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Snoopy Lending
A new program requires lenders to guess the backgrounds of clients who refuse to classify themselves.


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Mortgage servicers are now expected to record the race of all their clients — including those expressly unwilling to provide one. In order, naturally, to stop discriminatory lending.

The Home Affordable Modification Program (HAMP) is a creature of the Obama administration. It advertises itself as helping “financially struggling homeowners avoid foreclosure by modifying loans.” Sounds important. But its new guidebook reveals an intention to do more than just that. On page 28, the guidebook reminds lenders that HAMP “solicits data related to the race, ethnicity and sex of the borrower and co-borrower, referred to as Government Monitoring Data (GMD).”

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All nonsense, you might say, but nothing new — many government programs, including the Census, collect racial data. But usually, respondents can opt out of classifying themselves. Under HAMP’s new guidelines, by contrast, lenders are required to ignore such conscientious objections. See section 4.1.2.1, on page 31: “If a borrower declines to provide GMD, the servicer should attempt to provide the information based on visual observation, information learned from the borrower or surname.” Presumably, “visual observation” means skin tone, a “surname” can suggest country of origin, and “information learned” accommodates almost anything that can fit a stereotype. Note also the word “declines,” as opposed to “neglects”: Those who check the box that says “I do not wish to furnish this information” will have it furnished for them.

HAMP expects businesses to prep their employees for this difficult task: “Servicing staff should be provided with training and job aids (e.g., desk references, scripts and, where feasible, system prompts).” I wasn’t clear on what these “desk references” should contain (lists of racial characteristics?) or how to adjudicate conflicting signals (what to say about a Tiger Woods?). So, I called the HAMP Solution Center (as recommended to those with questions about the new guidebook). A friendly representative helped me through the new provisions, but he clammed up when I pressed him on what the recommended “desk references” should contain. “Desk references, I’m assuming, are something with lists of faces and — well, or something with surnames to distinguish — I don’t know. I really can’t answer that.”

He said HAMP will not provide specific instructions for interpreting “information obtained from the borrower” — but it will still expect the data. The servicers will do the awkward work of deciding how to get it.

This new guideline is a response to the Obama administration’s fears of discrimination against minorities in mortgages, as presented in Assistant Attorney General Thomas Perez’s testimony before a House subcommittee four months ago. He called “fair-lending issues” a “top priority for the Civil Rights Division.” The new HAMP guidelines will ensure a complete racial taxonomy of mortgage clients. Everyone must be categorized so the Justice Department can prove discrimination beyond a reasonable doubt.

Brett Natarelli, an attorney who practices and writes about loan-modification law, is troubled that the new provisions encourage “lenders to attempt to visually identify, or even guess by surname, the race of applicants . . . who have already indicated they do not feel comfortable.” That, he suggests, will not produce color-blind lending. If anything, HAMP now incentivizes stereotyping. The training programs will just call “attention to race characteristics that the employee processing the application may never have even thought to notice.”

And there’s a disturbing potential trap. The Justice Department has promised to monitor servicers for discrimination closely using the data coming from HAMP. But according to Natarelli, in practice, “lenders exercise little, if any, discretion under the HAMP program.” They are strictly subject to the Treasury’s narrow (and race-neutral) guidelines.

And the administration might find statistics that appear to show bias when some race-correlated variable is unaccounted for. The Kafkaesque prospect of all this is that a servicer could mechanically apply the Treasury’s narrow standards and still be accused of discrimination. As Perez put it, “The Civil Rights Division is open for business across the board.”

– Matthew Shaffer is a William F. Buckley Fellow at the National Review Institute.



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