Minority borrowers likelier to be steered into risky loans -- study

by Ryan Smith26 Feb 2016
A new study indicates that minority borrowers are far more likely to be steered toward high-cost loans than white borrowers in similar circumstances.

Home ownership is far less common among black and Hispanic Americans than among white Americans, and blacks and Hispanics who own homes are less likely to have homes that appreciate in value, according to a report in the Atlantic. They’re also more likely to lose their homes to foreclosure.

One reason for more frequent home ownership woes among minority groups is that home loans are often significantly more expensive for black and Hispanic buyers than for white buyers. And that’s because lenders habitually steer blacks and Hispanics toward higher-priced loan products, according to a study from the National Bureau of Economic Research.

A common refrain has been that some minority borrowers are more likely to have worse borrowing options not because of race, but because of their economic situation. But the study simply doesn’t bear that out. According to authors Patrick Bayer, Fernando Ferreira and Stephen L. Ross, race is a key factor in determining the kind of loan product a borrower gets, even after all other factors are taken into account.

Even after controlling for factors like credit score, debt-to-income ratio and LTV, Hispanic Americans are 78 times more likely than whites to be steered toward a high-cost loan. African Americans are 105 times more likely, the study found.

“The results of our analysis imply that the substantial market-wide racial and ethnic differences in the incidence of high-cost mortgages arise because African American and Hispanic borrowers tend to be more concentrated at high-risk lenders,” the study stated. “High-risk lenders are not only more likely to provide high-cost loans overall, but are especially likely to do so for African American and Hispanic borrowers.”

The study also found that high-cost lenders tend to market much more aggressively to minority customers, increasing their exposure to more expensive loan products.

The study’s authors recommended decreasing inequity in lending by phasing out the separation of lenders’ subsidiaries into prime and subprime entities, the Atlantic reported. The division, the study suggested, can unfairly steer minority borrowers into riskier loans.


Should CFPB have more supervision over credit agencies?