Mortgage Discrimination in the African American Community - Essay Example

Case Study: Mortgage Discrimination in the African American Community Multiple studies confirm a culture of predatory and abusive mortgage discrimination against African Americans. The recent burst in the housing and mortgage bubbles have created controversy that seems to cross ethnic lines, but African Americans have been particularly hard-hit in the bust because of discriminatory practices perpetuated by mortgage lenders for several decades prior to this most recent crisis. African Americans are disproportionately represented at rallies and protests, and several organizations (notably the NAACP) are targeting research and education to African Americans specifically. Discussions of discrimination can raise the blood pressure of even the most neutral person. On the one hand, there are those who steadfastly claim there is no such thing as discrimination in the mortgage industry: everyone is an “equal opportunity housing lender,” after all; it says so right on the application. On the other hand, there are those who have examined the issue with as much neutrality as possible and have arrived universally at one conclusion: all things being equal (such as similar credit reports, income, and down payments) African Americans are the victims of predatory, abusive, and discriminatory mortgages at a sickening rate. Just a quick glance at a few numbers: It’s estimated that 55 percent of African American households received subprime loans in 2006, compared to less than 20 percent of white borrowers (Fishbein, 2007). In 2002, median net worth for an average African American was $5,998. Median net worth for an average white was $88,651 (Calhoun and Bailey, 2006). Upper-income blacks are twice as likely to receive higher cost loans as their lower income white counterparts (NAACP.org). More than 70 percent of subprime loans are engineered by mortgage brokers, not lending institutions (Fishbein, 2007). In 1993, approximately 100,000 subprime loans were originated. In 2001, more than a million subprime loans were originated. In 2008, more than 65 percent of subprime loans were refinances, not direct purchase (ACORN.org). Racial discrimination is often hidden and it certainly can be inadvertent. This does not excuse banks and mortgage brokers accused of discrimination. Three major organizations address this as a part of their foundation missions, and steps have been taken to remedy the problem, such as neutral research, education, and collective action. Before we can understand what organizations and the collective actions of individuals do to expose the problem of discriminatory lending, we must define what we mean by predatory and abusive mortgage loans. Once we have created a broad definition of discriminatory lending, we must seek to understand how the African American community can fall victim to such practices on a broad level through a culture of overt and inadvertent discrimination. The major leaders and organizations involved in exposing the problem have a multi-pronged approach to the problem, and institutional recognition of the problem lends strength to individual collective action. Finally, there are several effective actions both organizations and individuals can take in the future to reduce discriminatory lending in the African American community, in the hope of preventing these major issues from arising again. Predatory and Abusive Mortgage Loans Defined Allen Fishbein (2007), director of the advocacy group Consumer Federation of America (CFA), offers this insight: “Predatory loans are generally viewed as loans where the loan originator is taking advantage of a borrower’s lack of sophistication…. Predatory lending has been particularly rampant in the subprime market” (30). Delgadillo, Erickson and Piercy (2008) define predatory lending as consumer loans that are aggressively or deceptively marketed; where the lender has a lack of concern over the borrower’s ability to repay; and where high interest rates, excessive fees, unnecessary provisions, and large prepayment penalties are part of the loan structure (313). They add that faulty underwriting is often a component as well. The Center for Responsible Lending (CLR) adds loan flipping (immediate sale of loans to a third party by the originator) and mandatory arbitration (clauses which state that in a dispute, judicial remedies cannot be sought, only arbitration) to the list of items identifying predatory loans (CLR.org, 2009). Finally, Engel and McCoy (2007) point to equity stripping schemes such as refinancing zero-interest Habitat for Humanity loans. It would be hard to imagine the marketing spin a mortgage broker could put on such an abusive tactic, but it happened to thousands of unsuspecting or uninformed people. Predatory loans typically occur in the subprime market (Delgadillo, Erickson, and Piercy, 2008). Subprime loans occur in every income bracket, and are ostensibly related to credit worthiness. The borrower’s credit record, of course, is part of the loan application; underwriters look not only at the estimated credit score but also the borrower’s credit history. Past debts that have been turned over to collection agencies, late payments, or