The theory that the CRA or government mortgage policy in any way led to the financial crisis has been debunked by scholars as well as influential policymakers including the Federal Reserve chair and the treasury secretary.66 Every serious analysis has concluded that the CRA did not cause the rise in subprime lending. How could it?
The act was passed in 1977, and subprime lending started heating up more than twenty years later. The majority of the crisis-causing subprime loans were not made by lenders with any CRA obligations— only 6 percent of subprime loans were even CRA loans.67 Those who blame Fannie and Freddie also miss the mark, as most subprime loans were not standard GSE loans, and the timing of lowered underwriting standards did not match the heating up of the subprime market.68 Yet pundits and politicians continue to blame the financial crisis on the one law that was aimed at increasing minority lending. It is likely that at least some part of the public still believes blacks and other minorities are undeserving of government benefits and that they take more than their share. Like President Reagan’s “welfare queen" story, this narrative paints low-income subprime borrowers as exploiters of taxpayer money and government largesse.69 It is a convenient fiction that protects banks from appropriate regulation and ignores a history of injustice.
Those who construct a story in which banks grudgingly give out loans in order to appease their powerful and high-minded regulators, or to ward off robust coalitions of inner-city poor activists, which is exactly the narrative many have espoused, do not understand the banking industry.70 The banks wanted subprime loans because they were making unprecedented profits. Subprime lenders popped up in ghettos not because the government or community activists wanted them, but because that was where they could convince more people to take out subprime loans. In fact, many activist and consumer groups were trying to fight these subprime lenders.71
Subprime mortgage lending took over the market not because borrower demand increased, but because banker and investor demand did. It is a simple story of profits. Wall Street banks had previously stayed away from this market because there was no profit in it, but they became hungry for subprime loans once they became profitable. The story of the MBS and the transformation of the mortgage market has already been discussed in Chapter 7, but in the years preceding the crisis, the subprime market began overheating due to increased demand for investments by what economists have labeled a “savings glut." Foreign investors flooded U.S. markets with money. This oversupply of cheap cash lowered U.S. treasury note yields, and so the money flowed into the next safest investment— asset-backed securities, or home mortgages. The financial sector met the demand by selling, bundling, insuring, and creating new “structured products,” and then originating more mortgage loans. This demand created the subprime mortgage market—a new supply of loans that produced even higher yields for investors. The crisis was not created by poor minorities demanding housing loans, but by Wall Street demanding more loans and then lobbying for government policies that lowered underwriting standards.72
A small army of mortgage brokers went looking for new borrowers, knowing that as soon as they could get the papers drawn up, a Wall Street bank would buy the loan. These neighborhoods were open for the attack. Most ghetto residents had “thin file” credit scores, meaning they had very little meaningful credit history. They were risky borrowers because of their marginal economic standing, but they were a source of untapped profits in the house of cards being created by debt. For example, JPMorgan Chase marketed its “no doc” and “liar loans” (where the lender did not verify any of the information provided on the application), claiming to investors, “It’s like money falling from the sky!”73 The money was actually falling from the subprime borrowers.
So profitable was the subprime market in the years preceding the crisis that banks chose not to give prime loans (those insured by the GSEs) and focused instead on subprime loans. The Wall Street Journal reported that more than 50 percent of borrowers who were sold subprime loans could have qualified for prime loans. At the peak of the subprime market in 2006, 61 percent of borrowers were steered toward subprime, which meant that “a significant number of borrowers with top-notch credit signed up for expensive subprime loans.”74 Mortgage brokers made more money for convincing—duping—borrowers into taking out costlier subprime loans than the prime loans that they were eligible for and could more easily afford. The higher the interest paid by borrowers, the bigger the bonus received by the mortgage broker.75
And predictably, blacks were much more likely to be sold subprime loans. As economist Vivian Henderson argued decades ago, “racism put blacks in their economic place, but changes in the modern economy make the place in which they find themselves more and more precarious.”76 It was revealed after the crisis that banks were specifically targeting black borrowers for their worst loan products even when they qualified for prime loans.77 The Center for Responsible Lending found that black borrowers were 150 percent more likely to get high-cost loans.78 Data collected under the Home Mortgage Disclosure Act confirmed that blacks were being targeted for subprime loans even when they would have qualified for prime loans.79 Mortgage originators like Countrywide opened branches in inner cities to peddle as many subprime loans as possible. Most of the areas that were targeted for subprime lending were formerly red-lined districts—Chicago’s black belt, for example, was the area with the most subprime loans between 2004 and 2006.80 Subprime was just the new face of predatory lending, with some lenders even targeting elderly black homeowners to sell them sham reverse mortgages that resulted in their losing their homes.81 Deprivation again led to exploitation.82
