Economics | Microfinance | World

Subprime Loans and Race Inequality

The NYTimes has an interesting article on the relation of subprime lending and race in America. The article looks at the distribution of subprime lending, to discover that the majority of such loans were concentrated in black and hispanic neighborhoods, and that these communities were much more likely to take on subprime, but high interest rate loans even after controlling for income.

There has been less attention paid to the concentration of these loans in neighborhoods that are largely black, Hispanic, or both. This pattern, documented in federal loan records, holds true even when comparing white middle-income or upper-income neighborhoods with similar minority ones.

Last year, about 70 percent of the loans made in the Detroit neighborhood (97% black) carried a high interest rate — defined as 3 percentage points more than the yield on a comparable Treasury note — while in Plymouth (97% white) just 17 percent did.

Last year, blacks were 2.3 times more likely, and Hispanics twice as likely, to get high-cost loans as whites after adjusting for loan amounts and the income of the borrowers, according to an analysis of loans reported under the federal Home Mortgage Disclosure Act. (Asians are somewhat less likely than whites to take out high-cost loans.)

One can draw several interesting inferences from this. First, it would appear that banks in America have been unable and unwilling to move down the “pyramid” to cater to people with bad or unknown credit histories. This stands in start contrast to the success microfinance in the developing world.

Second, credit is not a good thing by itself. In this case, it was overzealous and highly competitive lenders that “actively sold subprime loans” (see also). The corollary for microfinance is that if the aim is development (as opposed to building a new business model), one needs more than credit.

© 2007 The Discomfort Zone.