recent bankruptcies all affect the underwriter’s opinion of credit worthiness (Ross and Yinger, 1999). So, no matter the income or credit score, anyone could fall into a subprime loan (Turner and Skidmore, 1999; Delgadillo, Erickson, and Piercy, 2008). Social Basis for both Overt and Inadvertent Discrimination A complex web of factors contributes to current discriminatory lending practices. For the last 100-150 years, social stigmatization of African Americans has been a continuous obstacle to equality, and government and community efforts to rectify the situation have only made it worse. For instance, the Urban Renewal movement was a good-intentioned fix for struggling working-class neighborhoods, but gave rise to the “hood” instead of providing fair and equal housing for ethnic communities (Carr, 2008). The stigma that property values fall in middle-class neighborhoods when a black family moves in has still not been overcome. Segregation, while not enforced by law, is still in full effect in practice. Studies show that homeownership in working-class and minority neighborhoods has a direct effect on lowering crime (Squires and Kubrin, 2006). This works because “[residential] stability in communities lowers crime rates by promoting social organization and heightened levels of supervision or social control” (97). Thus it would seem that black families do not hurt neighborhoods. The complexity of the issue gives rise to two results: (a) it is incredibly hard to prove discrimination because every slip of paper in a loan application says in bold letters, “We are an equal opportunity lender” or similar language; and (b) it is impossible to fix the problem because it is part of the social fabric of our nation. Activists picket individual banks or lobby Congress on specific issues; lawsuits can be filed; some change can occur. Transforming the social fabric is an entirely different matter, especially when there is denial on the part of those in power. The Fair Housing Act was passed more than 40 years ago. Carr (2008) quotes the National Fair Housing Alliance estimate that 3.7 million instances of discrimination still occur each year (414). If discriminatory lending practices are viewed through an extremely cynical lens, it could be said that anti-discrimination rules have not fixed anything, and have made it more difficult to prove discrimination. Banks and mortgage brokers hide behind the thin theoretical veil of those “equal opportunity” words and thus do not have to confront the discrimination that occurs in practice (Ross and Yinger, 1999). Allen Fishbein (2007) sums up the impact subprime loans, predatory lending, and subsequent foreclosures have on a community: [Foreclosures] are a drain on public resources. The foreclosure process involves a significant public cost that is borne by localities. It also involves increases in social services…. All this adds up and becomes a broader societal problem (32). James Carr (2008) echoes these words when he states, “[It is] damage that has left thousands of communities across the nation literally in shambles, many in complete disarray” (414). Foreclosures stem directly from abusive loans with rapidly rising interest rates and other poor terms, and from inaction on the part of lenders to refinance loans in a timely manner so families could remain in their homes. Working-class neighborhoods are experiencing conditions similar to the abandoned ghost towns in the early West. The Current State of Banking in Working-Class Communities Banking in African American neighborhoods presents a unique challenge (Squires and Kubrin, 2006; Calhoun and Bailey, 2006; Williams, 2007). Few national banks have branches in the inner city, and people are forced to use check cashing outlets and usurious predatory lenders for their daily banking needs. Despite their positive “emergency loan” marketing spin, only 1 percent of payday lender loans are actually one-time loans, and 91 percent of borrowers receive payday loans five or more times per year (Calhoun and Bailey, 2006). The NCRC conducted a study of the 25 largest metropolitan areas in the United States and found that the number of banks in working-class and minority neighborhoods was significantly fewer than in wealthy and white neighborhoods (Townes, 2007). A similar study conducted in 1997 by the Federal Reserve Board showed that low-income areas had experienced an actual decrease in the number of bank branches when compared with middle- and high-income neighborhoods. Lack of mainstream banking opportunities impacts low-income and minority residents in several ways (Engel and McCoy, 2007; Williams, 2007): without verifiable checking accounts, a loan originator questions income and outgo claims on applications; there is no relationship between the borrower, the lender, and the community; such neighborhoods are ripe for corruption and usury, because there is nowhere else to go; lack of experience with banking practices makes it easier for predatory lenders to convince borrowers they are “getting a great deal”; oversight of lenders and pseudo-banks is slim to none. On the other hand, community development credit unions and banks have a definite role to play in neighborhoods where large, mainstream banks