"Huge Racial Disparities Found In Lending Practices At TARP Banks"
As the wreckage of the subprime bubble has settled, details have slowly leaked out about the pernicious lending practices that some of the biggest banks employed, particularly when it came to taking advantage of minority borrowers. The highest-profile example of this was Wells Fargo’s “ghetto loans,” in which the bank allegedly pushed minority borrowers who qualified for prime loans into subprime, which can add more than $100,000 in interest payments to a mortgage.
But according to a new report by CAP’s Andrew Jakabovics and Jeff Chapman, Wells Fargo was far from the only bank with obvious racial disparities in its lending. Jakabovics and Chapman looked at the lending data for 14 systemically important banks in 2006 — a year in which these 14 originated more than one out of every three higher-priced mortgages in the country — and the results are fairly appalling:
Overall, 17.8 percent of white borrowers were given higher-priced mortgages when borrowing from large banks in 2006, yet 30.9 percent of Hispanics and a staggering 41.5 percent of African Americans got higher-priced mortgages…Among high-income borrowers in 2006, African Americans were three times as likely as whites to pay higher prices for mortgages—32.1 percent compared to 10.5 percent. Hispanics were nearly as likely as African Americans to pay higher prices for their mortgages at 29.1 percent.
So not only were the banks handing out subprime loans to minorities on a much greater scale, but they were issuing them to lots of low-risk borrowers — households earning more than twice their area’s median income, most of which reported six-figure incomes — at a dizzying rate (which was, again, significantly higher for minorities). I would be interested to hear how the banks explain away that one.
To be fair, many of the banks that have the most egregious stats actually bought their racial disparities, as some of the biggest subprime lenders collapsed and were acquired by the big banks. Bank of America, for instance, acquired LaSalle and Countrywide, both of which were far more likely to offer higher-priced loans to minorities than Bank of America itself. JP Morgan bought Washington Mutual, which was the worst of the banks analyzed, “with fully 56.9 percent of African Americans and 42.3 percent of Hispanics paying higher prices, compared to 16.9 percent of whites.”
The banks examined in the report were the recipients of 43 percent of the funds dispersed under the Troubled Asset Relief Program (TARP), and Jakabovics and Chapman advocate not allowing any of the banks that still owe TARP funds to pay them back without receiving a passing grade on fair lending practices from the TARP’s Inspector General.
These numbers also make the case for the creation of a Consumer Financial Protection Agency (CFPA) with strong enforcement abilities over fair lending practices. Discriminatory lending is illegal, but these numbers show that not very much was done about it. This was presumably a profitable form of lending for these institutions, which regulators charged with ensuring the safety and soundness of banks would have been loath to pull back.
By removing consumer protection responsibilities from the traditional bank regulators, and placing it with a new agency, consumers will have an advocate within the regulatory system, and discriminatory lending of the sort Jakabovics and Chapman found will hopefully be met with the sort of penalties that it deserves.