Almost five years
ago I wrote an essay about predatory lending practices that targeted African
Americans and other communities of color.
Mortgage originators relaxed their standards to offer subprime mortgages,
and in some instances, engaged in fraud so that they could make more loans at
high rates of interest and therefore make more money. Many consumers of color who qualified for
prime or low-interest mortgages were offered only subprime, high-interest
loans. People of color who did not
qualify for low-interest mortgages were offered subprime loans even though they
had no or low incomes and no assets.
Lenders told these consumers that they would be able to pay off their
mortgages as housing prices climbed. But
the housing bubble burst and housing prices plummeted. Predictably, many borrowers could not repay
these predatory loans. The mortgages,
however, had been pooled together to create securities that were sold to
investors. Banks and lenders were able
to transfer foreseeable risks that borrowers would default on the underlying
mortgages to investors who purchased the securities. These are risks that should have been
anticipated by lenders and the experts who advised them. These risks were understandably unforeseen by
borrowers with no economic expertise.
Billions of
dollars in wealth were drained from African American and Latino families when
banks foreclosed on the homes of consumers who were victims of this predatory
lending. Communities were infested with
unsightly, abandoned homes. Investors who purchased mortgage-backed securities
lost billions. Predatory lending harmed
local, national, and global economies and helped to precipitate the economic
downturn of 2008.
In that article I
described how banks and other financial institutions targeted people of color,
and African Americans in particular, for high-interest predatory mortgages. For example, a former Wells Fargo credit
officer revealed in a sworn statement that the bank targeted African American
borrowers for high-interest loans they could not afford because of the
pervasive perception at the bank that African American customers were not savvy
enough to figure out that the loans offered them were predatory. Another loan officer admitted that African
Americans who qualified for prime loans were targeted for subprime loans. Yet another Wells Fargo loan officer revealed
that African Americans were called “mud people” and the predatory loans offered
them were labeled “ghetto loans.” Loan
officers targeted black churches also.
And, when loan officers referred borrowers who qualified for
low-interest loans to the subprime division, they earned bonuses and higher
fees.
In the aftermath
of the predatory mortgage lending that targeted African Americans and Latinos,
and even after the passage of the Dodd-Frank Act enacted, in part, to address
this misconduct, the predatory practices used in the mortgage context werereplicated by the auto industry. Auto
dealers often connect auto buyers to lenders.
The dealers are allowed to engage in discretionary pricing when setting
interest rates and there is evidence that dealers charge consumers of color
more for their auto loans than they charge similarly situated white
consumers. As was true in the mortgage
context, these predatory loans are assigned to other institutions. When it was created, The Consumer Financial
Protection Bureau covered auto lenders but only if they do not assign the
loan. The creation of the CFPB under
Dodd-Frank left unprotected those consumers whose auto loans were assigned.
The stunning
audacity of this type of economic discrimination in the auto industry becomes
even more outrageous when we consider the Bush administration’s decision to
bail out Chrysler and General Motors along with the banks and other financial
institutions near the end of the twenty-first century’s first decade. The justifications for bailing out car
companies were identical to the pro-bailout arguments made for the banks. The argument was that like the banks,
Chrysler and GM were too big to fail. If
they failed, massive layoffs at the two companies and the firms that supply
them with goods and services would exacerbate the economy’s demise.
Even more
disturbing is the fact that predatory conduct in the context of home ownership
continues in 2016 under another name. On
April 18, 2016, the New York Times reported on a relatively new practice that
targets low-income homebuyers who are now unable to get mortgages because they
lost homes in the recent downturn, and because banks now adhere to lending
standards. The deals allow home sellers
to provide consumers with high-interest, long-term loans that are known as
contracts for deed. If the consumer can
repay the loan in installments on time, he or she will own the home. But two things make it unlikely for borrowers
to be able to pay on time. First, the
interest rates are exorbitantly high.
Once again we see the terribly familiar practice of imposing interest
rates that make repayment difficult if not impossible. Second, many of the homes are in a state of
disrepair and consumers need to spend money to make the home inhabitable. When a would-be homebuyer defaults on the
contract for deed, the lender may convert the contract to a month-to-month
tenancy. Even worse, the laws that
protect homeowners who default on mortgages from eviction do not apply in this
context.
As long as people need money, there will always be someone to lend it to them... for a price. Like it or not, but credit scoring is the best indicator we currently have of someone's credit-worthiness: using their past use of credit as an indication of their future use. The higher the risk that a lender isn't going to be repaid then the higher the interest rate that the lender will charge. The best way to combat those seeking to exploit borrowers is to put the borrowers in a position in which they have the option to go elsewhere if the rate offered by a lender isn't the best they could get. That comes from effective money-management and education.
ReplyDeleteRyan Holden
I was amazed because the title says "predatory." It caught my attention and here I am reading this article. Thanks for the post.
ReplyDelete