refuse to open branches (Williams, 2007). These institutions often operate in communities where more than half of their members are at or below 80 percent of median income for the area. Many partner with community-based organizations to develop or re-develop the community. Deposits from non-members help these financial institutions leverage funds for community investment including mortgages and small-business loans, and since they are usually chartered and insured by the FDIC, they are attractive to members and non-members alike. These banks and credit unions are valuable partners for grassroots organizations working for change in lending practices at the community level, and frequently partner with these organizations to provide statistics and education for potential African American homeowners. Major Leaders and Organizations Addressing Discriminatory Lending Practices There are three major organizations involved in this grassroots change movement: the National Association for the Advancement of Colored People (NAACP), the National Community Reinvestment Coalition (NCRC), and the Association of Community Organizations for Reform Now (ACORN). Each has a role to play in activism. NAACP. The NAACP was founded a century ago. In 1964 when it was strongest, it boasted 600,000 members; today, it has 250,000 paid members and 225,000 donors (Bello, 2009). It is a nationally-based civil rights organization which confronts discrimination in a huge variety of venues. Using its leveraging power, it does research, produces reports, files lawsuits, lobbies the government and civic organizations, advocates for youth and women, runs a prison project, and many other activities. It also keeps a hand in grassroots, community-based activism, including networking, protesting and organizing (NAACP.org). For instance, during May of 2009, the NAACP is sponsoring a golf tournament scholarship fundraiser in California; the 54th Annual Fight for Freedom Fund Dinner in Detroit, a diversity job fair in Chicago; gospel concerts in Athens, AL and Beloit, WI; and 15 other national events. With all this already going on, leaders say the NAACP must become even more involved in one of W.E.B. du Bois’ primary missions: equal economic rights, including the rising foreclosure crisis affecting blacks across the nation (Bello, 2009; Carr, 2008). The NAACP has been involved in suing 15 banks for predatory lending practices they say unfairly targeted blacks (Bello, 2009). Class action lawsuits concerning predatory lending are not a new development in the fight for fair and equal treatment. Between 1991 and 2006, approximately $1.7 billion in settlements was paid by more than 20 companies accused of predatory lending (Erickson, 2006, cited in Delgadillo, Erickson, and Piercy, 2008; ACORN.org, 2009). Compensation to individual victims remains inadequate to cover the individual costs of lending abuse. While $1.7 billion may seem like an astounding amount of money, it does not filter down sufficiently to the individual plaintiffs in the suits, nor does it sufficiently punish the defendants. In March of 2009, the NAACP filed two lawsuits against Wells Fargo and HSBC, alleging violations of the Fair Housing Act, the Equal Credit Opportunity Act, and the Civil Rights Act (NAACP.org). NCRC. The National Community Reinvestment Coalition (NCRC) was formed in 1990 to “harness the collective energies of community reinvestment organizations from across the country” (NCRC.org, 2009). It serves as a partner to community based organizations, religious institutions, and local and social service providers, in addition to spearheading community organization events and supporting civil rights groups. The NCRC has a long-term vision approach, creating fundamental change that impacts a broad group of people and lends strength to underserved communities. It provides expert testimony in legal actions, legislative and regulatory intervention, and offers advice for individual or class action civil-rights lawsuits regarding discrimination in housing and lending practices. It is highly active in lobbying and was instrumental in the formation of the Community Reinvestment Act. NCRC experts are frequently called upon by national and syndicated news organizations. It frequently hosts town hall events in cities across the nation, bringing an educational aspect to predatory lending and abusive loan issues, and addressing the foreclosure crisis. James H. Carr, CEO of the NCRC, delivered an address to the NAACP about a year ago. In this address, he painted an ugly portrait of how the financial crisis affects African American communities. About 20 percent of African Americans may lose their homes before the crisis is through. More than half of all home mortgages to African Americans were subprime loans. On average, African American households have $10 for every $100 in wealth of typical non-Hispanic white households (Carr, 2008). Because anti-discrimination laws are unenforced, and in some ways unenforceable, Carr calls for a radical change: get rid of the cumbersome and ineffective agencies and processes currently in effect and develop a new oversight cabinet office called the “Department for an Inclusive Society” (Carr, 2008). Carr is only being slightly