New Study Shows Minorities Targeted for Risky Loans


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New Study Shows Minorities Targeted for Risky Loans

As financial reform works its way through the Senate, a new study by the National Community Reinvestment Coalition (NCRC) indicates that subprime lending and subsequent resulting foreclosures were led by the private market and contained a clear racial component not explained by objective underwriting criteria. African American and Latino borrowers were more likely to receive a subprime loan, and to go into foreclosure, than similarly situated white homeowners, controlling for credit risk and other borrower, neighborhood and loan characteristics. The Government Sponsored Enterprises (GSEs) appeared to have a moderating effect on risky and abusive lending practices; privately securitized loans went into foreclosure twice as often as loans backed by the GSEs. The study can be downloaded at www.ncrc.org.

“Private market players, from brokers to mortgage lenders to Wall Street, created a lending pipeline typified by risky, abusive and unfair practices,” said John Taylor, president and CEO of NCRC. “It is a shameful condition that borrowing while black or Latino remains a hazard in this country. Without strong regard for the risky characteristics of the products they were peddling, lenders and Wall Street chose short-term profits over fair and prudent lending. These risky products were targeted to certain communities at first, and then spread elsewhere.”

“In the very place that Congress calls home, the ongoing existence of these problems is unconscionable. The study demonstrates the need for strong financial reform and the creation of an independent Consumer Financial Protection Agency that many of us have understood for a long time,” said Taylor. “The existing regulators have simply failed in their duty to protect American consumers. What’s more, the troubling racial disparities demonstrate the ongoing necessity of the Community Reinvestment Act, which needs to be strengthened and expanded to cover mortgage lenders and Wall Street, the chief purveyors and purchasers of risky subprime loans.”

The study uses regression analysis to examine a statistical sampling of loans in the Washington, DC, area. The patterns presented are similar to national trends. The findings of the study include:

 Latinos were 70 percent more likely and African Americans 80 percent
more likely than their white counterparts to receive a subprime loan.

 African Americans were almost 20 percent more likely and Latinos were
90 percent more likely than their similarly situated white
counterparts to go into foreclosure.

 Loan characteristics, especially payment-to-income ratios, adjustable
rates, high-costs (subprime) and balloon payments were found to have a significant effect on loan performance.

Source: National Community Reinvestment Coalition

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