Press Releases | Race and Ethnicity

News from EPI Regulatory complicity in widespread discriminatory mortgage lending perpetuated racial segregation

For Immediate Release: Monday, January 23, 2012
Contact: Phoebe Silag or Karen Conner, news@epi.org 202-775-8810

Regulatory complicity in widespread discriminatory mortgage lending perpetuated racial segregation

In December, Bank of America settled a complaint by the U.S. Department of Justice that mortgage lender Countrywide Financial, one of its subsidiaries, discriminated against African American and Hispanic borrowers. The $335-million settlement will be divided among 200,000 identified minority homeowners who were the victims of “reverse redlining,” the practice of targeting exploitative subprime mortgages to minority borrowers. In a new analysis, A comment on Bank of America/Countrywide’s discriminatory mortgage lending and its implications for racial segregation, Economic Policy Institute Research Associate Richard Rothstein explains that racial discrimination in mortgage lending was widespread in the recent housing boom, extending well beyond Countrywide. He also contextualizes reverse redlining within an 80-year history of racial discrimination by mortgage lenders, much of it expressly or tacitly condoned by federal regulators. Finally, he discusses how discriminatory practices have perpetuated racial segregation, and, as a result, poor educational outcomes for minority children.

The Justice Department’s complaint against Countrywide alleged that lending officers pushed minority borrowers into risky mortgages even when they were qualified for conventional mortgages. Furthermore, minority borrowers paid higher interest rates and fees than similarly qualified white borrowers. Other lawsuits and analyses suggest that this reverse redlining was widespread, practiced by a number of lenders nationwide. The phrase “reverse redlining” references redlining, the practice of denying minority homebuyers loans to purchase homes in white neighborhoods.

Historically, federal regulators shared responsibility for redlining, either by expressly condoning it or by failing to enforce laws that prohibited it. Similarly, widespread reverse redlining has mostly been met by regulatory inaction. This complicity of federal and state regulators in racial discrimination has been so extensive that the constitutional rights of minority homeowners were violated; in 2009, a federal judge suggested that rampant subprime lending to minority borrowers was a practice that “the law sanctions.”

Like redlining, reverse redlining has contributed to racial segregation. African American and Hispanic homeowners who lost their homes due to risky mortgages may have few options but to return to poorer and more racially segregated neighborhoods. The consequences of the loss of housing stability will continue to be felt by the children in these families—elevated family stress, lowered incomes, more moves to new schools and less exposure to higher-achieving peers all negatively affect academic achievement.

Rothstein concludes that the Justice Department’s complaint against Bank of America/Countrywide could be a welcome first step in a more aggressive campaign to reverse the promotion of racial inequality and segregation by the regulated banking sector. But much more needs to be done.

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