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Did Racial Predatory Lending Fuel Housing Crisis?

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By Laura Strachan, Esq. on October 06, 2010 7:04 AM

Predatory lending is a form of financial lending that carries unreasonable fees, high interest rates, and unmanageable payment requirements. According to a new study published in the American Sociological Review, this practice, primarily aimed at minority groups in racially segregated neighborhoods, played a big factor in the U.S. housing crisis. The study looked at the 100 largest U.S. metropolitan areas.

Reuters reports on the racial predatory lending problem, "By definition segregation creates minority dominant neighborhoods, which, given the legacy of redlining and institutional discrimination, continue to be undeserved by mainstream financial institutions." The ultimate conclusion of the study was that living in a predominantly African-American area or Hispanic neighborhood were powerful predictors of foreclosures.

Pawn shops, payday lenders, and check cashing services were some of the biggest culprits for engaging in predatory lending practices. Though the money came easy, paying it back was an impossible pursuit, leading to massive foreclosures, which ultimately pushed the financial crisis that the economy is still struggling to recover from.

The discrimination against minority applicants was essentially twofold: denying an individual based on his race for a more traditional and safer loan caused him or her to seek out some type of subprime lending. Assuming a much higher interest rate than traditional loans was just the first step in creating the national foreclosure problem. The study concluded with an important civil rights suggestion for combating the problem -- suggesting that the Civil Rights Act be amened to "create mechanisms that would uncover discrimination and penalize those who discriminated against minority borrowers."

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