by the Census Bureau into 30 tracts, which the city has grouped into 13 "areas." The top tracts have a per capita income of about $42,000. Many of the banks lend heavily to the city's wealthiest neighborhoods.

Ellen J. Klapper, an assistant vice president at Cambridge Savings Bank, said in an interview last month that the bank does not discriminate in lending.

"We do not discriminate against any area in Cambridge," Klapper says.

Klapper says the bank makes lending decisions based on an appraisal of the property, the applicant's employment and credit history and the ability of the applicant to provide a down payment.

Although some applicants come to the bank on their own, Klapper says the mortgage department's primary focus is on the real estate market.

For this reason, three of the bank's four mortgage executives are paid 50 percent salary and 50 percent commission to solicit in the real estate and business communities, Klapper says.

Although the representatives are supposed to solicit throughout the city, clearly it is in their short-term financial interest to work in more affluent areas.

"They make a lot of money," Klapper says.

Cambridge Trust Company, another of the city's lenders, received 50 applications in Cambridge in 1992, according to the company's Home Mortgage Disclosure Act report.

All but two applications were approved. The bank received no application from areas 3, 4, and 5. (Tracts 3524, 3525, 3526, 3527, 3528, 3532, and 3533.)

These tract lie in the neighborhoods of East Cambridge and Cambridgeport, which had the third, fourth, and fifth lowest per capita income (out of 13) in 1989.

George Beal, vice president of Cambridge Trust, said in an interview this month that the lack of applications from these areas may be due to the location of the bank's branches in the Kendall Square and Harvard Square areas.

Unlike Cambridge Savings Bank, Cambridge Trust does not employ commissioned loan executives, but relies rather on walk-in applications, Beal says.

"It's all really walk-in," Beal says, adding. "Our rate really has not been very competitive recently because we don't sell to the secondary market."

This combination of higher interest rates and a lack of sales representatives may discourage borrowing in certain areas, Beal says.

Beal says he expected the bank would receive no applications from the Central Square area because Cambridge Trust has no office there.

"[A Central Square branch] didn't really make sense because there are so many other banks in that area," Beal says.

Although the Federal Mortgage Disclosure Act requires all lending institutions to provide a copy of their annual mortgage statement within 90 days of the year's end, East Cambridge Savings Bank was able to provide only its 1991 figures.

Lynne Feeney, a mortgage executive for East Cambridge Savings Bank, says the bank was unable to release its 1992 data because it contains applicants' personal information. All the other banks contacted were able to release the 1992 data.

East Cambridge Savings Bank received 36 Cambridge mortgage applications in 1991.

The bank received no applications from Area 2 census tract 3531, the city's lowest income area in 1989. Area 7, the Riverside neighborhood which had the second-lowest per capita income in 1989, also submitted no applications.

To be sure, the Highland and Strawberry Hill neighborhoods also did not submit applications. These areas had middle range incomes in 1989 of about $19,000.

Feeney says the bank has employed two commissioned representatives for about the last eight months. Prior to this period, Feeney says, most mortgages occurred on a walk-in or referral basis.

Cambridgeport Bank was the city's largest mortgage lender in 1991 and one second largest in 1992.

William M. Mullins '71, the president of the bank's mortgage division, said in an interview that his firm is committed to providing capital for its home base of Cambridge.

"Since we're headquartered in Cambridge, it's very important that we be the biggest lender in Cambridge that we can be," Mullins says.

Mullins says Cambridgeport Bank decided to focus on mortgaging about five years ago as a means of increasing profitability.

Although the bank faces stiff competition, especially form larger lenders such as Baybank and Shawmut, Mullins says his mortgage executives are committed to soliciting loans throughout the city.

"The critical thing for a bank like us is to make sure that we're lending in all these [economically] different areas," Mullins says.

In 1992, Cambridgeport received 247 Cambridge mortgage applications. The only census tract from which the bank did not receive an application was 3524--a Central Square neighborhood with the third lowest income in 1989. Mullins says his 20 mortgage executives operate on 100 percent commission and are therefore driven to seek the maximum number of mortgages possible.

Residents of the city's poorest neighborhoods say funds for investment encourage stabilization.

Nancy Ryan, executive director of the Cambridge Women's Commission and an Area 4 resident, says she believes that low-income buyers are paying the price for risky loans banks made in the 1980s.

"With all of the risky loans [banks] have put out, the people who are paying the price are low income folks who are scrutinized more closely and who have to pay bigger down payments," Ryan says.

Ryan, who lives on a street on which nearly all the home are owner-occupied, said she hopes to see greater opportunity for investment in the future.

While large, mainstream bank may feel the pressure to maximize profits more than the pressure to stabilize neighborhoods, another kind of financial institution has found a marketing niche in servicing specific populations that might otherwise be ignored.

Borrowers who prefer not to finance their home purchase in the traditional manner may choose to mortgage their home through a credit union.

The Cambridge Portuguese Credit Union has been handling the banking needs of the city's Portuguese community for 65 years.

Alfred W. Ricci, the credit union's president, says borrowers may choose to become members of the credit union because all of his staff speak Portuguese, or because they feel they will not be discriminated against.

"In a perfect world, Portuguese Blacks, and Haitians would be treated just like anybody else," Ricci said. "Unfortunately that doesn't always happen."

In an imperfect world, banks must balance their shareholders' interest in making profits with the civic responsibility--and federal requirement of equitable lending. That's a difficult task for the moment, the short-term profit interests appear to have the upper hand.