Minorities in Dallas-Fort Worth are buying homes like never before, but they're more likely than whites to accept higher-interest loans that could lead to foreclosure, according to a Dallas Morning News analysis.

The News found that about 34 percent of home loans taken out by minorities in 2004-05 were considered higher-cost, compared with 17 percent for whites.

On average, minorities make less money than whites. However, the interest rate disparity remains even when comparing only middle- to higher-income borrowers of both groups.

Federal regulators and lending experts say the difference is wide enough to warrant a closer look at whether lenders are taking advantage of minority borrowers.

Even if lender practices aren't illegal, real estate experts say some minority borrowers are still paying more than they should for their home loan. Recent borrowers who took out adjustable-rate mortgages are feeling the pinch right now – or soon will – as rates continue to rise.

"It's definitely a problem because there are borrowers out there who are ending up with loans that are inappropriate for them," said Ann Graham, a professor of law at Texas Tech University who has studied lending patterns.

Only since 2004 has the federal government required lenders to disclose information on interest rates for individual loans when the rate exceeds a threshold set by federal regulators.

The News found the racial divide by analyzing a public Federal Reserve database of more than 600,000 loans from 2004 and 2005. It included rate information and other details on the loan and applicant, such as Hispanic ethnicity and race (white, black, Asian, American Indian or Pacific islander).

However, the data didn't include information on borrowers' debt, credit ratings or sale prices – all of which affect a mortgage loan's final interest rate and terms.

Regulators say a loan becomes problematic when lenders stick borrowers into pricey, riskier loans when they could qualify for something better.

Thysen Smiley, who is black, went to a mortgage broker when she wanted to refinance her three-bedroom home in Forest Hill, a town of 13,000 people south of Fort Worth.

Ms. Smiley, a 47-year-old former postal clerk, said the broker offered her one set of terms and then asked her to sign a contract for different terms. She didn't think she had a choice and agreed to a 10 percent adjustable-rate loan, which could go up after two years.

She later worked with a loan counselor who told her she should have qualified for a lower fixed rate that wouldn't change.

"A lot of people don't know there are other opportunities available to them," said Sherry Randall, office director at ACORN Housing Corp., a nonprofit organization that provides home loan counseling to low- and moderate-income people. "One of the biggies is a promise to set one set of terms once the client applies and then give them another set of terms when they're ready to close."

Denying loans

Concerns about fair lending used to focus on redlining, the discriminatory practice of denying loans based on the race or ethnicity of the borrower or neighborhood.

Lenders still deny loans to minorities more often than white applicants. As a demographic group, however, minorities are steadily climbing the homeownership ladder.

In 1990, minorities owned 17 of every 100 Dallas-Fort Worth-area homes. Last year, that number had grown to 31 of every 100 homes.

More flexible lending rules and increased competition among lenders made it possible for more people to become homeowners. Those changes created an especially big boom for minorities, local lending experts say.

Federal rules require financial institutions, such as banks, to invest in minority neighborhoods. As a result, some will pay a premium to buy loans that other lenders gave to minorities, said Marty Green, general counsel for CTX Mortgage in Dallas.

And, he said, the mortgage industry is so competitive today that lenders are looking for borrowers wherever they can find them.

"The pendulum has swung," said Alfreda Norman, community affairs officer for the Federal Reserve Bank of Dallas. More minorities are getting loans, but they're paying a higher price for what they borrow, she said.

Credit scoring

Credit scoring – which plays a big role in the type of loan anyone can get – could explain some of the disparity. A recent study by the Texas Department of Insurance showed that blacks maintain average credit scores 10 percent to 35 percent lower than average scores for whites; Hispanics were 5 percent to 25 percent lower than whites.

But local loan counselors, real estate agents and brokers say credit scores and finances don't explain the high interest rates for many minority borrowers.

ACORN Housing's Web site estimates that up to half of borrowers who receive higher-cost loans could have qualified for something less expensive.

Cranston Alkebulan, a mortgage broker for All Real Estate who has several minority clients, said he believes that 60 percent to 70 percent of those stuck with higher interest rates or fees should have done better.

"Some lenders look at it as, 'I can charge them as much interest as I want as long as they don't bark,' " he said. "I've seen scenarios where people have full documentation [of income] and their debt-to-income ratio is just solid. A greedy mortgage banker or broker took advantage of them."

Minority borrowers often don't object because they're thrilled that someone would lend to them in the first place, he said.

Mr. Alkebulan blames history, saying that past discriminatory practices have discouraged many minorities from trying to buy a home. He said others feel at a disadvantage when they start the application.

