MAXWELL: Is Fannie Mae software biased against minority home buyers? 

4/4/2004 – Printed in the PERSPECTIVE  section of The St Petersburg Times Newspaper

Each day, on television and radio, Fannie Mae ads boast, “Our business is the American dream.” This slogan, highlighted by a smiling family of four, also graces the top of Fannie Mae’s Web site.

The American Dream, of course, is homeownership.

Congress established Fannie Mae in 1938 to “expand the flow of mortgage money by creating a secondary market.” Decades later, after becoming a private company, Fannie Mae, along with its sibling Freddie Mac, began focusing on mortgages for minorities. On its Web site, the agency declares: “No company in America is more committed to expanding minority homeownership. Nobody is creating more innovative mortgage products and partnerships to break down the barriers. And nobody is more determined to lead the market in serving minority families.”

The Web site further states that currently “more than 24-million American families live in homes Fannie Mae has helped finance. In 2003, Fannie Mae purchased or guaranteed $1.4-trillion of home mortgages from 1,000 lenders.”

Most Americans who read or hear such promotions and statistics rarely think that anything could be amiss at Fannie Mae, a Fortune 500 giant. Who would complain about an agency that vows to “break down the barriers” for minorities?

Safiyyah Rahmaan does, and she does so vehemently. After having been denied a conventional mortgage, she learned the hard way that Fannie Mae’s warm-and-fuzzy image in its ads and Web site is a far cry from how the company operates behind closed doors.

After several banks had turned down her loan applications, Rahmaan, 43, discovered that Fannie Mae had thoroughly investigated her financial life and had branded her without her knowledge.

“Fannie Mae isn’t really helping the masses like the impression it gives,” Rahmaan said.

Represented by the Tampa law firm of James, Hoyer, Newcomer & Smiljanich, Rahmaan is leading a class action lawsuit that aims to force Fannie Mae to treat minorities seeking home loans fairly. The firm is filing a similar suit against Freddie Mac. At issue in the suit is whether in its mission to computerize mortgage lending, Fannie Mae has wound up penalizing black and Hispanic home buyers, the very clients it is mandated to help.

The alleged culprit is Desktop Underwriter, the computer system Fannie Mae uses to make lending decisions. Freddie Mac uses a similar system called Loan Prospector. When a mortgage broker submits a customer’s mortgage application to these systems, Fannie Mae or Freddie Mac pulls the customer’s credit report and decides if the person is a good risk for the loan. But the agencies never talk to the customer.

Only the numbers matter in the decisions.

“A computer can’t boil a person’s character down to a number,” said Christa Collins, one of Rahmaan’s attorneys. “We believe these computer programs discriminate against minorities. There is a mountain of studies showing that in their rush to use these computerized lending models, Fannie Mae and Freddie Mac have left behind their core constituency of minority borrowers.”

Collins argues that Fannie Mae and Freddie Mac operate much like the Great Oz: controlling choices of prospective home buyers from behind the curtains. Although most home buyers, especially first-time minority applicants, have only vaguely heard of Fannie Mae and Freddie Mac, these two conglomerates exercise vast control over the U.S. mortgage market. They can do so because they are the primary purchasers of home mortgages in the nation.

The companies do not issue mortgages directly but rather buy them from banks and neighborhood brokers, who originally help customers obtain loans. To stay in business, brokers have to sell the loans they generate by making their loans appealing to Fannie Mae and Freddie Mac.

When Fannie and Freddie introduced their computerized lending programs, the culture of home mortgage lending changed. Brokers learned in seconds if Fannie and Freddie would buy a loan they were offering the customer.

Although customers dealt with their brokers, Fannie or Freddie’s computer program called the shots by producing a credit score, which is at the center of Rahmaan’s complaint. Her attorneys are suing Fannie and Freddie for racial discrimination, arguing that the firms’ “credit scoring” programs for rating mortgages violate the civil rights of minorities.

Credit scoring is the process of distilling a person’s entire credit report into a single three-digit number. That number determines if an applicant gets the loan and at what interest rate. Credit scoring became popular in the late 1990s, when insurance companies began using it to price car and home insurance.

