NCRC on Credit Discrimination: Income is No Shield Against Racial Differences in Lending: A Comparison of High-Cost Lending in America’s Metropolitan Areas NCRC our Partner in the US published a Study on the two Faces of Racial Discrimination in Lending: ACESS and PRICE DISCRIMINATION. EXCECUTIVE SUMMARY A looming foreclosure crisis confronts America as lending institutions have engaged in new forms of dangerous high-cost lending. Most of the high-cost or subprime lending made in recent years feature adjustable rate mortgages (ARMs) with low “teaser” rates for the first few years followed by rapidly rising rates. Incredibly, many lenders assessed borrowers’ abilities to repay only at the low teaser rates. These loose underwriting standards have created the conditions for a perfect storm as almost 2 million of the ARM loans will re-set or start adjusting upward from their initial rates in 2007 and 2008.1 While they were slow to act, the federal regulatory agencies have finally raised the alarm and are now advising lenders to reform their underwriting practices. In the backdrop of the risky high-cost lending practices, NCRC observes striking racial disparities in high-cost lending. If a consumer is a minority, particularly an African-American or a Hispanic, the consumer is most at risk of receiving a poorly underwritten high-cost loan. In addition, middle-class or upper-class status does not shield minorities from receiving dangerous high-cost loans. In fact, NCRC observes that racial differences in lending increase as income levels increase. In other words, middle- and upper-income (MUI) minorities are more likely relative to their MUI white counterparts to receive high-cost loans than low- and moderate-income (LMI) minorities are relative to LMI whites. Mainstream media has taken notice of the predatory lending plague afflicting middle-class minority communities. For example, the Wall Street Journal recently wrote a poignant and detailed article describing widespread foreclosures due to predatory lending in Detroit’s middle-income African-American communities.2 NCRC has always said that responsible high-cost lending serves legitimate credit needs. High-cost loans compensate lenders for the added risk of lending to borrowers with credit imperfections. However, wide differences in lending by race, even when accounting for income levels, suggests that more minorities are receiving high-cost loans than is justified based on creditworthiness. Previous studies by NCRC and others suggest that minorities are, in fact, receiving a disproportionately large amount of high-cost loans, after controlling for creditworthiness and other housing market factors. When minorities receive a disproportionate amount of high-cost loans, they lose substantial amounts of equity through higher payments to their lenders. In addition, they are more exposed to irresponsibly underwritten ARM loans. The lending disparities for African-Americans were large and increased significantly as income levels increased. African-Americans of all income levels were twice as likely or more than twice as likely to receive high-cost loans as whites in 171 metropolitan statistical areas (MSAs) during 2005, the most recent year for which publicly reported loan data on an industry-wide basis is available. MUI African-Americans were twice as likely or more than twice as likely to receive high-cost loans as MUI whites in 167 MSAs. In contrast, LMI African- Americans were twice as likely or more than twice as likely to receive high-cost loans as LMI whites in 70 MSAs. Moreover, MUI African-Americans receive a large percentage of high-cost loans. In 159 metropolitan areas, more than 40% of the loans received by MUI African-American were high-cost loans. Number of MSAs METRO AREAS WHERE AFRICAN-AMERICANS TWICE OR MORE LIKELY TO RECEIVE HIGH COST LOANS THAN WHITES Hispanics also experienced greater disparities in high-cost lending compared to whites as income levels rose. LMI Hispanics were twice or more likely to receive high-cost loans than LMI whites in 10 MSAs. MUI Hispanics were twice or more likely to receive high-cost loans than MUI whites in 75 MSAs. In addition, the percentage of high-cost loans received by MUI Hispanics was high. For MUI Hispanics, more than 40% of the loans received were high-cost in 71 MSAs and more than 30% of the loans received were high-cost in 137 MSAs. The study also serves as a valuable resource for all stakeholders by depicting high-cost lending trends overall and by race in every metropolitan area in America. The study finds that African-Americans experienced large lending disparities in Southern and mid-west MSAs and also in New England MSAs. For Hispanics, the West and Midwest MSAs exhibited high-disparities, and, surprisingly, so did New England MSAs. West coast MSAs exhibited the widest disparities for Asians. When considering overall racial disparities, NCRC finds that the ten worst MSAs for lending disparities are (in descending order) Charleston, SC; Bridgeport, CT; Omaha, NE; Milwaukee, WI; Springfield, MA; Minneapolis-St. Paul, MN; Philadelphia, PA; Trenton, NJ; Birmingham, AL; and Greenville, SC. Since racial disparities have been stubborn and persistent over several years, NCRC calls upon all stakeholders to enact bold programmatic and policy reforms. Community groups and financial institutions should engage in more partnerships to devise counseling programs and lending products that are fairly priced and affordable for minorities and working class Americans. Congress must pass a comprehensive anti-predatory law that prohibits steering or price discrimination and that outlaws a range of equity-stripping and abusive practices. Senator Schumer’s bill (S. 1299 or the Borrower’s Protection Act of 2007) is an excellent start for an anti-predatory lending bill. Congress must also pass the Community Reinvestment Modernization Act of 2007 (H.R. 1289) that would strengthen the Community Reinvestment Act (CRA) and thus encourage more prime or marketrate lending to minorities. Finally, federal and state regulatory agencies must significantly bolster the rigor of their anti-predatory and fair lending enforcement. 1 “Regulators are Pressed to Take Tougher Stand on Mortgages,” by Gregg Hitt and James R. Hagerty, Wall Street Journal, March 23, 2007 2 Mark Whitehouse, “A Day of Reckoning Subprime Aftermath: Losing the Family Home – Mortgages Bolstered Detroit’s Middle Class Until Money Ran Out,” Wall Street Journal, May 30, 2007, page A1. ID: 39975 Author(s): UR Publication date: 26/07/07     URL(s): Full Report on Racial Discrimination

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