Racial Dimensions of Credit and Bankruptcy

Washington and Lee Law Review, Fall 2004 by Skeel, David A Jr

Whatever the merits of these arguments, bankruptcy's mortgage protection scheme has, quite accidentally, been a boon for the subprime lending industry.86 When a subprime lender tells a homeowner that she can solve her financial problems by consolidating her debts into a single loan secured by a second mortgage on her house, the lender knows that the mortgage, unlike the debts it replaces, cannot be restructured in bankruptcy if the homeowner later defaults.87 If the homeowner does not want to give up her house, she will have to pay the mortgage in full. Together with deregulated interest rates, this mortgage protection sets the stage for a dramatic expansion of subprime lending.88 If subprime lenders set the interest rate high enough, they could lend profitably to almost anyone who owned a house, even those in the most financially precarious position. The interest rate compensates for the high risk, and the mortgage protection provisions make it hard for overextended homeowners to use bankruptcy to scale down the debt.

The events set in motion in the 1970s utterly transformed American credit markets. More credit is available than ever before, and much of it takes a very different form than the credit arrangements of the past.89 During the same decade, Congress took major steps to try to end discrimination in credit markets.90 Did the discrimination of Sadie and Ray Alexanders' era disappear? How have the changes in the credit markets played out for blacks and other minorities? It is to these questions that we now turn.

IV. The New Face of Credit Market Discrimination

If we shift our perspective forward from the 1970s to the present, it is immediately obvious that remarkable strides have been made. Discriminatory practices, such as the red-lining of minority neighborhoods by banks, are much less common than in the past.91 Many blacks who simply had no access to conventional credit in the past are now able to obtain mortgage lending, credit cards, and car loans. As credit card use has skyrocketed and the subprime lending market has emerged, blacks and other minorities have figured prominently in the expansion.

However, the effects of discrimination have not disappeared. Although black borrowers have access to a much wider range of credit than ever before, the nature of this access often seems to differ from that of whites in troubling respects. This Part begins by considering evidence suggesting that blacks still often borrow on different terms than whites and then discusses some of the reasons for these differences.92 A key theme of the discussion is that the very developments that this Article has chronicled-in particular, the shift to conventional credit from unconventional and reputation-based credit-contributed to the differential treatment that we now see.93 The transition from one set of credit options to another has magnified the risk of the subtle forms of discrimination that we currently observe. This transition does not mean that black borrowers are worse off than they were in the Alexanders' era or in the decades that followed, but the transition does suggest that serious problems remain and that the old remedies may not be adequate to address them. In addition to considering the pernicious side of the new landscape for individual black borrowers, I also explore two related issues: the relationship between the shift in credit markets and black borrowers' access to bankruptcy, and the effect that the transition has had on black lending institutions.94