credit-cards_web.jpgPeople living in white neighborhoods are more likely to be approved for credit cards than those living in black neighborhoods, according to a study by the Federal Reserve Bank of Boston.

Banks deny that race is a factor in granting credit cards or setting credit limits. Consumer advocates and fair lending activists, however, say the study is just the latest evidence of systemic, institutionalized racism prevalent in the financial markets. Advocates point to lending bias at major banks and credit card issuers as the reason many low-income, black and Hispanic borrowers are forced to seek loans from payday lenders and other high-interest, high-cost sources.

“It matters where you live,” said Ethan Cohen-Cole, the financial economist who conducted the study, released with little fanfare in February 2008.

Although the Equal Credit Opportunity Act prohibits creditors from including questions about race, sex, national origin or religion on credit applications, Cohen-Cole’s research documents racial disparities in credit card lending.

“It should be not harder for a person of color to get credit,” said Jose Garcia, a senior policy analyst at Demos, a New York-based public policy research group that has conducted studies on racial differences in credit card debt. “You shouldn't have to move to get credit. But because of the color of my skin and where I live, some of those decisions are already made.” 

Is it ‘redlining’?

The study, titled “Credit Card Redlining,” compared people with identical risk profiles and payment histories and found significant differences based on the racial makeup of their neighborhoods. Redlining is a term that describes the illegal practice of denying banking, housing, insurance or other services in certain areas or communities based on race. Decades ago, lenders were said to draw a red line on a map around areas targeted for differential treatment.  

The research used data on more than 285,000 people supplied by a major credit reporting bureau. The three national credit bureaus are TransUnion, Equifax and Experian. Researchers received the data on the condition that the name of the credit reporting bureau remains anonymous and personal information about individual borrowers was withheld to protect their privacy.

Information on racial makeup of neighborhoods was obtained from publicly available U.S. Census tract data. 

“I had data that is in principle the same data that the credit card issuers have. I wanted to evaluate the same data they use to make their credit card decisions,” Cohen-Cole said. “When you fill out a credit card application, you do not fill out your race. However, they do know where you live and they do know the racial makeup of where you live. By using that information, you can determine if the racial composition of the neighborhood is one of the criteria they are using.”

He added: “The fact that credit is being differentiated by location is well known now. The question is whether or not they are also differentiating by racial composition of those neighborhoods … the answer is yes.”

Racial divide in credit card lending?

A Federal Reserve study of more than 285,000 people found those living in white neighborhoods were more likely to get credit cards than people living in black neighborhoods. The chart shows the gap in credit card lending between all-white neighborhoods and all-black neighborhoods.

Location and color

In essence, a white person living in a black neighborhood could have a greater chance of being denied a credit card. Conversely, a black person with the same credit score living in a white neighborhood could be more likely to be approved for a credit card.  

Cohen-Cole, who is white, said his motivation for doing the study stemmed from the important role that credit cards play in society today.

“As the study states, credit cards are the first step on the financial ladder,” he said. 

Cohen-Cole has a doctorate degree in economics from the University of Wisconsin. He attended Harvard University as an undergraduate history major and has a master's in public administration in economics and public policy from Princeton University.

His previous research has delved into other social issues such as capital punishment, obesity and welfare benefits. He has also studied credit and operational risk management and bank mergers. He lived in West Africa from 2001 to 2002, when he evaluated the economic impact of food aid programs on local farmers for Catholic Relief Services. He has been with the Boston Fed since 2006.

Cohen-Cole speculates that the reason for the disparity in credit card lending may be marketing.

“On average, the African-American community in the United States has lower income and lower education. All of those correlate to lower credit,” Cohen-Cole said. “If I’m an issuer and I want to send out 1,000 credit card offers, where do I send it?”

Issuers, he said, are more likely to target marketing mailers to areas with higher incomes and higher education, adding, “That alone is not an illegal or reprehensible thing to decide.”
Banks deny discrimination

“Race is not a factor in credit card solicitations or decisions,” according to Betty Reiss, spokeswoman for Bank of America, the largest credit card issuer. “We don't even have that information on applicants and it's not gathered as part of any credit card application. We look at stability, ability and willingness to repay.”

Peter Garuccio, spokesman for the American Bankers Association, the nation's largest banking trade group, said ECOA protects consumers from racial bias in lending. “What role does race play in issuing credit cards? Zero.”

He added, “Credit records don't have any personal demographic information except for a person's date of birth and their age.”
Cohen-Cole, the study's author, countered: “If this truly exists, no one is going to come out and tell you.”

Garuccio cited an August 2007 study conducted by the Federal Reserve on the influence of credit scoring on availability and affordability of credit. The study found that use of credit scoring models — based on standardized mathematical calculations of risk — have reduced the possibility of discriminatory behavior.

Still, not everyone is convinced that lending institutions are color blind. The NAACP, the nation's premier civil rights organization, filed suit against 14 major lenders in July 2007, alleging racial discrimination in granting high-cost subprime home mortgage loans.
The NAACP claims that systematic institutionalized racism was responsible for the large number of African Americans steered toward subprime home loans.

Historical context

“Until we solve the issue of historical discrimination, we will continue to see this type of trend,” said Garcia, the Demos analyst.
Garcia is also co-author of the book Up to Our Eyeballs: How Shady Lenders and Failed Economic Policies Are Drowning Americans in Debt.

A 2007 Demos study –  “Borrowing to Make Ends Meet: The Rapid Growth of Credit Card Debt in America” – analyzed data from the Fed's Survey of Consumer Finances and found that white households were more likely than African-American or Latino homes to have credit cards. Garcia said the heart of the problem lies in the historic income and wealth gap, housing gap and educational inequities.

“We need to level the playing field,” he said.

Garcia said people living in minority neighborhoods should arm themselves with knowledge of how credit is granted and of managing credit and finances.

“Communities of color need to understand the history,’’ Garcia said. “The education is not about reading the fine print, but knowing that there may be some biases in those products.”

Limited choices

Tom Feltner, policy and communications director at the Woodstock Institute, a Chicago-based economic development research group that specializes in consumer lending, said the credit card redlining study “raises a number of concerns.”

He added that, “The paper shows that ultimately for many consumers the racial composition of their neighborhoods is going to dramatically increase their cost of borrowing. When there is the documented fact that access to credit depends not on a customer's credit history, but on the type of neighborhood they live in, that raises issues for us.”

Low-income, minority borrowers who are shut out of mainstream lending options often turn to payday loans, Feltner said. Payday loans allow customers to borrow money using the proceeds of their next paycheck as collateral. Woodstock's research has found consumers often end up paying 400 percent to 600 percent in interest and fees on the loans because many people often cannot repay the money by the next pay period and extend the loans at additional cost.

“When there is no other choice, payday loans become the form of credit of last resort,” Feltner said. “We know that in Illinois, borrowers are primarily female (over 70 percent), concentrated in lower-income and minority communities.”

He noted that many states are passing laws to cap interest charges on payday loans.

Garuccio, the bankers association spokesman, said consumers who are denied credit cards have options.

“The credit card market is still very competitive,’’ Garuccio said. “There are 6,000 issuers out there.  Not everybody has the same credit card models. There are an unbelievable amount of choices for consumers.”

He added: “If you as an individual feel you are not getting the rate you feel you should or the amount of credit you should, you can always take your business elsewhere. Many people do.”

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Copyright 2008. Reprinted with permission. All rights reserved.