Lending and Mortgage Discrimination
By: Zahra Mardanyar
What is lending and mortgage discrimination?
Lending discrimination is the practice of judging an individual’s loan application on factors such as race, sex, religion, or origin to determine their creditworthiness. As a structural practice, lending discrimination primarily targets BIPOC by placing them in high-risk financial situations or denying their application regardless of their credit score. Research has shown that higher denial rates exist for BIPOC’s loan applications even if their application is similarly situated to white counterparts (Steil 2017). This means that BIPOC is discriminated against by lenders because of the institution’s perceived notions of racialized people.
What’s the historical context?
Neighborhood-based racial discrimination came from redlining, which is a practice that outlined dominantly Black communities with red lines to signal to banks and mortgage lenders that the area was “high risk” and least suitable for loan approvals (Aaronson 2020). Redlining was discriminatory and damaging to people of color because it limited their ability to become homeowners. Since homeownership means economic mobility, redlining excludes BIPOC communities from access to financial stability. This practice has resulted in lower household income, higher poverty rates, and lower chances of upward mobility for the redlined neighborhoods.
Who does it affect? Why? How?
Even though this practice targets all people of color, Black and Latinx communities are the highest targeted groups, limiting their chance of economic mobility by charging them more interest on loans. Black and Latinx people undergo a more strenuous application process, such as asking for more information and supplementary documents than white borrowers (Aaronson2020). Lending discrimination drags loan applications for Black and Latino people, making it harder to get approved. Even if their credit score is high enough to be approved for a prime loan, Black and Latinx people are often offered subprime loans with high interest rates that they have to pay more for (Steil 2017).
What does it matter?
BIPOC are either being denied or forced into high-risk loans, and both options limit their economic mobility. Mortgage loan originators intentionally target those who are Black or Latinx to trick them into high-risk loans because mortgage loan originators received a higher commission on subprime loans even if it disadvantages the borrower in the long run (Steils 2017). The unfair targeting keeps Black and Latinos in the renter category that limits their wealth accumulation. Lending discrimination becomes significant when we understand the role homeownership plays in economic mobility. Since the lending process is highly discriminatory towards Black and Latino communities, this structure excludes their upward mobility.
Key Points:
- Lending discrimination is the practice of basing an individual’s creditworthiness factors such as race.
- Latinx and Black communities are disproportionately targeted by Mortgage Loan Originators into high interest and high-risk loan options even if they have the same credit score as their white counterparts.
- Discriminatory lending practices financially disadvantage the above two groups by charging them more than white people, which moves them further away from economic mobility.
- Lending discrimination is also referred to as reverse redlining because instead of completely excluding the earlier marginalized groups from getting loans. Lenders are now targeting the community to pay more than any other group.
CITATIONS
Aaronson, Daniel. Faber, Jacob. Hartley, Daniel. Mazumder, Bhashkar. Sharkey, Patrick.
(2021). The Long-run Effects of the 1920s HOLC “Redlining” Maps on Place-
Based measures of Economic Opportunity and Socioeconomic Success. Regional
Science and Urban Economics. 86. https://doi.org/10.1016/j.regsciurbec.2020.102622
Steil, P. Justin, Albright, Len. Rugh S. Jacob. Massey S. Douglas. (2017). The Social Structure
Of Mortgage Discrimination. Routledge Taylor & Francis Group. Housing Studies.
33(5): 759-776 https://doi.org/10.1080/02673037.2017.1390076
