Financial regulatory reform: Diversity matters

This isn’t just political correctness. And it is not — despite misleading and irresponsible claims from some quarters – an effort to impose some sort of racial quota system on lending. It is the only way to ensure that the financial nightmare still haunting our economy doesn’t repeat itself.

To put it bluntly, race matters. Much as we may like to imagine that we live in a color-blind society, the plain fact is that subtle and not-so-subtle discrimination still exists, based on race, ethnicity, gender, sexual orientation, and other factors. And it contributed to the subprime meltdown.

A big part of the problem was that high-cost, subprime loans — often with built-in interest-rate time bombs or other provisions that made default and foreclosure far more likely — were sold to many borrowers who could have qualified for better terms. And those buyers were disproportionately nonwhite.

For example, Federal Reserve statistics show that among buyers with the best credit ratings — FICO scores of 720 or higher — 13.5 percent of Latino borrowers and 12.8 percent of African-American borrowers received high-cost loans, compared to only 2.6 percent of white borrowers.

A recent study by researchers at the University of North Carolina and the National Council of La Raza reported, “During the housing boom years, borrowers of color, the elderly, women, first-time homebuyers and others were frequently steered toward subprime mortgages despite having the credit and income to warrant prime pricing. Moreover, some were pushed into specific types of high-cost home loans that carry a higher risk of foreclosure due to resetting rates or negative amortization.”

That doesn’t mean that bankers or mortgage brokers engaged in some deliberate conspiracy to cheat minority homebuyers. Discrimination is frequently unintentional. For example, the Federal Reserve Bank of Boston has noted, “Unintentional discrimination may be observed when a lender’s underwriting policies contain arbitrary or outdated criteria that effectively disqualify many urban or low-income minority applicants.”

That sort of unintentional and even unconscious discrimination still has real consequences for real people. And it can be hard for those who haven’t seen or experienced it to recognize. That’s why the Boston Fed specifically urged banks to diversify their staffs: “A staff that encompasses a variety of viewpoints and experiences can create an environment in which minority applicants feel welcome, strengthen ties to minority communities, and design policies and products that more effectively meet the needs of minority consumers. … Management should take steps to ensure that racial and ethnic diversity extends throughout the institution.”

If that sort of diversity is essential for banks to avoid unintentional discrimination, surely it’s just as essential for those who will be policing the financial industry — especially given the incontrovertible evidence that minority borrowers have received worse treatment than white borrowers in comparable circumstances.

The pending financial reform bill addresses these issues in concrete ways. For example, it creates a Consumer Financial Protection Bureau to curb predatory practices. To do its job, the CFPB will need to understand the different ways these practices have manifested in different communities — and it will, because another provision creates an Office of Women and Minority Inclusion in this and other bureaus.

In addition, the bill will improve data collection to help identify discriminatory practices or other problem areas.

It is an unpleasant fact — but a fact nonetheless — that too often people of color have not been treated well by the banking system. As a result, they are more alienated from banks than any other group. For example, while 86 percent of whites have bank accounts, only 66 percent of Latinos and 54 percent of blacks do.

These disparities contribute to all sorts of inequalities. Whites, for example, are far more likely to own their own homes — a major means of building assets that can shield a family during tough times — than are Asians, African-Americans or Latinos. And on average, for every dollar that a white-owned business makes, Latino, Native American and Asian-owned businesses make 56 cents and black-owned businesses make 43 cents.

As a culture, we are still uncomfortable with race, and it may seem easier to ignore these unpleasant truths, indulge in the myth of a color-blind society and simply look the other way. But if we ignore these realities as we try to rebuild and effectively regulate our financial system, we invite disaster — and that disaster is unlikely to discriminate.

Preeti Vissa is community reinvestment director and Chris Vaeth is legislative director at the Greenlining Institute, www.greenlining.org.