sardonic when he suggests this. It is indeed a worthy ideal to “eliminate discrimination from our society once and for all” (412) but to accomplish this goal the slate would need to be wiped clean. As a society, we would have to start over, essentially sweeping out all current structures and rebuilding from the ground up, with clear boundaries and consistent reinforcement. It is impossible to wipe the political, judicial, and social slate clean, so activists must operate within current structures and change one thing at a time, in whatever way they have available. Leaders and organizations must do more than research discrimination and provide reports to legislators; they must bring fundamental changes to the mortgage industry and eliminate predatory and abusive (and discriminatory) loans from the market. ACORN. The Association of Community Organizations for Reform Now (ACORN) grew from small beginnings in Little Rock, AK in 1970. It is a grassroots, community-based organization known for its protest tactics. An organized event might consist of a dozen or more ACORN members protesting a particular bank’s branch office, with signs and small sharks stuck on forks as props. It considers itself a “community organization of low- and moderate-income families working together for social justice and stronger communities” (ACORN.org.). It counts more than 400,000 members organized into 1,200 neighborhood chapters across the nation, and estimates it has raised $15 billion in direct monetary benefit for its members and constituents. While most active in housing discrimination and predatory lending issues, ACORN also touches upon the living wage issue by lobbying for the ACORN Working Families Agenda. Its main mission is first time homebuyer education and counseling, along with information on foreclosure prevention, and collective action against predatory lenders. ACORN appeals to individual activists and provides a structure for people who want varying levels of involvement. Petition signings such as the 90-Day Moratorium and the Stop Foreclosures for Real Economic Recovery petition frequently garner thousands of signatures in the community and through the Internet, and are placed directly in the hands of local, state, and national legislators. In November of 2008, the organization presented the “Turkey of the Year” award to mortgage companies who had not adopted the 90-day moratorium; in more than 30 cities, members gathered to show off large banners to the media. But ACORN is known for its direct confrontation techniques: In 2008, a party of two dozen people from ACORN accompanied a homeowner facing foreclosure to the offices of the CEO of Yale Mortgage. Mr. Kahn refused to talk to the group, called the police, and had them run off the premises. The ACORN group had tried multiple ways to help this homeowner in crisis, none of which prevailed, and the protest was a last resort. It is a point of pride that the police are often involved; though ACORN protests peacefully, they refuse to back down until the person or organization they are protesting agrees to listen to demands. Community Members Joining Together to Fight Discrimination Recent newspaper stories regarding protests and demonstrations related to predatory lending and the foreclosure crisis abound. While none of the reporters identify the ethnicity of protest participants, there are always a great number of black faces in photographs of people marching, holding signs, and otherwise calling media attention to discrimination. For these protesters, discrimination crosses ethnic boundaries; there is strength in numbers, and while data and statistics point to African Americans as particular victims of predatory lending and abusive loans, activists leverage the strength of community to make their voices heard. On April 3, 2009, several homeowners spoke at the annual shareholders’ meeting for KB Home, one of the largest homebuilders in the nation, as a group of two dozen construction workers picketed the meeting across the street. KB Homes, in a joint venture with Countrywide Financial, steered homeowners into builder-originated interest-only loans critics say were used to control home prices. One of the protestors told his story to the reporter: KB pressured him into a $430,000 interest-only loan in 2005, and threatened to sue him when he resisted signing the papers. He subsequently lost this home to foreclosure. This article points out that when predatory loans cause financial hardship and foreclosure, construction workers also lose because their incomes have dried up. The article did not mention which organization sponsored the protests (Steinhauer, 2009). On March 22, 2009, a busload of activists visited the lavish homes of American International Group (AIG) executives who received millions in bonuses after their company received a federal bailout. The company doled out approximately $165 million in bonuses overall. Protestors admired the colonial mansions with stunning views of golf courses and the Long Island Sound from a distance, stopped by security guards. The most the activists could do was leave letters for the homeowners urging them to re-think how they have handled the bailout and bonus controversy, and encouraged the