Saturday, February 12, 2011

Predatory Lending

Recently, Memphis has attempted to fight against the practice of predatory lending. Predatory lending is when banks focus on giving mortgages to low income individuals or families. These mortgages are high risk, high cost mortgages that usually result in foreclosure. The city of Memphis is trying to hold banks responsible for disproportionally targeting African Americans. The lawsuit states that 51 percent of loans make to black households were subprime, whereas only 17 of loans make to white households were subprime (here is the full article). Is this a form of discrimination against African Americans?

While there is no specific right in the Universal Declaration of Human Rights about this specific type of lending, Article 2 does state that everyone is entitled to their rights regardless of race or color. Given the statistics, it seems like a disproportionate number of these subprime mortgages were given to African Americans. Does this necessarily mean that the banks giving these subprime mortgages are privileging white people over black people? The banks argue that it isn’t, saying that the city is accurately appropriating blame.

More fundamentally, are these subprime mortgages and predatory lending practices a violation of human rights regardless of race? It seems like this type of lending practice is taking advantage of people who do not know much about mortgages or borrowing money in general. If the bank tells them that there won’t be a problem, they tend to believe it. To what extent does the bank have a responsibility to inform the people it is giving loans to about what the loan entails? Obviously the bank shouldn’t be able to lie to its customers, but if the homeowners looking to get a loan are ignorant of banking practices, is it the bank’s responsibility to inform them of the ramifications of taking out a high risk loan? Someone who is trying to own a house should probably be at least familiar with the process of taking out a loan and should know the benefits and risks of having each kind of loan.

To what extent are the potential homeowners responsible for these types of predatory lending? To what extent are the banks responsible? Do white and black homeowners have equal opportunities to invest in homeownership? The statistics seem offer evidence against this idea of equal opportunity.


  1. Ben, this is a really interesting topic. I didn’t know that the banks were doing this and especially to this extent in Memphis. I personally see this as a violation of human rights because it is taking advantage of people who may not know what they are getting themselves involved in. It is even worse that the banks here in Memphis are specifically targeting African Americans. This has to be a form of discrimination. I like that you present the use of article 2 and tie it into the situation because I think it fits well with your point and the thought of discrimination. Although the banks seem to be denying the discrimination, the statistics are outrageous and seem to show a very different conclusion. I agree with your statement that people who are taking out a loan should know how they work, but isn’t this also a partial responsibility for a bank to explain exactly what is going to happen throughout the process? Taking advantage and lying to individuals is unacceptable from banks.

  2. I agree that the bank has a responsibility to inform the people it lends money to. While I don't like the idea of having high risk, high cost, I'm not sure simply making them illegal will fix the problem.

  3. Presumably any form of actual fraud is a criminal matter that ought to be investigated, and there is probably something to be said for government action to ensure that borrowers are fully aware of the terms of loans. However, to my way of thinking, the racial angle is somewhat overblown. The banks do not extend subprime to blacks at a dispropritionate rate out of a sense of racial animus, but because this is the policy they expect to bring the biggest returns. Since African Americans (especially in urban Memphis) are disproportionately poorer than the population at large, they constitute (statistically) a greater risk for the banks' capital.

    Forcing the banks to offer more generous loan terms purely out of a sense of racial equity would result in either fewer loans to blacks overall or in greater levels of foreclosure, since individuals would be incentivized to take out loans for homes they ultimately could not afford (this was precisely a large part of the problem with the subprime lending crisis). There is a place here for education of consumers and for a certain level of government oversight, but you cannot simply decree racial equality among various groups when real economic disparities exist between them.

    To say that the banks are violating human rights implies that (1) The borrowers have no choice in the matter and (2) The banks should be expected to lend to seperate populations with economically different characteristics on broadly the same terms. Both are rather dubious assertions.

  4. The practice of issuing high risk high cost loans is a soulless and spineless act of greed on the part of banks. Such loans only ruin those already straddling the poverty line, and as such are detrimental to society as a whole. Like Patrick, I would not consider such practices a violation of human rights, but I do feel that it is the government's responsibility to intervene and make this immoral exploitation illegal.

  5. I agree with Cole and Patrick that although this is an awful practice and shameful that it is occurring in Memphis, I do not feel that it is a violation of human rights. The statistics show that there is obviously no awareness or education for the people getting involved with these types of loans, and this advances the idea of greed within the middle American population. The wealthy to middle class Americans are taking advantage of a group of people that have not been educated in the same way. I think this is an issue within a country and more needs to be done to promote national pride and care for fellow citizens.

  6. To play devil's advocate, doesn't the disproportionally large number of African Americans receiving these high risk loans make this an issue of race? I agree that the solution probably involves education. Insofar as the borrowers are not educated about how subprime mortgages work, I would argue that they don't have a genuine choice in the matter. You can't have a choice when you don't understand what you are choosing between.


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