January 20, 2009

Who exploited minority subprime borrowers?

On the CreditSlips blog, Harvard Law School professor Elizabeth Warren (co-author of The Two Income Trap, which I reviewed for VDARE.com in 2003 here), wrote last summer:

From Redlining to Target Practice

posted by Elizabeth Warren

Redlining was a practice that banks once used: hang a map on the wall, draw a red line around minority neighborhoods, and deny all mortgage loans inside the line. The results were devastating--depressed prices because no one could get financing to buy homes and underinvestment in African American and Hispanic communities.

But those bad old days are gone. Now some lenders seem to draw a line around minority neighborhoods, then paint a big bulls-eye on them. That's where they target their worst mortgages. Massachusetts Attorney General Martha Coakley filed suit yesterday against Option One, the mortgage arm of H&R Block, alleging that they piled on costs for non-white families.

The specific examples are breath-taking: A black borrower with a 523 credit score paid $10,635 to refinance $167,000, while a white borrower with a 520 credit score paid $2,275 to refinance $200,000. Coakley said this was happening systematically across Massachusetts and elsewhere in the country. ...

Why isn't there an outcry against H&R Block? This is a well-known company with offices in minority and white communities across the country. Yes, they sold their housing unit this spring, but Coakley says this company followed procedures that systematically targeted minorities to pay far more than whites for the same loans. Coca-cola made national headlines years ago when some executives were caught on tape making racist comments. What about following policies that, if proven, show that this company stripped hard work black and Hispanic families of their money? Where are the boycotts and the cover stories in Newsweek and Time?

A commenter named Russ cut through the HLS professor's naievete and makes an important point:

Here we go again blaming the big bad lenders. I say these types of lawsuits are bunk. I am a black mortgage broker and the reason I say they are bunk is because I would bet a sizeable sum of money that the LOs [loan officers] banging those borrowers for $10k in fees are black too.

See, most successful LOs have a niche. And often that niche is race, ethnicity, religion, etc. That is how you earn business. Often times, when I see minority borrowers getting taken advantage of, it is by other minorities. They prey on the trust factor. The borrowers also don't make any effort to comparison shop. A five minute phone call will expose any broker/banker trying to take advantage of a borrower with excessive fees. Most brokers don't need to make $10k on a loan to be happy. However, without actually seeing the fee break down and specifics of the loan, it is hard to say if $10k in fees is excessive. On the surface it is, but there are times when it is justified particularly if that money is being used to buy out of a prepay penalty, discount points, etc.

Anyone with a 532 FICO score should be happy a bank is even willing to give them a loan, even if it cost $10k. A 532 FICO means you don't pay anything on time... EVER. I wouldn't loan a person with a 532 FICO a stick of gum. I have seen people 6 mos out of bankruptcy with scores higher than a 532. That FICO score is frame on the wall material. It also means one of the other bureaus scores were lower since lenders use the middle score!

It is hard to say these actions are systematic. I have NEVER seen a bank have different pricing for people based on race. The ONLY things that matter are credit, income, assets, property, and loan to value. Any pricing variation is ALWAYS done at the loan officer level since the LO is the one who ultimately controls price (rate and fees). That variation is based on how much work is needed to actually get the file closed. Subprime loans often take a ton of work - massaging credit scores, credit repair, etc....

Like I said, the only discrimination is at the individual LO level. Some LOs may charge more to unsavy borrowers regardless of race. If the borrower isn't shopping the LO and the LO feels they can get away with it, the borrower gets charged more regardless of race.

We know from the Ian Ayres study that Malcolm Gladwell and I notoriously disagreed upon that car dealers expect to extract more profit out of blacks than out of whites, so it would hardly be surprising if loan officer pile more fees on blacks on average. But, an awful lot of the loan officers doing the exploiting will be the same ethnicity. This is especially true for Spanish-speaking borrowers. Of course, borrowers with 532 FICO scores are exploiting lenders, as well. Everybody involved is exploiting savers and taxpayers, which, by now, you could say is pretty much the national pasttime.

My published articles are archived at iSteve.com -- Steve Sailer


Anonymous said...

Don't forget the role of borrower's IQ. Duller people tend to pay more: they are less adept at comparison shopping, less likely to spot the gouges in the fine print, etc, etc.

I wish we had specific data on borrower IQ rather than just statistical inference. I'd be willing to bet that IQ explains more of loan price disparities than race does.

Anonymous said...

At least now I understand what redlining is: drawing red lines around high-risk areas on a map with a marker. Sounds like a sensible thing to do.

Anonymous said...

There are already "Life Skills" classes in high school - how to make a budget, balance a checkbook, understand credit card debt.

We could add, how to shop around for a loan, assess the salespitch (ignore group loyalty until everything else balances out), be wary of mortgaging a paid for home, what is worth going into debt for and what isn't.

This might be easier to teach, as it doesn't require working numbers in class, but understanding of general principles.