The Department of Justice sued Wells Fargo in 2010 for intentionally and systematically targeting minority borrowers and pushing them toward subprime loans. The DOJ claimed that Wells Fargo and Bank of America, two of the largest mortgage lenders, steered thousands of minority borrowers into costlier subprime loans when whites with a similar credit score were given prime loans.83 The DOJ unearthed signs of explicit discrimination at Wells Fargo, with loan officers referring to black borrowers as “mud people" and to subprime loans as “ghetto loans."84 “We just went right after them," Beth Jacobson, a former Wells Fargo loan officer, told the Times. “Wells Fargo mortgage had an emerging-markets unit that specifically targeted black churches because it figured church leaders had a lot of influence and could convince congregants to take out subprime loans."85 Wells Fargo settled the case and avoided trial. Bank of America also settled their discrimination lawsuit, in which the DOJ accused its mortgage issuer, Countrywide, of racial discrimination in lending.86
This market was not created by poor minority borrowers, but those at the bottom are often the most likely to be exploited by new credit innovations. Just as exploitative credit arrangements like sharecropping were created because of demand from the worldwide cotton market, subprime lending was connected to a worldwide demand for mortgage loans. Global capital markets found yield in the cotton produced by sharecroppers and in the interest paid by subprime borrowers. That the black community was exploited in both situations speaks to their lack of wealth, political power, and their exclusion from the main channels of economic power. During Reconstruction, black borrowers had no other option for credit, so they entered sharecropping arrangements. A similar situation played out with contract selling when blacks were redlined out of the government loan market. Once again, during the subprime era, the market demanded more loans, and the black population was the most vulnerable population of borrowers—having had limited access to credit for generations. Without malice, capital looking for yield can lead to exploitation if there are structural inequalities. Capitalism itself cannot overcome those inequalities because capital only seeks to accumulate unto itself. Without structural changes, the urban ghetto would never be a lure for wealth-building capital, only a magnet for exploitation.
There are two banking systems in America. One is the regulated and heavily subsidized mainstream banking industry; the other is the
unregulated, costly, and often predatory fringe industry. The black community has historically been under the latter system, having been left out of the former. This has come at great expense to that community. Richard Thaler and Cass Sunstein found that blacks pay on average of $425 more for loans than white customers.87 Most black neighborhoods are “banking deserts," neighborhoods abandoned by mainstream banks.88 The FDIC’s surveys on the “unbanked and underbanked" reveal that 60 percent of blacks are either unbanked or underbanked.89 In striking contrast, only 3 percent of whites do not have a bank account and 15 percent are underbanked. Those without bank accounts pay up to 10 percent of their income, or around $2,400 per year, just to use their money.90 That is a meaningful amount of money for low-income Americans, and it is being sucked up by alternative financial services. This problem has been exacerbated since the crisis of 2008, when 93 percent of all bank closings occurred in low-income neighborhoods.91
When banks leave a neighborhood, the sharks usually fill the void. Banking deserts are left vulnerable to high-cost payday lenders, title lenders, and other fringe banks.92 Once the subprime profits dried up as a result of the crisis, banks began avoiding the ghetto again. By 2016, an investigation of mortgage lending in St. Louis found that banks made fewer loans to borrowers in black neighborhoods than white ones. Mortgage applicants from minority zip codes were denied at significantly higher rates than applicants in white neighborhoods.93 Unsurprisingly, it appears that contract selling has actually made a comeback in these areas abandoned by banks. This time, private equity firms are leading the charge.94 Buyers are given loans that look like mortgages, but they are in fact more like rental agreements, under which the borrower can be evicted because of a missed payment. In one example, a private equity investor bought a foreclosed home for $8,000 and sold it on contract for $36,000.95
In banking deserts, blacks rely disproportionately on payday lenders—they are more than twice as likely as any other race to use payday loans.96 With such costly credit options, it is no wonder that debt collectors extract as much as five times more judgments against black neighborhoods than white ones. Two studies conducted between 2015 and 2016 revealed that blacks were much more likely to be sued by debt collectors than any other racial group, even when differences in income were accounted for. One in four black residents in the studied communities was being sued by a debt collector. Most of these lawsuits were similar: large debt collectors suing for small amounts.97 The study found that debt collectors were not intentionally discriminating, but that “white consumers are, in general, better able to resolve smaller debts."98 Indeed, the study confirmed that black communities simply have less wealth than white ones and therefore enjoy less of a buffer against hardship.99
Unsurprisingly, black college graduates owe an average of $53,000 more than their white counterparts in student debt. Blacks have to borrow more for college and have to carry greater debt several years after graduation—usually from two to three times the amount of white graduates. Black students default on student debt at a rate five times higher than white or Asian graduates and because student loans cannot be discharged in bankruptcy, this debt is carried until it is paid off.100
The racial wealth gap not only means that black families have greater difficulty ascending the economic ladder; it also means that it is much easier for these families to fall. Because wealth provides a cushion against life’s hard edges, those without it are exposed to devastating financial shocks like bankruptcy, eviction, and apparently lots of lawsuits. These lawsuits further ratchet up the financial pressure through wage garnishments, aggressive collection practices, and criminal prosecutions. These actions create what one black resident in the study called a “web of indebtedness.”101 A wage garnishment can feel like extortion, but increasingly, creditors are using actual extortion. Often the original credit, such as a municipality, sells its debts to an underworld of unregulated debt collectors who threaten debtors with criminal prosecution in order to intimidate them into paying their debts.102 These threats are usually baseless and illegal, but that does not stop these unscrupulous bounty hunters from continually harassing debtors.
