Jesse Jackson said today that mortgage companies and other lenders discriminated against black Americans by “profiling” them and that the rash of home mortgage foreclosures could initiate a “sustained depression”.
Am I being naive or is what J.J. calls “racial profiling” is more commonly known as “risk assessment”?
One of Jackson’s sources is the National Community Reinvestment Coalition. Here’s a link to a report of theirs from June of this year. Some of the highlights:
Market failure is rampant and all stakeholders, industry and government alike, are collectively responsible for this failure. The lending industry has created a system in which no one is accountable when the tsunami hits borrowers.
This is not at all true, of course. Borrowers bear the full weight and responsibility for the debts that they willingly, even eagerly, in the case of low interest rate home loans, take on.
The lending industry’s responsibilities are few indeed. One is that they must operate within the law. For instance, lenders mustn’t deceive borrowers as to the terms and conditions of their loan agreement or discriminate against borrowers based on skin color. While key financial data such as credit scores and income levels is definitely related to race and ethnicity I don’t see that as a problem in and of itself.
That’s because lenders’ primary responsibility is to their owners, whether private partners or corporate stockholders. Their sole objective is to make money, meaning their very nature is to put customers into loans that pay as high an interest rate as possible. But competition – and home mortgage lenders are a dime a dozen in a metro area like Chicago – doesn’t allow this tendency to generate profit to grow without bound, particularly in an industry that has relatively low barriers to entry.
It’s ridiculous to claim that the lending industry is responsible for borrowers’ plights. People gambled by making purchases they couldn’t afford and got burned. But no one made them take that risk and we don’t owe them a bailout as a result.
But is there something to what Jackson alleges?
Our results documented the following disturbing patterns:
1. African Americans and Latino’s were discouraged 25% of the time concerning their efforts to meet with a broker, while Comparison testers were discouraged only 12% of the time in their efforts to obtain credit.
2. Brokers spent more time with white shoppers then African Americans and Latinos, spending on average 39 minutes with white testers and only 27 minutes with African American and Latino testers.
3. White mortgage seekers received greater encouragement over sixty percent of the time, while African Americans and Latinos were questioned about their credit over 32% of the time. White shoppers were only questioned about credit 13% of the time.
4. White mortgage seekers had specific products discussed with them 91% of the time, while African Americans and Latinos had specific products discussed with them 76% of the time. Further, White testers received two rate quotes for every one quoted to African American and Latino testers.
5. NCRC documented pricing discrimination in 25% of the fair lending tests, and noted that fees were discussed 62% of the time with white testers but only 35% of the time with “protected testers.”
6. Fixed rate loans were discussed 77% of the time with white testers but only 50% of the time with African American and Latino testers.
These results are very troubling and document the fact, controlling for credit and individual applicant qualification factors, African Americans and Latinos are being discriminated against in the marketplace and being forced to pay a “race tax” due to unequal access to credit.
If this information is accurate then I would agree that the lending industry has some explaining to do (and quite possibly some additional financial penalties to pay).
Did lenders fail to disclose financial alternatives with their customers based on race? And did they do so deliberately with the idea that minorities who might be less informed about the borrowing process would fail to protect themselves as a result of not knowing the right questions to ask?
Although I firmly believe in the concept of buyer beware, I find the potential answers to these questions disturbing. I’d like to think that financial advisers fulfill their legal and ethical obligations to their customers by treating them all with respect and giving them all of the information they need to make an informed borrowing decision.
On the flip side, I’d also like to believe that Americans have enough intellectual wherewithal to manage their own finances. That’s clearly not the case for too many of us. But ultimately we have to take responsibility for our own actions.
The NCRC says, “The federal government holds ultimate responsibility for allowing the mortgage market to spin out of control.”
That’s a nice sound bite. Unfortunately it’s not true. That responsibility for the foreclosure mess lies squarely on the shoulders of borrowers who should have known that they were getting in over their heads.