"The African-American community has been able to actually practice in the free-market economy in this country somewhat legitimately for only four decades," he said.

Lenders realize their power and their authority and use questionable methods regardless of the community, he said. It's just that minority borrowers are "not as financially savvy as someone whose family has had this wisdom and knowledge for generations," Mr. Alkebulan said.

'Sub-prime' lenders

Minority borrowers often stumble when picking a lender.

Many simply assumed they could only use a "sub-prime" lender, which specializes in lending to people with credit dings and little savings. They justify making loans that prime lenders would not make by considering things such as future income, time on the job and debt repayment plans.

Prime lenders – often banks and large mortgage companies – tended to give loans only to borrowers who had a solid financial history and higher credit scores, income, and savings for a down payment.

Loans from sub-prime lenders generally charged higher interest rates, in part to compensate for the lenders' risk in gambling on someone whose payments might fall behind.

Changes in lending practices have morphed those categories. Many prime lenders can find loans for people with not-so-hot credit, and some sub-prime lenders can offer terms competitive with prime lenders.

But people in minority neighborhoods still shy away from banks and well-known lenders because they just assume they won't qualify, Mr. Alkebulan said.

"They're not walking into Bank of America or Chase saying, 'Hey, I need a home,' because the tradition is that they'll have to put down 20 percent," he said.

Instead, they'll call the number from a television ad promising, "Bad credit OK, and no money down." Or they'll use the same person their friend, co-worker or cousin used.

A mortgage company representative contacted Derek McCutcheon, 34, and Micaela Cotton, 26, after they filled out an online survey looking for a lender. The couple, who are both black, planned to a buy a house in South Dallas large enough for their three young boys. The family had been cramped in their Irving apartment.

Mr. McCutcheon's credit was OK, but a few missed college loan payments and a credit card hurt Ms. Cotton. Together, they had about $7,000 in debt.

Their annual household income was about $50,000. They spied a newly remodeled house they wanted for $72,000, and they figured they could put 5 percent down.

They didn't realize at first that they were using a mortgage broker – someone who contacts various banks or mortgage lenders to find a loan for a client.

Their mortgage broker's company frustrated them and delayed their closing through paperwork errors, ignored phone calls, a questionable inspection and other mishaps.

They ended up borrowing about $68,000 with a 9.75 percent adjustable-rate mortgage. Since then, others, including someone else's real estate agent, told them they probably could have done better.

Allen Kingsley agrees.

Mr. Kingsley, president of the Dallas Association of Mortgage Brokers and a local broker at Merit Mortgage, looked at the couple's income, loan and credit scores. He said a lender could have done the loan differently and secured a 30-year fixed rate between 6.75 and 7.5 percent.

Mr. Kingsley said some brokers put people into higher-interest loans because they don't understand their own profession.

"Loan officers are loaning by fire," he said. "The training in our industry is terrible unless you, as an individual, take it upon yourself to become educated. Some people are really being taken, but I don't think they're being taken maliciously."

Some lenders break the law when they put borrowers into higher-cost loans. These "predatory lenders" scam customers by misleading them about rates and terms, asking them to falsify information and tacking on excessive fees.

It's not just small-time brokers who get in trouble. Last year, lending giant Ameriquest Mortgage agreed to pay $325 million to 49 states to settle predatory lending allegations.

When higher-cost loans end in foreclosure, that obviously hurts the borrower, but it also takes a toll on the community, said state Sen. Royce West, D-Dallas, who has worked on predatory-lending issues.

If a failed borrower moves into public housing or needs other public assistance to bounce back, then taxpayers will have to foot the bill, he said.

"If we're not our brother's keeper, then we're going to have to pay for our brother," he said.

Mr. West says greater scrutiny of the lending industry would be in the public interest.

Federal regulators say they're constantly reviewing data to weed out predatory lenders and determine whether the industry needs to do more to meet minority borrowers' needs.

In the meantime, consumer advocates, lenders and brokers agree that education is the best way to avoid a higher-cost loan.

People who know how to repair their credit and shore up their finances ahead of time can qualify for a lower interest rate. And they'll know to shop around for the best deal and avoid lending scams, said Ms. Randall with ACORN.

Financial educational opportunities are expanding, as several government and private agencies offer home-buying classes.

And Texas schools now require high school students to take lessons in personal finance, including instruction on credit card debt and home loans.

Ms. Cotton, the new South Dallas homeowner, said she's already looking into credit counseling and plans to quickly pay off her debt.

Both she and her boyfriend have agreed that they're going to check out different lenders and negotiate for a better rate when it's time to refinance.

Right now, she said, she's going to enjoy the privileges of home ownership.