Rationale for 'racism'?

0 Comments | Insight on the News, Dec 11, 1995 | by Gene Koprowski

Attorney General Janet Reno, accompanied by her underlings, strides to the podium at the Department of Justice and announces another settlement with a bank for alleged lending discrimination. Reno has reached a number of similar accords with high-profile institutions such as the Chevy Chase Federal Savings Bank in Washington, Shawmut Bank in Boston and the First National Bank of Vicksburg, Miss. "We will tackle lending discrimination wherever it appears," declares Reno. "No loan is exempt; no bank is immune."

The latest agreement came in June, when the Justice Department signed a $700,000 settlement with Northern Trust Corp., one of the nation's largest banks, based upon allegations that the Chicago institution discriminated against minority home-loan applicants. The Clinton administration reckons that racial discrimination is rampant in mortgage lending and has stepped up investigations and enhanced regulations during its nearly three years in power.

But conservatives are questioning whether racism really is the reason that many minorities and low-income individuals have been turned down for loans. Several studies by academics, as well as by the Federal Reserve Bank of Chicago, have detailed how factors other than race are used by bankers when weighing loan applications. And the House Banking and Financial Services Committee, headed by Republican Jim Leach of Iowa, recently issued a report that said the Justice Department should consult with other federal agencies before bringing civil suits for lending discrimination.

Though no hearings have been held, the idea may be brought to the House floor for a vote during this Congress. "We're hearing complaints that the Justice Department is overzealous," Margo Tank, an aide to Leach, tells Insight. "We're planning our oversight agenda. But we think there does need to be some regulatory relief The Justice Department can't just launch these investigations on its own."

An oft-cited 1992 report by the Federal Reserve Bank of Boston -- completed just as Clinton was assembling his administration -- influenced the liberal establishment's thinking on race and lending. The study of more than 6 million mortgage applications showed that blacks were rejected for loans 17 percent of the time while whites were turned down 11 percent of the time. The economist responsible for the study, Alicia Munnell, was appointed as an assistant Treasury secretary in the Clinton administration.

Though criticism of the report still resonates, the question remains: If racism is not to blame for blacks getting turned down for mortgages more often than whites, what is? Dinesh D'Souza, author of the controversial book, The End of Racism, tells Insight that one reason may be the applicants' net worth.

White households have a median net worth of around $45,000, while black households have a median net worth of $4,200 -- less than a 10th that of whites, says D'Souza, citing U.S. census data. "Since black incomes have risen dramatically in the last few decades, even blacks and whites who earn roughly the same amount often have vastly different levels of net worth. These gaps in accumulated wealth could influence mortgage-lending decisions."

A recent study by the Federal Reserve Board, which examined default rates of federally insured housing loans during the late 1980s and early 1990s, sheds further light on the problem. Default rates for blacks averaged around 9 percent - substantially higher than the 4 percent for whites. American Indians defaulted on about 6 percent of their loans, Hispanics a little more than 5 percent. Asians exhibited the lowest default rate, 3.2 percent. "Studies that take credit histories into account fail to demonstrate racism," says Jonathan R. Macey, a professor at Cornell University Law School.

The Federal Reserve Bank of Chicago completed its own study a few months ago, examining 1990 data on mortgage lending. According to the study, white applicants often develop an "affinity" with bank loan officers that blacks don't. Banks often ask applicants for further information about themselves, their income or the property they intend to buy. But in many cases, blacks may feel slighted if this information is requested and, as a result, don't provide the extensive documentation required. "It's easier and cheaper for the loan officer to acquire additional information about a white applicant's creditworthiness than a minority applicant's creditworthiness," says Mary Beth Walker, a Georgia State University economist. "These effects are rational responses to costs of information."

D'Souza calls this practice "rational discrimination." Lenders try to lower the information costs of considering the complex circumstances of borderline applicants. Even identically situated individuals could be treated differently for legitimate economic reasons. "Rational discrimination may be difficult to understand in loan practices to racial groups, yet its economic justification is obvious in other areas. Insurance companies have no special dislike for teenage boys, but they charge them higher rates than female and older drivers," notes D'Souza.