Tom: Very interesting topic today – we are talking interest rates and race?
Mellody: That is correct, Tom. A study published in july found a significant discrepancy between the interest rates that people of different races are charged on home mortgages. Black americans pay higher interest rates that white americans who have the same financial background. And this discrepancy is especially big for subprime borrowers. This morning, I just want to walk our listeners through the findings.
Tom: What was the difference?
Mellody: The study – which analyzed data from the Federal Reserve’s survey of consumer finances to look at mortgages and demographic characteristics of more than 3,500 households between 2001 and 2007 – found Black borrowers were charged between 0.29 and 0.31 percentage points more in interest than whites, on average, even after controlling for their debt and credit history. When the study’s authors controlled for mortgage features, borrower characteristics such as credit history and income, shopping behaviors, and types of lending institutions, the disparity between Blacks and whites as whole groups shrank to just under .14 percent. However, the difference in interest rates between white and Black borrowers grew more pronounced for subprime borrowers who couldn’t qualify for low-interest mortgages, with Blacks being charged rates that were nearly have a percentage point (0.4%) higher than white borrowers who were in the same subprime category. And the fact that there is any difference given the controls, is a stark reminder that the long history of racial discrimination in mortgage lending.
Tom: Absolutely. Where there other findings in the study that jumped out at you?
Mellody: The gap between Black women and other groups is very stark. The average Black american male who gets a loan will on average pay an interest rate about 0.09 percent higher than a white male with the same financial profile. But that is nothing in comparison to the difference between women of color and their white counterparts. When you look at individuals of the same financial profiles but different races here, you see a nearly .27 percent gap between black and white women. Shocking, but sadly not surprising.
The other thing that jumped out wasn’t a finding, but comments from one of the authors that really drove home the discriminatory aspect. Professor Ping Cheng, the leader of the study, pointed out that other studies suggest that Black borrowers tend to have lower default risk that the general public, saying “if they get a loan, that means the (Black) borrowers… generally, maybe comparably, have lower risk profiles and they should be the same in terms of interest rate.”
Tom: What do these differences translate to in dollars?
Mellody: when comparing all Blacks and all Whites, this discrepancy means paying $82.86 per month more for a mortgage assuming a $250,000, 30-year mortgage at a rate of 3.75%, according to the study. And when you plug the numbers into a mortgage calculator and run the numbers broken down by race and gender, on a $250,000, 30-year mortgage, a Black man will pay about $3,600 more than a white man over the course of the loan, and a Black woman getting the same loan would pay over $10,400 more than a white woman over 30 years.
Tom: Given this very specific discrimination, are there any changes in the works?
Mellody: Well, the authors of the study have said that they hoped these findings would spur policy changes regarding lending, but there aren’t any specific efforts to address these discrepancies out there at the moment. Part of this is due to the fact that transparency about their lending rules and practices is not high on the list of priorities for lenders, and part of it is due to the fact that it is hard to prove that lenders are engaged in intentional discrimination.
However, the Consumer Financial Protection bureau has increased the regulations on lenders, and the Obama administration’s Justice Department has been aggressive in its pursuit of companies suspected of discrimination. We have seen a number of settlements in recent years, including Countrywide and Bank of America. So hopefully, this situation will be a thing of the past at some point. In the meantime, really do your research, and if you suspect you are subject to this type of discrimination, report it to your elected officials or another regulatory body.
Tom: Hopefully these efforts make headway. Thanks for joining us this morning, Mellody.
Mellody: Have a great day, Tom.
Mellody is President of Ariel investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts. Additionally, she is a regular financial contributor and analyst for CBS News.