|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.
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
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.
Created: 30/07/07. Last changed: 31/07/07.
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