New Study Finds Racial Predatory Lending Contributed to Housing Crash

Published by: Kelly Curtis on 4th Oct 2010 | View all blogs by Kelly Curtis
 New Study Finds Racial Predatory Lending Contributed to Housing Crash

According to a new study published in the October issue of the American Sociological Review, predatory lending practices directed towards racially segregated neighborhoods inhabited by minorities were responsible for a significant number of foreclosures which were a key component in the US housing crisis. The housing dilemma, in turn, was at the center of the worst recession in the US since the Great Depression.

The term predatory lending refers to the practice of offering loans with unreasonable fees, payment requirements, or interest rates. Lenders began targeting minorities with these practices during the 1990s as the practice of mortgage-backed securities became more prevalent, allowing lenders to combine low- and high- risk loans in packages they could unload on the secondary market. According to the study, financial institutions found in high-minority areas tend to lean towards predatory practices. Pawn shops, payday-loan stores, and check-cashing companies, all prevalent in lower-income neighborhoods, typically charge unreasonably high fees and interest rates, according to the report.

The study was authored by PhD candidate Jacob Rugh and Professor Douglas Massey of Princeton University's Woodrow Wilson School of Public and International Affairs. The study pointed out that racial segregation, by definition, creates minority-dominant areas which tend to be underserved by mainstream financial institutions. The report goes on to say that such neighborhoods have historically been subjected to redlining, which is defined as denying or increasing the cost of banking and insurance services to inhabitants of particular areas. Historically, redlining is typically based on race.

The US economy continues to be mired in its worst recession since the 1930s. The recession was originally triggered by a crash in the housing market, which was in turn caused primarily by the crash in the subprime lending sector. Subprime loans are defined as loans made to consumers with poor credit ratings or other higher-risk borrowers, and typically carry significantly higher interest rates than loans to lower-risk borrowers.

The study compiled data from the 100 largest metropolitan markets in the US. It found that homeowners living in predominantly African-American neighborhoods, or, to a slightly lesser extent, Hispanic neighborhoods, had a significantly higher rate of foreclosure than homeowners in more affluent neighborhoods inhabited primarily by non-minorities. Even more affluent African-Americans, with similar credit ratings and available cash for down payments as white borrowers were more likely to be stuck with subprime loans, according to the study.

The study showed that from 1993 to 2000, the share of subprime mortgages extended to borrowers in minority neighborhoods climbed from 2 to 18 percent. Massey and Rugh recommended an amendment to the Civil Rights Act that would create mechanisms to uncover racially-motivated financial discrimination and institute penalties for those lenders guilty of discriminating against minority borrowers.

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