The Washington Post
By: Ylan Q. Mui
July 8, 2012
The implosion of the subprime lending market has left a scar on the finances of black Americans -- one that not only has wiped out a generation of economic progress but could leave them at a financial disadvantage for decades.
At issue are the largely invisible but profoundly influential three-digit credit scores that help determine who can buy a car, finance a college education or own a home. The scores are based on consumers' financial history and suffer when they fall behind on their bills.
For blacks, the picture since the recession has been particularly grim. They disproportionately held subprime mortgages during the housing boom and are facing foreclosure in outsize numbers. That is raising fears among consumer advocates, academics and federal regulators that the credit scores of black Americans have been systematically damaged, haunting their financial futures.
The private companies that calculate credit scores say they do not consider race in their formulas. Lenders also say it is not a factor when deciding who qualifies for a loan; federal laws prohibit the practice. Still, studies have shown a persistent gap between the credit scores of white and black Americans, and many worry that it is only getting wider.
Chicago resident Ida Mae Whitley, 62, used to have stellar credit.
That was before the African American laid eyes on her dream home in Chicago's Scottsdale neighborhood, where she and her husband hoped to retire -- before she said she was steered into a mortgage with more fees and a higher interest rate, putting her in danger of losing her home.
Now, Whitley said, her credit score has tanked, along with her hopes for a comfortable retirement. She can't even get approved for an auto loan. Her daughter had to delay her education to help support her parents.
"I had number-one credit before this happened," Whitley said. "I don't know whether I'll ever be able to rebuild."
Groups such as the NAACP and the National Urban League worry that stories such as Whitley's are signs that the nation's financial crisis has ushered in a new era of de facto economic segregation. Some community leaders are calling the rebuilding of wealth in black communities the next frontier for civil rights.
"Folks are going to have to work longer and work harder to even try to maintain a standard of living," said Kendrick Curry, pastor at Pennsylvania Avenue Baptist Church in the District. "It really speaks to a backward movement."
The Federal Reserve is collecting data on how the recession has affected credit scores by race, in what is expected to be significant research on the issue. But the widespread belief among economists, consumer advocates and community leaders is that black Americans are falling behind.
Credit scores summarize consumers' financial past and help project their future behavior. A critical factor in deciding who qualifies for a loan, they are designed to give lenders a quick way to assess the risk of a customer. FICO and VantageScore are the two primary companies that generate the scores.
For most people, credit is the key to accessing the trappings of the American Dream, such as higher education and homeownership. That makes the scores, and the detailed personal financial reports that accompany them, one of the most important factors in determining financial opportunity.
And for black Americans, that means they are starting at a disadvantage. Even near the height of the country's economic boom, blacks had lower credit scores than whites. Data collected by the Federal Reserve from 2003 -- in the most comprehensive study on race and credit scoring to date -- showed that less than a quarter of blacks had prime credit scores. Meanwhile, about 65 percent of whites were in this top tier.
The gap got wider as black and white Americans grew older, the Fed found. By age 75, the average black consumer's credit score still had not reached the national average.
"It's one more way that credit scoring . . . sort of sets in stone income and wealth disparities between minorities and whites," said Chi Chi Wu, a lawyer with the National Consumer Law Center. "The playing field was never level."
Banks and industry groups often cited low credit scores as one of the main reasons black consumers were denied loans at higher rates than whites. According to the 2000 Census, less than half of black households owned their homes, compared with nearly three-quarters of whites. Consumer advocates said the lack of credit in black neighborhoods was so pervasive it is dubbed "redlining."
The housing boom helped change that. New financial instruments created by Wall Street helped generate enormous pools of money for mortgage lenders to distribute -- and blacks were one of the largest untapped markets. Riskier borrowers with lower credit scores qualified for mortgages, albeit with higher interest rates and fees or unconventional terms.
At first, the shift was heralded as a way to help boost homeownership in black neighborhoods. The move also dovetailed with federal initiatives to promote fair lending. And the financial industry uncorked a lucrative new market that created jobs and drove the economy.
"There was a loan for almost anybody who wanted a loan. It was just priced differently based on credit," Andrew Sandler, a lawyer for Wells Fargo, said of the industry at the time.
But the movement backfired. Borrowers with the new breed of subprime loans defaulted at alarming rates, sending the economy into a tailspin. Many of those mortgages were made using false information or shoddy underwriting. Instead of helping black communities build wealth, the lending boom destroyed it.
A Pew Research Center analysis last year found that the wealth of blacks plunged 53 percent during the recession, driven by falling home prices. The average net worth of a black household in 2009 was $5,677, according to the study, the lowest of any racial group. After years of record prosperity, homeownership rates among black Americans have plunged to the lowest level in 16 years. Unemployment has reached levels not seen since the 1980s.
Baltimore resident Kevin Matthews has worked hard to stabilize his finances after fighting off a wrongful foreclosure that drained his savings. He is paying his bills and studying to become a medical lab tech or researcher, but in the eyes of banks and lenders he is largely a three-digit number: 560.
That is Matthews's credit score. It is 160 points lower than it was five years ago. That means it will cost him more to get credit cards, pay for his education or eventually move into another house -- assuming he can qualify for a loan. It means Matthews faces years of struggling to hold on to the middle-class life he once thought was guaranteed.
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Blacks more likely to have high-rate mortgages.
According to FICO, a foreclosure can remain on a consumer's credit report for seven years. It can lower a score by 85 to 160 points, a hit second only to bankruptcy.
The company says that its scores are a snapshot of risk at a moment in time -- one that will change as consumers rebuild their finances. FICO said borrowers can rebuild their scores in as little as two years if they remain current on their other bills.
But for many, foreclosure is only the beginning of their financial woes. "Everybody's worried about their credit score," Matthews said. "But, unfortunately, I can only worry about one thing at a time right now."
The black middle class
Civil rights groups say those personal anecdotes underscore a more fundamental fear: that the country is headed toward a kind of financial segregation.
During the recession, credit scores shifted downward for many consumers, regardless of race. According to a FICO analysis , nearly 50 million people saw their scores fall by more than 20 points during the height of the financial crisis. Lenders also tightened the spigot of credit, with the total volume of loans to consumers falling 9 percent over 2009, according to government data, though lending has rebounded somewhat.
Research by VantageScore found that the two biggest contributors to consumers' deteriorating credit were the fall of home prices and unemployment. Activists say the demographic that has borne the brunt of those head winds are black Americans.
Groups such as the NAACP and the National Urban League say the black middle class is shrinking as a result. Lisa Rice, vice president of the National Fair Housing Alliance, says the country suffers from what she has dubbed the "dual credit market." Longtime civil rights attorney John Relman, who has won millions of dollars from companies such as Avis and Denny's in discrimination lawsuits, has set his sights on the banks.
"Race and economic injustice always go together in this country," Relman said.
A month ago, the Justice Department reached a $21 million settlement with SunTrust over what it called a "racial surtax" on home loans. For instance, it said black borrowers in Atlanta were charged $745 more in fees than white borrowers with similar credit histories and qualifications.
"SunTrust's African American and Latino borrowers had no idea they could have gotten a better deal, no idea that white borrowers with similar credit would pay less," Assistant Attorney General Thomas Perez said. "That is discrimination with a smile."