Study Suggests Pre- and Post-Crisis Lending Discrimination in Twin Cities

A newly released study from the University of Minnesota Law School charges mortgage banks in the Twin Cities of lending discrimination against borrowers in largely minority areas.

According to a report put out Wednesday by UM’s Institute on Metropolitan Opportunity (IMO), Twin Cities lenders have been treating minority mortgage applicants unequally for 10 years—first by originating an inordinate number of subprime loans to minority borrowers before the crash and then by disproportionately limiting credit access to those same communities.

Citing a 2009 study, IMO points to stats showing a stark difference in subprime lending to black borrowers compared to white borrowers in 2004–2006, regardless of income; according to those findings, black applicants with very high incomes were still 3.8 times more likely to receive subprime loans for home purchases than very low income whites.

“Although income is not the sole determinant of whether applicants obtain loans, it is hard to believe that credit profiles or economic factors other than income could justify differences of this magnitude between very high income black applicants and very low income white applicants,” the report says.

Even high income whites living in predominantly minority or racially diverse areas were 1.8–2.9 times more likely to receive a subprime loan than those living in predominately white neighborhoods, the study found.

Now that subprime lending is less common, IMO says communities of color are less likely than their white counterparts to get a loan at all.

Between 2009 and 2012, the institute says diverse and majority non-white neighborhoods received 23 percent fewer home purchase loans and 66 percent fewer refinance loans than would be expected, given their populations and incomes. Again, denial rates were also higher for high-income whites living in those neighborhoods.

If the home loan portfolios of the region’s banks reflected the distribution of homeowners and household incomes, IMO says there would have been more than 13,300 additional loans to diverse and majority non-white neighborhoods from the start of 2009 through the end of 2012, a 55 percent increase.

According to IMO director Myron Orfield, the institute’s findings explain how some of the area’s neighborhoods were hit harder during the crash—and why they still struggle to find solid ground.

“The banking system has not served the region's racially diverse neighborhoods at all equitably,” Orfield said. “High-cost loans and poor access to prime finance exacerbated the housing crisis in these areas. More equitable treatment now could make an enormous contribution to rejuvenating housing markets decimated by the foreclosure crisis.”