Predatory lending aimed at racially segregated minority neighborhoods led to mass foreclosures that fueled the U.S. housing crisis, according to a new study published in the American Sociological Review.
Predatory lending typically refers to loans that carry unreasonable fees, interest rates and payment requirements.
Poorer minority areas became a focus of these practices in the 1990s with the growth of mortgage-backed securities, which enabled lenders to pool low- and high-risk loans to sell on the secondary market, professor Douglas Massey of the Woodrow Wilson School of Public and International Affairs at Princeton University and Ph.D. candidate Jacob Rugh, said in their study.
The financial institutions likely to be found in minority areas tended to be predatory — pawn shops, payday lenders and check cashing services that “charge high fees and usurious rates of interest,” the study said.
The study, which used data from the 100 largest U.S. metropolitan areas, found that living in a predominantly African-American area, and to a lesser extent Hispanic areas, were “powerful predictors of foreclosures” in the nation.
Even African-Americans with similar credit profiles and down-payment ratios to white borrowers were more likely to receive subprime loans, according to the study.