Truth in Business and Home Lending Discrimination

Truth in Business and Home Lending Discrimination

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Product Details

ISBN-13: 9781434347985
Publisher: AuthorHouse
Publication date: 12/28/2007
Pages: 84
Product dimensions: 6.00(w) x 9.00(h) x 0.20(d)

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Truth in Business and Home Lending Discrimination


By Wilbert Smith Jr.
AuthorHouse
Copyright © 2007 Wilbert Smith Jr.
All right reserved.

ISBN: 978-1-4343-4798-5



Chapter One
INTRODUCTION

This research examined the practice of discrimination in bank and government-guaranteed lending in relation to racial and ethnic minorities in the United States. The problem investigated is explained in this chapter, and relevant terms and concepts are defined. The specific research questions addressed are stated, and the methods followed in the investigation of the research questions are described. Lastly, a preview of the remainder of the project is presented in this chapter.

Definitions of Terms

A loan is defined as the extension of funds directly by a lending institution. Operationally, a loan is classified as either approved (money provided) or rejected (money denied).

Discrimination in lending, for purposes of this study, was defined as the determination of the credit worthiness of an individual or business on the basis of factors other than credit history, financial position, earning potential, business experience, loan purpose, or other factors directly relevant to the probability of loan repayment. Personal characteristics such as ethnicity, race, gender, age, and so forth were not considered to be factors directly relevant to the probability of loan repayment.

Racial and ethnic minorities were defined within the context of specific racial and ethnic components of the population in the United States. These population components were as follows: African-American, Asian-American/Pacific Islander, Hispanic-American, and Native American.

Bank was defined as (1) a commercial banking institution that was chartered by either the federal government of the United States or by one of the state governments, (2) a thrift institution-either a savings and loan association or mutual savings bank, or (3) a credit union that was chartered by either the federal government of the United States or by one of the state governments. Government-guaranteed lending was defined as either a business loan or a residential mortgage for which payment to the lender was guaranteed to some extent by an agency of the federal government. With respect to residential mortgages, such agencies included the Federal Housing Authority (FHA) and the Veterans Administration (VA) among others. With respect to business loans, the primary agency considered was the federal-level Small Business Administration (SBA).

An approval rate in the award of loans is defined as the number of approvals divided by the number of applicants. Operationally, an approval rate is expressed as a percentage.

Mean loan amount is defined as the total amount of loans divided by the number of loans extended. Operationally, a mean loan amount is expressed as a dollar value rounded to the nearest $100.

Total loan amount is defined as the total amount of all of the loans extended to a specific population group. Operationally, a total loan amount is expressed as a dollar value rounded to the nearest $1,000.

Problem Statement

Discrimination in lending is an important issue for society as a whole. The denial of business loans on the basis of the ethnic or racial background of applicants not only denies such individuals the opportunity to establish business enterprises, but such action also retards economic growth in the United States, reduces tax revenues as a consequence, and in many instances increases governmental expenditures for social support services. The denial of residential mortgage loans on the basis of the ethnic or racial background of applicants not only denies such individuals the opportunity to become home owners with all the personal and family benefits that accrue from home ownership, but such action also weakens social stability in the United States, which in turn leads to increased expenditures for police and social services.

Since its inception, the SBA has been subject to criticism over the outcome of the agency's lending practices because of perceived inequities between white-owned and minority-owned business firms in the extension of loans. As an example, a State of California Reinvestment Committee found that Hispanic-Americans received only 6.6 percent of the SBA loans granted in that state, although Hispanic-Americans constitute approximately 25 percent of California's population. The SBA makes a valid point when the agency contends that loan percentages should not reflect population proportions; however, such wide gaps as those found by the California Reinvestment Committee invite criticism and demand satisfactory explanation. By vowing to extend more lending to minorities and women, the SBA tacitly admits that the agency's past lending practices have been less than satisfactory.

African-Americans complain the most about being shortchanged by the SBA, pointing out as an example of the problem that the SBA in 1992 awarded only two-percent of the agency's small business loans to African-American applicants. Both white applicants and Asian-American/Pacific Islander applicants tend to receive SBA loans disproportionately high in relation to the population proportions of the two ethnic groups, while African-American, Hispanic-American, and other groups are awarded SBA loans disproportionately low in relation to the population proportions of the groups. This situation has led to a conflict between two minority groups competing for SBA loans. African-American groups contend that Korean-American applicants for SBA loans are given preference over African-American applicants. Korean-American and Japanese-American recipients of SBA loans complain that in the wake of the destruction of their businesses by rioting in predominantly African-American communities, the SBA imposes a requirement that such businesses be rebuilt in the riot-prone communities as a condition of continued SBA financial support. Many Korean-American business owners think that they should receive reparations for riot-related damage to their businesses, as opposed to additional SBA loans.

