Thursday, August 20, 2009

Will talk of economic recovery preclude consideration of the causes of the financial collapse?

In the last few months, some have asserted that the economic downturn is slowing. And, this month, The Federal Reserve announced that the economy is improving. Most predict that the recovery will be slow.

The recovery will be slowest in minority communities that were financially vulnerable long before the recent financial collapse. We should not allow the rosy forecasts about the beginnings of an economic recovery to obscure our understanding of the conduct of the corporate actors who precipitated further financial decline in African American and Latino communities.

Nonbank lenders, some of them public companies, targeted minorities for predatory lending schemes during the height of the subprime lending debacle. Their conduct violated Title VIII of the Civil Rights Act of 1968 – The Fair Housing Act (“FHA”). The FHA prohibits discrimination on the basis of race and other factors when making or purchasing loans for purchasing, constructing, or improving a dwelling. We should also examine the governance systems of the financial institutions that did business with the lenders that violated the FHA. To what extent did lax corporate governance prevent Wall Street from engaging in the kind of oversight and decision making that would have avoided the excessive risks that were undertaken in the height of the subprime mortgage market?

Most Wall Street firms did not employ the people who dealt with borrowers and approved predatory mortgage applications. This work was outsourced to independent companies in order to keep costs down. What responsibility did the financial institutions have to ensure that the companies to whom they outsourced this work complied with the FHA? Did financial institutions such as Lehman Brothers, Bear Stearns, Wells Fargo and others owe a duty to ensure that the brokers and nonbank lenders who sold them mortgages complied with the FHA?

We should also take a critical look at the discourse generated by conservatives about the relationship between lending to minorities and the financial collapse. Many conservatives blamed the financial crisis of 2008 on the enactment of the Community Reinvestment Act of 1977 (CRA”). The CRA was enacted to require banks covered by the FDIC to refrain from the discriminatory practice of redlining under which they refused to lend to specific minority and low-income residents. Conservatives argued that the quest for increasing home ownership among minorities and working class Americans caused the economic crisis. This focus on the alleged inadequacies of minority and working-class borrowers eclipses the role that financial and lending institutions played in causing the financial collapse. It precludes consideration of ways to improve the governance and best practices of financial and lending institutions.


  1. Predatory lending results in exorbitant fees above the amount needed or requested for improving a dwelling. Reverse mortgages and home
    equity loans are suppose to benefit seniors and
    low income borrowers.However,the attached fees are so excessive that wise thinking applicants
    prefer to use portions of their "nest eggs" and settle for less than previously planned. Until
    lending institutions are compelled to treat borrowers with integrity and concern as opposed
    to greed and disdain, efforts need to be made to
    educate and inform the potential victims.

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  3. Everyone dreams of home ownership, however in minority communities that dream is harder to achieve. Driving through minority communities you don't find the big five-real estate offices, you do find an abundance of check cashing stores. Is it any wonder that minorities would be subjected to predatory lending when they are under-serviced throughout the process.

    The rule of thumb for subprime loans were:
    A++ 125% financing 721-850
    A+ 100%, 103%, 107% financing 700-720
    A Borrower pays stated rates 660-699
    A- Borrower pays .5%-1% more than A 620-659
    B Borrower pays 1%-2% more than A 580-619
    C Borrower pays 2%-3% more than A 579 -