Friday, August 14, 2009

Predatory Lending and the Racial Wealth Gap

Disparities in wealth between white Americans and people of color have grown in the last thirty years in spite of dramatically increasing levels of educational attainment on the part of African Americans and Latinos. For every dollar the median white family owns, the median Latino family owns twelve cents. For every dollar the median white family owns, the median Black family owns ten cents. Many have written about and discussed the fact that African Americans and Latinos have less wealth than white Americans. But, to the extent this wealth gap is discussed, it has been without the benefit of context. It is time to add context so that we understand at least one of the underlying causes of the racial wealth disparity. The predatory lending that occurred during this decade provides the context that illustrates the type of structural and institutional racism that impedes the economic advancement of people of color.

Predatory lending and mortgages should be distinguished from subprime lending. Subprime mortgages and loans extended to low-income borrowers have enabled many to purchase homes and other consumer goods that would otherwise be out of reach. The interest rates of subprime loans are higher than the rates on prime loans to account for the risk that lenders would not be repaid when a borrower’s income is low or her credit history is weak. Predatory lending, however, involves excessive and unnecessary fees. Predatory lenders steer borrowers into expensive loans even when they qualify for more affordable credit.

Local, state and federal investigations across the nation have revealed that real estate professionals targeted people of color for predatory loans. Even middle and upper income African Americans and Latinos were led into subprime loans and mortgages even though they qualified for prime loans with much lower interest rates. In 2006, the National Community Reinvestment Coalition reported that in more than 70% of the neighborhoods it investigated, middle and upper income people of color were twice as likely as middle and upper income whites to receive high cost loans. The high rate of foreclosure caused by predatory mortgage lending has drained almost $200 billion from African American and Latino households.

Some of the lenders that engaged in predatory lending were public companies. And, we should also understand the relationship between predatory lenders and the financial institutions that did business with them. The relationship between Wall Street firms such as Lehman Brothers, Bear Stearns, and Merrill Lynch, on one hand, and predatory mortgage lenders and brokers, on the other, involved two aspects. First, Wall Street firms provided large loans to nonbank mortgage lenders that enabled them to make the predatory loans to prospective homeowners. Second, nonbank lenders were funded when they sold mortgages to major financial institutions as part of a securitization process in which investors purchased interests in pooled mortgages. In other words, the mortgage lenders and brokers who engaged in fraudulent and predatory lending could not have been in business without the help of Wall Street’s financial institutions.

Many of the predatory lenders and the financial institutions that did business with them have failed. But, it is important to understand the role of these companies in draining billions of dollars in wealth from communities of color. Understanding their role is essential to comprehending one of the most salient causes of the widening wealth gap between white Americans and Americans of color. Articulating the fact that there is a racial wealth gap without discussing the reasons it exists implies that the gap is attributable only to some deficiency in the financial acuity of people of color.


  1. Thank you for this post.

    Recently, in Illinois, the state filed charges against Wells Fargo for predatory lending targeting minority communities. Here is the link:

  2. I'm an eighty plus year old senior who appreciates your analytical approach in challenging the status quo of disparities in wealth between white Americans and people of color. It's an uphill struggle that continues, regardless of competency or education, against
    unfair labor and loaning practices.

  3. It, is unbelievable to think that after all the hard work the government did to create equality in America that we are still so far behind in actually having equality. It's no surprise the large loans from big companies are considered predatory because that's exactly what large comapanies are...predators!
    -David Rubin, St. Thomas University School of Law

  4. One main reason predatory lending exist is because of uneducated consumers. It would behoove us to educate ourselves and know what fees are customary and what fees are nonsense. Brokers getting paid on the front as well as the back end. Most banks don't require a prepayment penalty so why would it be required on a interest only loan for someone who has a 750+ credit score who will have to refinance in 5 years. Most people don't know what to ask because this isn't something the average consumer does on a daily basis.

  5. The oversight mechanism for the mortgage market was lacking for many years, which contributed significantly to the housing bubble and subsequent decline. With little oversight, it is hardly surprising that predatory lenders would seek to exploit anyone they can. Even people with a financial background can be overwhelmed when trying to understand all the fees, the interest rate amortization schedules, and the optimal capital financing decisions that should be made when evaluating different funding options. Couple the complexity of the options with mortgage brokers with no morals, banks that simply cared to resell the bad loans on the open market, and "hard sale" tactics, and there is a bad recipe. The lending industry should be regulated no differently than perhaps the public accounting sector. Tests and background checks should be required for mortgage brokers, and more strict criminal statutes to reduce predatory lending towards lower income groups should be enacted.