The Solution to Racial Discrimination in the Lending Industry

The lending industry encompasses a wide range of financial institutions, both traditional and alternative, with offers for all types of customers. One would think that any American citizen or permanent resident should have free access to get a loan. Nonetheless, it seems that lenders tend to discriminate against certain social groups. Statistics from the Federal Bureau of Consumer Financial Protection have revealed that the number of rejected African-Americans and Hispanic applicants is double compared to the number of white and Asian potential borrowers. That applies to mortgages and personal loans alike.

The statistics on credit discrimination were revealed due to the data from the Home Mortgage Disclosure Act. According to it, mortgage lending is least available to blacks. While the numbers differ across racial groups, the reasons for loan denials are almost the same. The applicant’s debt-to-income ratio, credit history, and collateral are the top three arguments for a lender to deny loans. These are reported as valid separate reasons or as combinations. African American applicants usually get rejected because of their poor credit history, while Hispanics and Asians can’t get loans because of high debt-to-income ratios.

After looking through an applicant’s credit report, a lender will often set higher fees for blacks and Hispanics. Surveys from the American Housing Survey confirm that these racial groups submit a higher monthly payment than other consumers with a similar profile. A creditor is thus discriminating against applicants of certain races, which goes against the principles stipulated in the Fair Housing Act.

The only branch that doesn’t seem to record cases of racial discrimination is payday lending. One of the reasons is that credit reports don’t matter much to direct lenders. Any person may get approval on a loan if they meet the requirements set by state laws in general and lending businesses in particular. Short-term lending is a fast way to get money for emergency cases. That makes them attractive to low-income Americans of all races and nationalities. The lenders charge high-interest rates for their increased risks. The amounts they lend out depend on your state of residence, generally up to $5,000.

As a result of frequent denials, fewer minority groups apply for mortgage loans. On the one hand, they reduce their debts. On the other hand, they also significantly diminish their chances of becoming homeowners. The number of blacks getting a mortgage keeps dropping by 5% yearly, while Hispanic households pay more monthly. The long-term consequences are negative for minorities, and highly unfair to the more privileged racial groups. The federal government needs to adjust its long-term strategy to tip the scale the other way. On top of that, fair lending policies must be changed to prevent discrimination in all its forms. As a potential borrower, it is your responsibility to know your rights and report any irregularities.