Predatory lending aimed at racially segregated minority
neighborhoods led to mass foreclosures that fueled the U.S. housing
crisis, according to a new study published in the American
Predatory lending typically refers to loans that carry unreasonable
fees, interest rates and payment requirements.
Poorer minority areas became a focus of these practices in the
1990s with the growth of mortgage-backed securities, which enabled
lenders to pool low- and high-risk loans to sell on the secondary
market, Professor Douglas Massey of the Woodrow Wilson School of
Public and International Affairs at Princeton University and PhD
candidate Jacob Rugh, said in their study.
The financial institutions likely to be found in minority areas
tended to be predatory -- pawn shops, payday lenders and check
cashing services that "charge high fees and usurious rates of
interest," they said in the study.
"By definition, segregation creates minority dominant
neighborhoods, which, given the legacy of redlining and
institutional discrimination, continue to be underserved by
mainstream financial institutions," the study says.
Redlining is the practice of denying or increasing the cost of
services, such as banking and insurance, to residents in specific
areas, often based on race.
The U.S. economy is still struggling with the effects of its
longest recession since the 1930s, which was triggered in large
part by the housing crisis, which was in part triggered by the
crash of the subprime loan market.
Subprime lending refers to loans made to consumers with poor credit
and others considered higher risk. They tend to have a higher
interest rate than traditional loans.
The study, which used data from the 100 largest U.S. metropolitan
areas, found that living in a predominantly African-American area,
and to a lesser extent Hispanic area, were "powerful predictors of
foreclosures" in the nation.
Even African-Americans with similar credit profiles and
down-payment ratios to white borrowers were more likely to receive
subprime loans, according to the study.
"As a result, from 1993 to 2000, the share of subprime mortgages
going to households in minority neighborhoods rose from 2 to 18
percent," Massey and Rugh said.
They said the U.S. Civil Rights Act should be amended to create
mechanisms that would uncover discrimination and penalize those who
discriminated against minority borrowers.
Written by: By Nick Carey