For Black Americans, Financial Damage from Subprime Implosion Is Likely to Last

Ylan Q. Mui, Washington Post, July 8, 2012

The implosion of the subprime lending market has left a scar on the finances of black Americans—one that not only has wiped out a generation of economic progress but could leave them at a financial disadvantage for decades.

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For blacks, the picture since the recession has been particularly grim. They disproportionately held subprime mortgages during the housing boom and are facing foreclosure in outsize numbers. That is raising fears among consumer advocates, academics and federal regulators that the credit scores of black Americans have been systematically damaged, haunting their financial futures.

The private companies that calculate credit scores say they do not consider race in their formulas. Lenders also say it is not a factor when deciding who qualifies for a loan; federal laws prohibit the practice. Still, studies have shown a persistent gap between the credit scores of white and black Americans, and many worry that it is only getting wider.

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The Federal Reserve is collecting data on how the recession has affected credit scores by race, in what is expected to be significant research on the issue. But the widespread belief among economists, consumer advocates and community leaders is that black Americans are falling behind.

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{snip} Data collected by the Federal Reserve from 2003—in the most comprehensive study on race and credit scoring to date—showed that less than a quarter of blacks had prime credit scores. Meanwhile, about 65 percent of whites were in this top tier.

The gap got wider as black and white Americans grew older, the Fed found. By age 75, the average black consumer’s credit score still had not reached the national average.

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Banks and industry groups often cited low credit scores as one of the main reasons black consumers were denied loans at higher rates than whites. According to the 2000 Census, less than half of black households owned their homes, compared with nearly three-quarters of whites. Consumer advocates said the lack of credit in black neighborhoods was so pervasive it is dubbed “redlining.”

The housing boom helped change that. New financial instruments created by Wall Street helped generate enormous pools of money for mortgage lenders to distribute—and blacks were one of the largest untapped markets. Riskier borrowers with lower credit scores qualified for mortgages, albeit with higher interest rates and fees or unconventional terms.

At first, the shift was heralded as a way to help boost homeownership in black neighborhoods. The move also dovetailed with federal initiatives to promote fair lending. And the financial industry uncorked a lucrative new market that created jobs and drove the economy.

“There was a loan for almost anybody who wanted a loan. It was just priced differently based on credit,” Andrew Sandler, a lawyer for Wells Fargo, said of the industry at the time.

But the movement backfired. Borrowers with the new breed of subprime loans defaulted at alarming rates, sending the economy into a tailspin. Many of those mortgages were made using false information or shoddy underwriting. Instead of helping black communities build wealth, the lending boom destroyed it.

Pew Research Center analysis last year found that the wealth of blacks plunged 53 percent during the recession, driven by falling home prices. The average net worth of a black household in 2009 was $5,677, according to the study, the lowest of any racial group. {snip}

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Civil rights groups say those personal anecdotes underscore a more fundamental fear: that the country is headed toward a kind of financial segregation.

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Groups such as the NAACP and the National Urban League say the black middle class is shrinking as a result. Lisa Rice, vice president of the National Fair Housing Alliance, says the country suffers from what she has dubbed the “dual credit market.” Longtime civil rights attorney John Relman, who has won millions of dollars from companies such as Avis and Denny’s in discrimination lawsuits, has set his sights on the banks.

“Race and economic injustice always go together in this country,” Relman said.

A month ago, the Justice Department reached a $21 million settlement with SunTrust over what it called a “racial surtax” on home loans. For instance, it said black borrowers in Atlanta were charged $745 more in fees than white borrowers with similar credit histories and qualifications.

“SunTrust’s African American and Latino borrowers had no idea they could have gotten a better deal, no idea that white borrowers with similar credit would pay less,” Assistant Attorney General Thomas Perez said. “That is discrimination with a smile.”

The Justice Department also reached a $335 million settlement with Bank of America over similar charges last year and is investigating Wells Fargo. The banks have denied wrongdoing.

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