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'Dual System': Minorities Lose Financial Ground, Critics Say
After making big financial gains in recent decades, African Americans and Hispanics are again losing ground, critics say.
Rather than blaming the lingering effects of the recession, a growing number of reports point to financial discrimination as a major cause.
"Communities of color have received the worst treatment at a very high cost," says Michael Calhoun, president of the Center for Responsible Lending (CRL). "We estimate 20% of African-American and Hispanic homeowners will lose their homes in this housing crisis," more than twice as high as white households.
Homeownership is the primary engine of wealth, but the housing slump only partly explains the growing gap affecting minority families, says John Taylor, CEO of National Community Reinvestment Coalition (NCRC).
"It's about a dual system of finance," he says. "People of color do not have the same access that most American citizens enjoy."
While most consumers are able to go to a full-service bank branch that offers an array of competitively priced products and services, minorities are disproportionately forced to go to payday lenders, pawnshops and high-cost mortgage lenders, Taylor says.
Those who live in minority neighborhoods — even middle-income families whose high credit scores could qualify them for a prime loan — are likely to be steered into a subprime loan, says Hilary Shelton, NAACP's senior vice president for advocacy and policy.
Josephine Wiles-Warner didn't think that she would become a subprime casualty statistic when she bought a home in Herndon, Va., in 2000 as she sought to provide security and good schools for her family.
"That is what this nation is about," says Warner, 57, a single working mother who is raising five adopted children while she pursued dual graduate degrees in project management and information systems.
She had needed to refinance her mortgage when she took time off from work in 2006 to go to Liberia for her mother's funeral. Countrywide Financial offered her a subprime loan that Warner later found out she couldn't afford.
When Countrywide was close to filing for bankruptcy protection, another lender took over her loan, and her payments continued to spiral out of control until she got a foreclosure notice.
Getting pushed back
"She had faith in the process, but she was qualified for a loan that she could not afford," says Mani Fierro, a real estate and bankruptcy attorney in Herndon who assisted Warner but does not represent her. Many minorities have become victims of mortgage lenders who are interested only in getting the biggest commission, he says.
Fierro suggested Warner find a buyer for a short sale, where the home is sold for less than the mortgage balance and prevents a foreclosure. He put her in touch with Robert Chavez, a Realtor, who purchased the home and now rents it to Warner and her family.
"They were my guardian angels," says Warner, who hopes to eventually buy back the home.
Cases like that show how minority communities are being pushed back to where they were 25 or 30 years ago, Calhoun says.
It is a reminder of redlining, a practice that grabbed much attention in the 1990s, where whole minority neighborhoods were excluded from banking and insurance services, as though the financial community had drawn a red line around areas where it didn't want to do business.
Regulators tried to stamp out redlining by using the Community Reinvestment Act and public access of mortgage data through the Home Mortgage Disclosure Act to help more minorities become homeowners.
Those "were major and effective tools in helping to open the doors of opportunities," says Shelton, but over time, regulatory oversight has loosened.
Now, minorities face what is sometimes called reverse redlining, Taylor says. Instead of financial services companies avoiding minority neighborhoods, the industry targets them with more-expensive and more-abusive products.
Other signs that minorities are losing financial ground:
•In December, the NCRC said that too many of the largest lenders in the FHA loan program refused to provide conventional loans to consumers with credit scores between 580 and 640, even though that violated FHA policy. It said that has had a disparate impact on communities of color.
Last May, a study compiled by seven non-profit groups including the Chicago-based Woodstock Institute, also found that from 2006 to 2008, the overall share of conventional prime mortgage lending in communities of color fell 35%, while the share of loans to predominantly white neighborhoods increased 11%.
•Minorities are much more likely to be unbanked and underbanked, which are households that have a checking or savings account but rely on alternative financial services, such as payday loans. In January 2009, 54% of black households and 43.3% of Hispanics were either unbanked or underbanked, compared with 25.6% of U.S. households, according to a survey by the Federal Deposit Insurance Corp.
•Only 16% of people who overdraw their accounts paid 71% of all overdraft fees, but they were more likely to be minorities and low-income consumers, according to a 2006 and 2008 study by the CRL.
Excessive overdraft fees are a major reason why consumers close bank accounts and leave the banking system, according to a 2008 Harvard study.
•People of color are more likely to be payday borrowers, and a typical borrower pays back $800 for a $300 loan, says the CRL. In California, minorities represent 56% of payday borrowers but make up just 35% of the population, a 2008 CRL report said.
Many financial experts say that African Americans and Hispanics tend to get subprime loans or rely on check-cashing businesses, payday lenders and pawnshops because of job loss and low income.
They also say that banks do not ignore minority neighborhoods.
"The penetration of banks throughout the communities has continued to grow," says Wayne Abernathy, executive vice president at the American Bankers Association. "Many bank branches are very marginal in terms of profitability, but we maintain them anyway to reach out to populations."
Meanwhile, regulators are taking steps:
•The FDIC tried to address payday lending by creating a two-year, small-dollar loan pilot program with 28 volunteer banks. When it ended last summer, the banks had made more than 34,400 loans with a principal balance of $40.2 million, the FDIC said.
•The Department of Justice created a fair lending unit in January 2010. In March 2010, it reached a $6.1 million settlement with two AIG subsidiaries after a lawsuit alleged AIG charged African-American borrowers higher fees.
•The Consumer Financial Protection Bureau opens its doors in July.
The agency's Elizabeth Warren has said it will target one type of fee that has hit minorities so hard.
"Warren has indicated that overdraft fees are a major problem … that she wants to address," says the CRL's Calhoun.