Minority Borrowers and the Subprime Foreclosure Crisis: Unintended Consequences of Regulations vs. Unfair Lending
42 Pages Posted: 13 Aug 2012 Last revised: 13 Sep 2013
Date Written: September 12, 2013
Subprime loans were disproportionately offered in minority areas prior to the subprime crisis, even after controlling for other determinants of loan costs. There are two potential explanations for this phenomenon. Lenders could have charged subprime rates in minority areas to compensate for externally unobservable risk imposed on them by lending regulations. Politicians and commentators often use this explanation to argue that the foreclosure crisis is the result of regulations that facilitate mortgage access to minorities. Alternatively, lenders could have unfairly forced borrowers from minority areas into subprime loans. The empirical evidence suggests that this second potential explanation at least dominates the first one. Holding loan cost constant, I find that foreclosure is lower in minority areas. This evidence is consistent with lenders charging interest rates in minority areas that are not commensurate with the risk profiles of these areas’ residents and inconsistent with the notion that extant regulations forced the average lender to engage in suboptimal behavior prior to the foreclosure crisis.
Keywords: Minority lending, Regulations, Subprime crisis, Discrimination
JEL Classification: G01, G14, G28, J71, J78
Suggested Citation: Suggested Citation