Credit Segregation
Concentrations of Predatory Lenders in Communities of Color
Three years into the massive financial crisis, the economic fallout has clearly not impacted all areas of the nation equally.
As this report documents, sharp racial divides exist in terms of the prevalence of mainstream, wealth-building credit and the availability of high-priced, subprime loan products such as “payday” loans.
This report examines the recent availability of consumer credit in African-American and Latino communities in five major Midwestern metropolitan areas: Chicago, IL, Detroit, MI, Kansas City, MO-KS, Peoria, IL, and St. Louis MO-IL. This report focuses on two consumer credit products at the opposite ends of the credit spectrum: home mortgage refinance loans and cash advance or payday loans. Together the disparate availability of these products paints a disturbing picture of consumer credit conditions in the areas where most African Americans and Latinos live during this third year of financial crisis.
This report reveals that during the apparent depth of the financial crisis in 2009, many homeowners in predominately white neighborhoods showed an overall recovered ability to access real estate-secured bank credit. Communities of color meanwhile have suffered the greatest financial damage in the aftermath of the mortgage crisis. The mortgage banking industry sold costly home debt in record volumes prior to the mortgage market collapse in 2007 which now leaves many black and Latino homeowners unable to access affordable credit to refinance and better manage their debt levels.
Moreover this analysis shows that in African-American and Latino neighborhoods a particularly prevalent form of credit is not from the mainstream banking sector but rather from under-regulated payday lenders which advance paycheck income at triple digit interest rates. The wealth-stripping payday lending industry operates in the highest reported concentrations among communities of color -a discouraging sign for future prospects of wealth creation for the working poor and fixed-income residents among these populations. This report also shows a simple but meaningful fact: there is virtually no neighborhood with a large African-American or Latino population in the study area that displays stable levels of prime credit for homeowners and very few neighborhoods that do not have a proliferation of high-priced payday lenders.
Finally, this report points out that the dynamic that exists in minority communities of few quality credit products and a prevalence of predatory credit products available is due in large part to the business practice of the nation’s four very largest banks. Since the onset of the financial crisis, the leaders of the banking industry have in effect pulled back from lending in areas with major black and Latino populations. Having made record profits both before and after the mortgage market collapse, the major banks have done little to service the needs of the average black or Latino homeowner. However, on the other end of the consumer loan spectrum, the big banks do not offer affordable small dollar loan products.1 Instead the banks have chosen to discretely fund payday loan companies who do service communities of color, albeit in the form of 400% APR cash advance loans.
Major Report Findings
- African-American homeowners suffered an 86% decrease in overall home refinance loans between 2006 and 2009, while Latino homeowners have experienced a 76% overall decline in home loans to refinance mortgage debt since 2006.
- The nation's major home lenders issued 38% more prime-rate refinance loans to white homeowners from 2006 to 2009, while they extended 63% fewer prime-rate refinance mortgages to African-American homeowners and 59% fewer to Latino homeowners compared to 2006.
- In predominately white areas, refinance loan volume in 2009 was at a
level of 12% of total area homes while in the areas with the highest concentration of black and Latinos, only an estimated 1.6% of the area’s homeowners received a refinance loan. - The nation’s leading banks exemplified the above trend of racial disparities in prime-rate home credit, refinancing homeowners in predominately white areas at 6.5 times the rate as they did for homeowners in communities of color.
- In communities of color payday lenders are three times as concentrated as compared to other neighborhoods. Neighborhoods with a high population of African-Americans or Latinos have on average two payday lending locations within one mile, six payday lenders within two miles, and 12 payday lenders with 3 miles. Predominately white areas, in comparison, had an average of two payday lenders within two miles, and about four payday lenders within three miles...