Collins, one of Rahmaan’s attorneys, contends that credit scoring “is the latest proxy used by insurance companies to redline coverage areas and focus on wealthy white customers. Whether you’re talking mortgages or insurance, we think the evidence will show credit scoring hurts minorities, single parents, renters, city dwellers, old people who like to pay in cash, people who’ve never bothered to create a credit history (so-called “thin files’) and members of ethnic groups in which families tend to lend money to its own.

“Fannie Mae, therefore, slams the doors in the faces of minority home buyers and perpetuates the discrimination it is supposed to cure. Furthermore, Fannie Mae fails to give prospective homeowners notice of the adverse action Fannie Mae takes against them.”

Rahmaan said Fannie Mae calculated her credit worthiness and circumscribed her life, without knowing her _ without speaking with her, without meeting her, without informing her as to how the agency arrived at its verdict.

“It is hard to speculate how much lower an interest rate Ms. Rahmaan would have gotten had Fannie Mae approved her because the mortgage market is so fluid,” Collins said. “However, it was not uncommon for the difference between conventional and subprime loans at the time to be several percentage points. On the residence in question, Ms. Rahmaan presently pays 10.25 percent interest. She is current with that obligation.”

Rahmaan said that if Fannie Mae had met her personally, the agency would have experienced the ideal applicant. “If Fannie Mae had a poster child, it would be me,” she said. “Besides being financially responsible, I’m a double minority. So, why did I get “caution’ and not “approved’ on my rating? Why am I forced to go and pay a higher interest rate? This is not helping me.”

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Indeed, Rahmaan, as a single mom, would seem to be an excellent risk for a Fannie Mae mortgage. All of her adult life, her top priority has been caring for her eight children. During the mid-1980s, she and her husband began their own business called Ocean Delight, a frozen fish delivery service in Rochester, N.Y. After her divorce, she supplemented the child support she received with a variety of full-time and part-time jobs, when she moved to Wilson, N.C., about 50 miles east of Raleigh.

Here, she established and operated a concession business, selling food and drink each day in front of the Wilson courthouse and during special local events. In 1997, she opened the Milk Store, a small neighborhood market providing items such as eggs, cereal and milk that are covered by the Federal Women, Infants and Children Program.

Rahmaan sold the Milk Store five years later and opened a similar business called the Baby Stop. Saving her money, she went into real estate investments, buying her first house through owner financing. She rehabilitated the house herself. All the while, she met her other monthly financial obligations.

In 2001, Rahmaan’s steady progress hit a wall when she applied for a conventional loan at several institutions and was denied. After a few months of returning to the banks and getting the runaround, she learned that Fannie Mae’s computer system, Desktop Underwriter, was behind the denials.

“I was forced to go and deal with mortgage brokers, and that forced me into a higher interest rate,” she said. “Just knowing that my life had been fed into this computer, it rendered a decision that also altered my life. I’m a mother of eight. If anyone needed a lower interest rate, I needed it. But I had to go to a B lender. I didn’t know and was not told what the decision was made on. Because of this lawsuit, I learned that my white counterpart with a similar background, with similar things on her credit report, was rendered a different decision.”

Rahmaan is angry also because Fannie Mae ignored, or dismissed, her pride and work ethic.

“There were opportunities for me to go to the department of social services to seek aid because I was unemployed when I came to Wilson,” she said. “But I didn’t want or expect a handout. I want to build something that makes me independent and not have to rely on the system. Give me a level playing field, and I’ll make something happen. I don’t need for you to grease the tracks for me. Just don’t hurt me.

“I feel like I’ve been raped because they went through my life, invaded my life, my privacy, and made decisions I didn’t even know what they were making. They had this information on me that they withheld from me. If I had known I was going to be judged by them, I could’ve decided if I wanted to deal with them or not. As it was, I had no choice.”

As the lawsuit moves forward, Rahmaan says she has to remember that Fannie Mae is not a charitable organization, as many people may believe after seeing the agency’s upbeat ads.

“This is a business,” she said. “A cutthroat business that discriminates.”

On March 15, Fannie Mae filed a motion for summary judgment for dismissal in the federal district court in the District of Columbia, arguing that Rahmaan was denied various loans because “her credit history was very poor.” The denials had nothing to do with Rahmaan’s race, spokesman Chuck Greener wrote in an official statement.