Name of Report: Risk or Race? Racial Disparities and the Subprime Refinance Market
Organizational Affiliation: Center for Community Change
Author: Calvin Bradford (Calvin Bradford & Associates, Ltd.)
Date: May 2002
Contact Information: 1000 Wisconsin Avenue, NW , Washington , DC 20007 Phone: (202) 342-0519 Fax: (202) 333-5462 Email: Afishbein@communitychange.org Dgoldberg@communitychange.org Website: http://www.communitychange.org
Pages: 9
Content Summary
Subprime mortgage lending provides an opportunity for high-risk borrowers to finance homeownership. Although subprime lending can help to open up lending markets to under-represented populations, its benefits are limited. Most subprime borrowers, whose credit does not meet eligibility requirements for conventional loans, use collateral in their homes for debt consolidation. The widespread abusive credit practices of subprime lenders, however, cause high rates of foreclosure within this market, and place borrowers at a greater-than-average risk of home equity loss. Foreclosures reflect badly on a borrower's credit and on his/her neighborhood, potentially setting off a chain of depressed property values, neighborhood deterioration and disinvestment
Previous work in this area has revealed consistent patterns within the subprime lending market that have raised questions about fair-lending practices. For example, African-Americans and Hispanics make up a disproportionate share of subprime home refinance mortgage loan recipients. Subprime borrowers are also geographically concentrated in certain neighborhoods within each metropolitan statistical area (MSA). This study examines the disparity in the percentage of subprime home refinance loans awarded to African-Americans and Hispanics as a group, and to Whites. The study differs from previous work because it provides both a national and regional analysis of lending practices. It also analyzes the impact of subprime lending on individual neighborhoods, and attempts to characterize the neighborhoods where this market is most concentrated, and therefore most vulnerable to predatory lending. The results of this study will be available on a new national database on subprime lending.
Major Findings
The findings of this study strengthen the results of similar studies demonstrating that risk alone does not account for widespread racial disparities in subprime lending. Surprisingly, the racial disparity in subprime borrowers persists and is enlarged in higher-income populations. Racial disparities in the subprime lending market are found across all regions of the nation, and in MSAs of all sizes. The study also finds high disparity ratios for neighborhoods with concentrations of African-American and Hispanic populations, compared to mostly White neighborhoods. The report concludes by stating the limitations of its findings: they do not conclusively prove the existence of widespread discrimination in subprime lending practices. They do, however, lend strength to reports of differential treatment of minority borrowers or in industry practices. The findings support the position that racial discrimination may be a factor in explaining the racial disparities in subprime lending markets, especially in light of the persistent racial discrimination in U.S. home finance markets generally. Other factors that may contribute to the disparity include a relative lack of prime lenders in minority markets, aggressive marketing by subprime lenders in minority communities, and behavioral differences by race, regarding financing options.
Related Issues
Although this report found racial disparities in the subprime market across a demographically diverse population, it did not attempt to relate these disparities to discriminatory practices found in other markets. Additional discussion of the well-researched effect of discrimination on racial disparities in the U.S. home finance market in general (Zhou & Shaw), in the small-business credit market (Blanchflower et al.), or in alternative financing programs for assistive technology (Carey et al.) would strengthen the claim that something other than "risk alone" influences the composition of the subprime market.
Furthermore, a recommendation as to how lenders can unearth "hidden" discriminatory lending practices would impart a proactive and preventive outlook to this report. A 2003 study (Agarwal et al.) describes a successful model of self-assessment of fair-lending practices for banks, which focuses on examining underwriting policy guidelines. A similar approach to examining fair-lending practices among subprime lenders could potentially uncover policies that place minority communities at a greater risk of predatory lending.
Reference List
Agarwal, Sumit, Shumin Li , and Lawrence Mielnicki. "Mortgages, Minorities and Discrimination: A Bank-Specific Approach." Housing Studies 18.3 (2003): 295-303.
Blanchflower, David G. , Phillip B. Levine , and David J. Zimmerman . "Discrimination in the Small-Business Credit Market." The Review of Economics and Statistics 85.4 (2003): 930-943.
Carey , Allison C. , Virginia DelSordo , and Amy Goldman . "Assistive Technology for All: Access to Alternative Financing for Minority Populations." Journal of Disability Policy Studies 14.4 (2004): 194-203.
Zhou , Bin and Wendy Shaw . "Financial Transformation and Portfolio Reallocation: Impacts on House Mortgage Finance in the USA ." Housing Studies 19.2 (2004): 207-228.
How to Access Report
Contact Kendra Wess .
Email: kwess@communitychange.org
Contact Karen Khan . Phone: (202) 339-9364
Mail: Center for Community Change Attn: Karen Khan
1000 Wisconsin Ave, NW Washington , DC 20007
See website for details: www.communitychange.org