executives to share the wealth. “You have a wonderful opportunity to help your neighbors in Connecticut,” the letters stated. “We ask you to consider the experiences of families struggling in this economy.” One of the protestors told the reporter a little more succinctly: “You ought to share it, and God bless you for doing it.” The article did not mention which organizations sponsored the protests (Christoffersen, 2009). On March 12, 2009, more than 60 activists staged a demonstration outside the Hennepin County Sheriff’s office in Minneapolis, MN in an unsuccessful effort to stop the day’s foreclosure sale. The protest was organized by ACORN officials, who are very active in Minnesota, and involved several other grassroots organizations such as the Poor People’s Economic Human Rights Campaign. The head of the PPEHRC was removed by law enforcement but allowed to remain in the protest. After several activists sat down on the floor, Hennepin County Commissioner Gail Dorfman and Chief Deputy Mike Carlson agreed to hold a meeting to address the issue. Sheriff’s officials stated they were simply enforcing the law, whether they liked it or not. Another of the protestors told reporters that she is facing eviction from a home that has been in her family for 55 years because her adjustable-rate mortgage rose from $1,200 a month to $2,200 a month and she was unable to keep up with the payments (Furst, 2009). Outcomes and Future Directions for Activists The larger organizations of the NAACP and the NCRC act in the highest levels of government and the judicial system, and sometimes dabble in direct action; ACORN operates at the very base of grassroots and sometimes dabbles in national politics. Though they approach the problem from different angles, there are universal messages coming from leaders in these organizations calling for transformational change and an end to discrimination. African Americans are the targets of discriminatory loan practices, inadvertent or overt, and by identifying a particular group, change can happen for the “others” who are victims of subprime loans. Perhaps lending institutions could learn a few good lessons from small community development credit unions, which typically offer financial education and counseling as part of the membership package (Williams, 2007). These credit unions help their customers build wealth and assets, and because they are non-profit, do not market abusive loans aggressively—in fact, they market against abusive loans and offer an alternative to the credit-seeking community member. There is a clear and consistent positive relationship between good banking practices and significant impact on borrowers’ lives. There are a few lenders out there at the moment that could use some good feelings from their customers. A set of best practices is a good place to start, but those practices must have some muscle behind them in order to be effective (Turner and Skidmore, 1999). Temkin, Levy and Levine (1999) recommend that banking institutions themselves take an active, organization-wide role in educating borrowers and preventing abusive loans and defaults. Organizations believe they are adhering to fair lending practices because there are multiple checks along the way from application to approval. Managerial practices play an important role in compliance with fair lending rules, and each person who touches an application must have proper training and monitoring. Recommended organizational activities include: Keeping employees current on fair lending requirements; Compensating staff with fair base salaries and small commissions and profit-sharing bonuses; Hiring a diverse workforce; Providing staff with multicultural training while treating everyone fairly; Testing the lending process through third-party evaluation, and abiding by the findings of the third party; Designating one employee to handle all discrimination complaints, responsible for follow-up and resolution of complaints; and Creating a coherent strategy at all levels of the organization to address discrimination issues (pp. 149-152). Again, best practices are a good thing. Unfortunately, lending institutions believe they are already operating under a set of best practices, and discrimination is widespread. It was stated earlier that predatory and subprime loans frequently happen in the mortgage broker-led portion of the market. Regulation of this market is extremely loose and rarely enforced. Leaders call for a review of these unregulated sectors, and perhaps subjecting them to the same sets of rules banks and deposit institutions operate under (Delgadillo, Erickson, and Piercy, 2008; Carr, 2008; CLR.org, 2009). While there are anti-discrimination laws firmly in place on the state and federal level, unregulated agencies and deceptive mortgage brokers can easily sidestep those rules when they are sitting across the table from a perfect mark: an African American working-class citizen with a few dings on his credit, who believes the only way to first-time homeownership or an equity refinance is through the “great deal” the broker has laid out in front of him. Subprime mortgage brokers perform due diligence by pointing out the Fair Housing Act words on each page of the application, and