In 2015, a cell phone video showed a police officer shooting an unarmed man, Walter Scott, who was running away from the officer. The press coverage focused on the fact that the officer had allegedly lied about the shooting and appeared on video to be planting a weapon near Scott’s body. Less attention was paid to the reason Scott was running away from the officer in the first place. It was revealed that he was likely running because he had unpaid debt and may have been worried about criminal retribution.103 The wealth disparity leads cryptically and tragically to many seemingly unrelated injustices suffered by the black community.
The destructive economic and social forces created within the boundaries of a racially segregated ghetto are interrelated. The effects of the most recent loss of black wealth were not just in lost homes and bank accounts, but in the resulting loss of social and community capital. From 2003 to 2013, Detroit closed 150 public schools and Chicago closed fifty in 2013 alone, primarily in black and brown neighborhoods. Black unemployment reached a twenty-year high, and black and brown prisoners make up almost 60 percent of the prison population.104 Many black communities are “opportunity deserts,” lacking in paths toward upward mobility yet with an overabundance of pitfalls that result in incarceration or worse. Languishing in what Chimamanda Ngozi Adichie has called “the oppressive lethargy of choicelessness,” many are born into and live their whole lives with the certainty that they will not be able to escape their circumstances. The National Urban League reported in 2015 that the state of black America was one of “crisis.” The report followed up, in words reminiscent of the Kerner Commission, “America today is a tale of two nations.”105
The Obama administration did make inroads into poverty alleviation; specifically, the Affordable Care Act was aimed at lowering health-care costs, which are a major source of financial distress for the low income.106 President Obama, like his predecessors, did not specifically target the racial wealth gap, nor did he advocate a race-based economic agenda. The administration’s efforts were a continuation of theories underlying black capitalism and the updated community capitalism of the Clinton administration. In several speeches, Obama heralded the importance of small businesses and minority businesses, including renewing Minority Business Enterprise Week and praising the importance of minority businesses in several small forums.107 On the campaign trail, he had promised “to help bring businesses back to our inner-cities." He envisioned creating institutions akin to the World Bank to “spur economic development." He lamented that “less than one percent of the $250 billion in venture capital that’s invested each year goes to minority businesses that are trying to breathe life into our cities. This has to change." He promised that he would make sure every community had “financial institutions that can help get them started" on the road to building wealth.108
These promises were not pursued, either because of the game-changing financial crisis, the antagonistic legislative environment, or perhaps due to the president’s lack of conviction on black capitalism. When Obama was asked in 2012 to respond to criticism that his administration had not done enough to support black business—the premise being that helping black business was akin to addressing black poverty—he responded, “I’m not the president of black America. I’m the president of the United States of America."109 The Treasury did announce in 2015 that it would name its newly created wing alter the Freedmen’s Bank. This would be the first time, of course, that the Treasury would actually be linked to the bank. (The last time, the link was purely speculative and the depositors paid the price.) The Treasury also decided to put Harriet Tubman on the $20 bill.
Banking agencies are still carrying out their FIRREA legislative mandate to support minority banks. The Minority Bank Deposit Program (MBDP) is still ongoing, which means that federal agencies and federal grant recipients are encouraged to deposit funds into banks
owned or controlled by women or minorities.110 Typical deposit funds are agency deposits of public money, cash advances to federal contractors and grantees, Postal Service funds, and other moneys held by the agencies.111 The FDIC also runs its own minority bank deposit program, called the Minority Depository Institution
Program (MDIP).112 The MBDA, the successor to the OMBE, is still active and advertises on its website that it is “the only federal agency created specifically to foster the establishment and growth of minority-owned business in America." Its most advertised feature is a website for minority entrepreneurs called the “Minority Business Internet Portal," which is described as “an e-commerce solution designed for the MBE [Minority Business Enterprise] community."113
In 2007, the House Committee on Financial Services held a hearing to assess whether regulatory agencies were meeting the FIRREA mandate of “preserving and expanding minority banks." Black bank representatives and top agency officials testified about the state of minority banks, with a focus on black-owned banks. The hearing was accompanied by an expansive GAO report. The FDIC testified that it was offering “technical assistance" and “training and educational programs" to minority banks.114 As for the charge to preserve and promote minority banks, the agency explained that it did not have a process in place to do this, but made decisions on a case-by-case basis. The Office of the Comptroller explained that it had held conferences, offered technical assistance, and then after periodic bank examinations, the examiners contacted minority institutions to “make sure that the institution understands any issues or concerns that we have highlighted in the report. And we can help them."115 The Office of Thrift Supervision (OTS) explained that its program consisted of technical assistance and education.
Education, guidance, training, and counseling—that was the theme of the support being given to black banks. Apparently, it was not just minority subprime borrowers who needed “education," but also minority banks. The regulators have essentially been playing the role of high school guidance counselor—available for advice or technical assistance with the occasional workshops for good measure. With Section 308’s vague requirements and no clear mandates from either the president or Congress, what else were they supposed to do but offer regulatory hand-holding?
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