How Wall St. Screwed Blacks and Latinos

In the 1980s and early 1990s, racial discrimination in mortgage lending resulted in less access to home loans for predominantly black and Latino borrowers and neighborhoods. Home mortgages were a fairly standardized product, and the problem was that banks avoided lending in minority neighborhoods (redlining) and denied applications from blacks and Latinos at disproportionately high rates compared to equally creditworthy white applicants (lending discrimination).

Soon afterwards, however, a different form of lending discrimination rose to prominence as high-cost subprime loans became increasingly common. Precisely because borrowers and neighborhoods of color had limited access to the traditional prime loans, they were vulnerable for exploitation by predatory lenders pushing the new product.

Redlining was soon over-shadowed by “reverse redlining.” Instead of being ignored, borrowers and neighborhoods of color were now aggressively targeted for high-cost subprime loans. Community groups documented and aggressively publicized the problem, and the U.S. Department of Housing and Urban Development (HUD) reported in 2000 that “subprime loans are five times more likely in black neighborhoods than in white neighborhoods.” By the final year of the Clinton administration, government regulators were mobilizing to take action against this plague. But once the Bush administration took over in 2001, predatory lenders had nothing to fear from the federal government.

In the early 2000s, predatory lending began to take on a new and more explosive form. Mortgage brokers earned high fees for persuading borrowers to take on high-cost loans from lenders, who then sold the loans to big Wall Street firms, who in turn packaged them into “mortgage-backed securities” that were sold to investors. Everybody earned big fees along the way—in fact, the worse the deal was for borrowers, the bigger the fees for everyone else—and so the system gathered incredible momentum. Wall Street’s demand for loan volume led ultimately to a complete lack of lending standards and millions upon millions of loans were made to borrowers who had no realistic prospect of repaying them.

For present purposes, the most important aspect of this appalling story is that these exploitative high-cost loans were strongly targeted to borrowers and neighborhoods of color. My own research on lending in Greater Boston during 2006, the peak year of the subprime lending boom, found that 49% of all home-purchase loans to blacks, and 48% of all home-purchase loans to Latinos, were high-cost loans, compared to just 11% of all loans to whites—and that the share of high-cost loans in predominantly minority neighborhoods was 4.4 times greater than it was in predominantly white neighborhoods. Similar racial and ethnic disparities were documented in numerous studies all across the country. Echoing work by researchers at the Federal Reserve Bank of Boston fifteen years earlier, the Center for Responsible Lending made use of industry data to demonstrate that these disparities could be only partially accounted for by differences in credit scores and other legitimate measures of borrower risk. In other words, they again provided statistical proof that racial discrimination was at least partly responsible for the observed racial disparities.

Nevertheless, federal regulators again did virtually nothing in response to the abundant evidence of violations of fair housing laws. Their most vigorous action was when the Comptroller of the Currency, the principal regulator of the nation’s largest banks, actually went to court to stop New York’s attorney general from enforcing that state’s anti-discrimination laws against big national banks.