handing out a few HUD brochures titled “Don’t Be a Victim: Protect Yourself from Predatory Lenders.” The rules do not apply, and discrimination is rampant. Racial discrimination is often hidden and it certainly can be inadvertent. These facts should not be used as an excuse by banks and mortgage brokers accused of discrimination. Research bears out that discrimination occurs, and in reality, it doesn’t matter why: it is a problem that needs fixing. Predatory and abusive mortgage loans exist, and African Americans are targeted in disproportionate numbers. Through research and examination, we begin to understand how the African American community can fall victim to such practices on a broad level through a culture of overt and inadvertent discrimination. There are effective actions both organizations and individuals can take in the future to reduce discriminatory lending in the African American community, in the hope of preventing these major issues from arising again. Increased regulation will go a long distance to protect consumers. Education programs should be fully funded and required for all potential homeowners, whether in the prime or the subprime markets. Discrimination should be called out and named what it is, and no longer tolerated. Class-action lawsuits should result in more than monetary dispensation to plaintiffs: changes in law must come hard on their heels. Grassroots pickets, demonstrations and boycotts should reach the ears of lawmakers and policymakers at lending institutions. Legal practices which are unethical, while they may be legal, must be stopped. References ACORN.org. Main website for the Association of Community Organizations for Reform Now. Available at http://www.acorn.org. Bello, M. (10 February 2009). NAACP looks at next 100 years. USA Today, News section p. 3a. Retrieved 11 February 2009 from EBSCO Academic Search Premier database. Calhoun, M. and Bailey, N. (2006). Predatory lending: undermining economic progress in communities of color. Poverty and Race in America. C. Hartman, ed. Lanham, MD: Lexington Books. Carr, J.H. (2008, September). Discrimination. Vital Speeches of the Day, 74(9): 410-415. Retrieved 11 February 2009 from EBSCO Academic Search Premier database. Center for Responsible Lending (CLR) website. Available at http://www.responsiblelending.org. Christoffersen, J. (2009, 22 March). Activists visit high-dollar homes of AIG executives. Tulsa World p. A4. Accessed 21 April 2009 from the ProQuest database. Delgadillo, L.M., Erickson, L.V., and Piercy, K.W. (2008, Fall). Disentangling the differences between abusive and predatory lending: professionals’ perspectives. The Journal of Consumer Affairs, 42(3): 313-334. Retrieved 11 February 2009 from EBSCO Academic Search Premier database. Engel, K.C. and McCoy, P.A. (2007). Predatory lending and community development at loggerheads. Financing Low-Income Communities. J.S. Rubin, ed. New York: Russell Sage Foundation. Fishbein, A. (2007, May). The foreclosure epidemic. Multinational Monitor, 28(3), 30-34. Retrieved 10 April 2009 from Academic Search Premier EBSCO host database. Furst, R. (2009, 12 March). The fight hits home: Protesters targeted a Hennepin County Sheriff’s sale of foreclosed properties as they joined a nationwide call for a moratorium. Minneapolis Star Tribune 12 March 2009. Accessed 21 April 2009 from ProQuest database. NAACP.org. Main website for the National Association for the Advancement of Colored People. Available at http://www.naacp.org. NCRC.org. Main website for the National Community Reinvestment Coalition. Available at http://www.ncrc.org. Ross, S.L. and Yinger, J. (1999). The default approach to studying mortgage discrimination: a rubuttal. Mortgage Lending Discrimination: A Review of Existing Evidence. M.A. Turner and F. Skidmore, eds. Washington, DC: The Urban Institute. Full text electronic book available from http://www.urban.org/url.cfm?ID=106763. Squires, G.D. and Kubrin, C.E. (2006). How home mortgage money reduces crime. Privileged Places: Race, Residence, and the Structure of Opportunity. Boulder, CO: Lynne Rienner Publishers. Steinhauer, J. (2009, 3 April). Ire in foreclosure crisis turns to a home builder. The New York Times late edition, p. A16. Accessed 21 April 2008 from ProQuest database. Temkin, K., Levy, D.K., and Levine, D. (1999). Inside a lender: a case study of the mortgage application process. Mortgage Lending Discrimination: A Review of Existing Evidence. M.A. Turner and F. Skidmore, eds. Washington, DC: The Urban Institute. Full text electronic book available from http://www.urban.org/url.cfm?ID=106763. Townes, G. (2007, November). Banking in the ‘hood: a rip off for consumers. The New York Amsterdam News, November 1-7, 2007: 4, 32. Turner, M.A., and Skidmore, F. (1999). Why it is difficult to measure lending discrimination. Mortgage Lending Discrimination: A Review of Existing Evidence. M.A. Turner and F. Skidmore, eds. Washington, DC: The Urban Institute. Full text electronic book available from http://www.urban.org/url.cfm?ID=106763. Williams, M.E. (2007). The un-banks: the community development role of alternative depository institutions. Financing Low-Income Communities. J.S. Rubin, ed. New York: Russell Sage Foundation. Read More