Consider this: Well-off African-Americans who refinanced their homes in the greater Boston area in 2002 were more than six times as likely as well-off whites to take out a higher-cost, subprime loan.
But well-off blacks, defined as those with annual incomes $90,000 or above, were also three times as likely as low-income whites, those with incomes up to $38,000, to turn to the subprime market, according a study for the Massachusetts Community & Banking Council, a coalition of community groups and banks.
The data do not prove discrimination. High levels of subprime borrowing in minority neighborhoods and among minority buyers, however, do indicate they are more likely to be targeted by unscrupulous lenders.
"There are a lot of folks out there who are convinced their credit is not good enough to get a conventional loan. Some of that has to do with aggressive marketing of these subprime lenders," says Tom Callahan, executive director of the Massachusetts Affordable Housing Alliance. "If you're lower-income minority, (you've) been told for years that sometimes traditional lenders don't want to deal with people that look like you."
Jim Campen, a research associate at the University of Massachusetts Gastón Institute, a Latino public policy institute, who wrote the Boston study, says the data could reflect legitimate lending decisions based on lower credit scores of some minorities. But he points to years of research showing minorities are denied prime loans more often than whites, even with equivalent credit records.
"The way the subprime industry works, it's not about denying blacks more often. It's about making loans, too many high-cost loans, to blacks," Campen says.
Subprime lending, as a share of overall refinancing, was nearly six times higher in the predominantly minority neighborhoods of Boston than in white areas. Overall, subprime refinance activity rose 41.8% in 2002. Similar racial patterns were found in seven other Massachusetts cities. In Boston, subprime lending was highest in neighborhoods such as Mattapan, Roxbury, Dorchester and Hyde Park.
The Boston data track studies in other cities that show concentrated subprime lending in minority neighborhoods and higher foreclosure rates in such areas. A March report on Chicago neighborhoods by the non-profit Woodstock Institute found that for every 100 additional subprime loans from 1996 to 2001 there were an additional nine foreclosures in 2002 compared with the average in Chicago neighborhoods.
The lending industry points to economic data that show Hispanics and blacks have lower incomes and wealth than whites. Immigrants are more likely to have impaired or incomplete credit ratings or lack documented income. Prospective borrowers may have a sparse credit history because they lack consumer education or access to mainstream banks. Some upper-income borrowers may prefer low document or no down-payment loans.
Terry Theologides, executive vice president of corporate affairs at New Century Mortgage, a national subprime lender, disputes charges of minority targeting. "Our pricing is automated, is absolutely colorblind," Theologides says. "The program they (minorities) are offered is identical to the program that would be offered if they were white and lived in the suburbs."
Theologides says New Century's internal statistics do not show an over-concentration in minority markets. Nationally, 52% of New Century borrowers in 2003 were white, 20% Hispanic, 16% black and 4% Asian/Pacific Islander. That includes purchase and refinance loans.
Geoff Smith, project director at the Woodstock Institute, says research finds a high concentration of subprime lending in minority areas, even after controlling for such factors as income and earnings. "I think it is an example of subprime lenders targeting minority neighborhoods and borrowers," he says.
Evidence of racial patterns in lending, and much of the data about the subprime market, comes from the Home Mortgage Disclosure Act. The law requires many lenders to report data about loans, including race of borrowers. Mortgages are classified prime or subprime depending on whether they are offered by a firm that makes predominantly subprime or conventional loans. That has the effect of classifying some prime loans as subprime and vice versa.
Glenn Canner, senior adviser to the Federal Reserve Board, which oversees the law, says reporting probably picks up about 80% of subprime lending. The Fed has tightened the rules so that data for 2004, to be released in 2005, will pick up more data about loan price as well as more subprime firms. The effect will be more data allowing researchers to link race and price.
"The data is supposed to be effective as a screen to identify potential problems, it's not supposed to be evidence of a problem," says Canner.
Subprime lenders worry the change will damage reputations and even destroy the subprime sector. They say the data will not show factors that determine creditworthiness and pricing.
The American Financial Services Association (AFSA), which represents lenders, including subprime mortgage firms, in May asked the Fed to add a disclaimer to the data indicating it does not include factors integral to loan pricing.
"Potential misperception should not be permitted to destroy the subprime mortgage market," the group said. "Looking at race and price without additional context may lead to a wide-based perception that race correlates to cost. It does not."
AFSA officials have not heard back from the Fed and are considering options to get their message out.
