"The foreclosure crisis that plagues the United States disproportionately affects
minority borrowers. African American and Latino borrowers with incomes
and credit scores similar to those of white borrowers receive far less
favorable loans, commonly referred to as subprime loans,1 and are often
charged exorbitant fees that lenders tend not to charge to white borrowers.
These subprime loans typically begin with a reasonable interest rate, but then
skyrocket, or, as the banking industry euphemistically says, âadjust,â to a far higher rate, causing the borrowerâs monthly payments to soar. As monthly
payments increase, many borrowers quickly fall into default on their mortgages
and eventually fall victim to foreclosure.
A host of non-profit organizations, civil rights attorneys, and government
agencies have brought race discrimination claims against subprime lenders
under the Fair Housing Act (âFHAâ) and the Equal Credit Opportunity Act
(âECOAâ), arguing that lenders treated minority borrowers less favorably than
white borrowers with similar risk-related credit characteristics. Plaintiff borrowers
have argued that the lendersâ practices and policies, though neutral on their face, have had an unjustifiably disparate impact on African American and
Latino borrowers.
(SNIP)
"The President of the National Urban League called on
Treasury Secretary Henry Paulson âto refute statements by conservative politicians
and pundits that subprime mortgages provided to minorities led to the
financial crisis and a $700 billion federal rescue of Wall Street,â calling such
allegations a âbig lie.â Daniel Gross responded, âLet me get this straight.
Investment banks and insurance companies run by centimillionaires blow up,
and itâs the fault of Jimmy Carter, Bill Clinton, and poor minorities?â Gross
blamed the crisis on âstupid, reckless lending, of which Fannie Mae and Freddie
Mac and the subprime lenders were an integral part.â As he saw it, âInvestment
banks created a demand for subprime loans because they saw it as a
new asset class that they could dominate. They made subprime loans for the
same reason they made other loans: They could get paid for making the loans,
for turning them into securities, and for trading themâfrequently using borrowed
capital.â
Several aspects of the CRA belie the conservative punditsâ theory that liberal
lending mandates, as opposed to bad business decisions, were the cause of the
mortgage foreclosure crisis. As a principal matter, a large number of subprime
loans are not even covered by the CRA and thus could not have been coerced
by CRA requirements. In fact, by some estimates up to three-quarters of sub-prime loans fell outside the range of the CRA. Tellingly, lenders covered by
the CRA engage in high-cost loans at lower rates than those outside the CRAâs
reach. Further, the subprime crisis did not begin until a quarter century after
the enactment of the CRA, and Congress weakened the CRA regulations in
late 2004 to exclude small and mid-sized banks from its more stringent requirements
- yet the subprime market continued to grow. The number of high-cost
loans provided to individuals who could not afford them seems then to stem
more from a combination of bad business decisions on the behalf of lenders and
a failure of the federal government to adequately regulate the residential mortgage
market.
We do not dispute that the CRA was likely enforced in an imperfect manner.
We believe, however, that conservative pundits tend to make little effort to
distinguish between pressure exerted by legislators to encourage, or even force
lenders to increase lending to minority borrowers, and independent predatory
lending practices by lenders, based not on undue pressure from legislators and
community groups (i.e., ACORN), but on the lendersâ own business interests
and poor decision making.
(SNIP)
While the subprime crisis affects individuals of all races, it has been a catastrophe
for African Americans and Latinos. The CRL conducted one of the
most comprehensive studies on the subject by using HMDA data combined
with a âlarge, proprietary subprime loan dataset.â The study found that, de
pending on the type of loan, African American and Latino borrowers were anywhere
from 6% to 142% more likely to receive a higher-rate loan than white
borrowers with similar qualifications.
According to the CRL study, the racial disparity in subprime lending has not
been strictly based on borrowersâ income-levels or risk-related credit factors.
The study breaks down its data by LTV, FICO credit score range, and race.
In the highest-risk borrower categoryâfeaturing an LTV of above 90% and
FICO score below 620âAfrican Americans were only 6% more likely than
white borrowers to receive a subprime loan for a home purchase and 5% more
likely to receive a subprime loan for refinancing. For borrowers with the
best credit histories and thus the lowest risk categoriesâLTV below 80% and
FICO score of above 680âAfrican Americans were 65% more likely to receive
subprime loans than their similarly situated white counterparts for a home
purchase and 124% more likely when refinancing. Beyond the clear racial
disparities in lending, the increased disparity in refinancing is particularly unsettling
as minorities who refinance with subprime loans are at risk of losing
the equity that they have invested in their homes, often comprising their life
savings.
The Federal Reserve Boardâs report on the HMDA data found similarly concerning
statistics. On average, 53.7% of African Americans received high
cost home purchase loans compared to 17.7% of whites, and only one-sixth of
the 36% difference appeared to be based on legitimate âborrower-related factors.â
Similarly, when refinancing, high cost loans were issued to 52.8% of
African Americans as compared to 25.7% of whites, with only one-ninth of the
27% difference based on legitimate âborrower-related factors.â A significant
portion of this disparity is thus found in factors unrelated to the borrowerâs risk
of default, which is theoretically the only factor that should matter. Interestingly
enough, controlling for the lender accounted for a much more significant part of the difference in both cases. In other words, the disparity is
much more closely related to factors relating to a bankâs lending practices than
to factors associated with the borrower.
An ACORN study analyzing the 2006 HMDA data found that African Americans
and Latinos are more likely to receive high-cost loans for home purchase
and refinance, and that the disparity actually rises with income level. For
example, the ratio between African Americans and whites receiving high cost
home purchase loans is 2.0 for low-income individuals, 2.3 for moderate income,
2.6 for middle income, and an astounding 3.3 for upper income (54.4%
vs. 16.4%). The ACORN study even shows that upper income African
Americans and Latinos receive high cost loans at higher rates than lower income
whites.
http://www.bu.edu/law/central/jd/or...18no1/documents/18-1AleoandSvirskyArticle.pdf