Thursday, August 5, 2010

Dodd-Frank X: Finally Doing Something About Race?

As the above chart from United for a Fair Economy shows, even high income minorities are much more likely to end up with high-cost, subprime mortgages than low income whites. The full report entitled State of the Dream 2008: Foreclosed is available here. This report is consistent with overwhelming evidence that minority borrowers were too often steered into subprime mortgages even though they qualified for less costly prime mortgages. As the National Coalition for Community Reinvestment found in a recent report, blacks are 80 percent more likely to end up in a subprime loan than whites, and Latinos 70 percent more likely, even after controlling for credit score, income, loan-to-value ratios and neighborhood characteristics. This racial steering dynamic, so central to the entire crisis, has also been detected in carefully structured audit studies. Indeed, Illinois Attorney General Lisa Madigan (and Loyola University Chicago alumnae) recently filed a massive lending discrimination lawsuit against Countrywide Financial alleging precisely this kind of massive and systematic steering after an exhaustive investigation based upon interviews with former employees, borrowers and a review of nearly 100,000 loan files. Many other such suits are now pending or have settled. As Cheryl Wade highlights, this racial steering has devastated communities of color.

So what does Dodd-Frank do to address this thorny problem?

Section 1403 simply provides: "For any residential mortgage loan, no mortgage originator shall receive from any person and no person shall pay to a mortgage originator, directly or indirectly, compensation that varies based on the terms of the loan (other than the amount of the principal)."

Section 1404 then creates a broad private action for violation of this provision: "The maximum amount of any liability of a mortgage originator. . . to a consumer for any violation of this section shall not exceed the greater of actual damages or an amount equal to 3 times the total amount of direct and indirect compensation or gain accruing to the mortgage originator in connection with the residential mortgage loan involved in the violation, plus the costs to the consumer of the action, including a reasonable attorney's fee."

This simply eliminates any incentive for steering, racial or otherwise.

But, Dodd-Frank does more. Section 917 requires a study regarding financial literacy. Section 1021 requires the new Consumer Financial Protection Bureau to conduct financial education programs. More education for consumers and the investing public in a true capitalist economy makes good sense. Markets pervaded by ignorant market actors are bound to spin into dysfunction.

More importantly, in a nation pervaded by tacit acceptance of white supremacy or widespread delusions regarding our so-called post-racial society, it is rather refreshing to see some reforms that could actually mitigate continued racial oppression, albeit in a facially non-racial way.

Combined with the near abolition of predatory lending, this near abolition of steering in mortgage lending holds the promise (much depends upon regulatory follow-up) of never permitting the subprime debacle to recur.


  1. I can personally relate to this blog. During my first time homebuyer experience the majority of the mortgage brokers I encountered tried to sale me a subprime mortgage. I qualified for a fixed mortgage due to my credit but that did not matter to the majority of the mortgage brokers. My working in the banking industry for several years and advice from family aided me in making the right decision. But many people do not have that experience or a person who has their best interest in mind to educate them concerning mortgages. As a result, many people have been taken advantage of by mortgage brokers who are more concerned with the money they will make from the YSP due to selling a subprime mortgage, instead of the mortgage that is in the best interest of their client. I absolutely agree that education is a very important factor and I commend Dodd-Frank for bringing it to light and Steven Ramirez for sharing the information.

  2. I wonder if money was the motivation or unintentional racism? Negative stereotypes about blacks are feed to many of us from childhood, this causes a wrong but almost natural distrust of blacks. When working in a professions where the client is judged on honesty and reliability it should not come as a surprise that blacks are discriminated against. I hope we see the regulatory follow up needed to keep everyone in check.