Bias in lending on the basis of race and ethnic background has an extensive history-both actual and perceived-in the United States. Such bias is charged and investigated most frequently in relation to home mortgages; however, bias in the extension of business loans has also constituted a significant problem in American society over the decades. The SBA has vowed to change the agency's lending practices to provide better access to SBA loans for minority applicants. One such change involves a discontinuance of the SBA's practice of awarding loans on a first-come, first-served basis in favor of focusing loan awards on the basis of community need comparisons. A second change is the implementation of a policy to increase the allocation of funds for loans less than $25,000. Participating lenders are reluctant to extend loans for amounts less than $25,000, although loans in this range are the most in demand by minority applicants for SBA assistance.

Although the existence of statistical disparities between whites and minorities in the extension home mortgage loans is acknowledged by all parties, disagreement exists as to the reasons for these disparities. Equal opportunity activists contend that racial discrimination by mortgage lending institutions "is a contributing, if not the primary, source of these patterns." Other parties, however, "suggest that the patterns reflect fundamental differences in the economic circumstances of population groups."

Research Questions

Research questions were investigated in relation to both business loans and residential mortgages. Separate sets of research questions were formulated for the two lending areas.

With respect to the issue of discrimination in the extension of business loans, six research questions were investigated in this project. These research questions were as follows:

1. Does the approval rate in the award of SBA loans vary between ethnic and racial minority applicants and white (non-Hispanic) applicants? 2. Are there factors other than racial or ethnic bias that explain variation in approval rates in the award of SBA loans to ethnic and racial minority applicants and white (non-Hispanic) applicants? 3. Does the mean loan amount of SBA loans vary between ethnic and racial minority recipients and white (non-Hispanic) recipients? 4. Are there factors other than racial or ethnic bias that explain variation in the mean loan amount of SBA loans to ethnic and racial minority applicants and white (non-Hispanic) applicants? 5. Does the total loan amount of SBA loans vary between ethnic and racial minority recipients and white (non-Hispanic) recipients? 6. Are there factors other than racial or ethnic bias that explain variation in the total loan amount of SBA loans to ethnic and racial minority applicants and white (non-Hispanic) applicants?

With respect to the issue of discrimination in the extension of residential mortgage loans, six research questions were investigated in this project. These research questions were as follows:

7. Does the approval rate in the award of residential mortgage loans vary between ethnic and racial minority applicants and white (non-Hispanic) applicants? 8. Are there factors other than racial or ethnic bias that explain variation in approval rates in the award of residential mortgage loans to ethnic and racial minority applicants and white (non-Hispanic) applicants? 9. Does the mean loan amount of residential mortgage loans vary between ethnic and racial minority recipients and white (non-Hispanic) recipients? 10. Are there factors other than racial or ethnic bias that explain variation in the mean loan amount of residential mortgage loans to ethnic and racial minority applicants and white (non-Hispanic) applicants? 11. Does the total loan amount of residential mortgage loans vary between ethnic and racial minority recipients and white (non-Hispanic) recipients? 12. Are there factors other than racial or ethnic bias that explain variation in the total loan amount of residential mortgage loans to ethnic and racial minority applicants and white (non-Hispanic) applicants?

Methods

The research design for this project provided for the collection of quantitative data directly relevant to the research questions investigated from governmental agencies. These data then were manipulated to reconstitute them in forms that facilitated the assessment of the data with respect to the research questions investigated. Primarily, such manipulation involved the conversion of absolute data to percentages. In other instances, some data sets were combined to cause the data to conform to the operational definition of ethnic and racial minority used in this research.

Statistical analysis procedures were not employed to determine the probability of statistical significance with respect to discrimination in residential mortgage lending. Rather, percentage distributions were compared in the assessment of the research questions investigated. Statistical analysis procedures were used in the investigation of the research questions pertaining to discrimination in business lending by the SBA. The criteria for assessing the research problems investigated related to residential mortgage lending were as follows:

1. A percentage variance of 10 percent in the approval rate in the award of residential mortgage loans vary between ethnic and racial minority applicants and white (non-Hispanic) applicants was considered to be sufficient evidence for a preliminary finding of the existence of discrimination. 2. The existence of factors other than racial or ethnic bias that explain variation in approval rates in the award of residential mortgage loans to ethnic and racial minority applicants and white (non-Hispanic) applicants to an extent to reduce the overall variation to five-percent or less was considered to be sufficient to negate a finding of the existence of discrimination. 3. A percentage variance of 10 percent in the mean loan amount of residential mortgage loans between ethnic and racial minority recipients and white (non-Hispanic) recipients was considered to be sufficient evidence for a preliminary finding of the existence of discrimination. 4. The existence of factors other than racial or ethnic bias that explain variation in the mean loan amount of residential mortgage loans to ethnic and racial minority applicants and white (non-Hispanic) applicants to an extent to reduce the overall variation to five-percent or less was considered to be sufficient to negate a finding of the existence of discrimination. 5. A percentage variance of 10 percent in the total loan amount of residential mortgage loans between ethnic and racial minority recipients and white (non-Hispanic) recipients was considered to be sufficient evidence for a preliminary finding of the existence of discrimination. 6. The existence of factors other than racial or ethnic bias that explain variation in the total loan amount of residential mortgage loans to ethnic and racial minority applicants and white (non-Hispanic) applicants to an extent to reduce the overall variation to five-percent or less was considered to be sufficient to negate a finding of the existence of discrimination.

Preview of the Remainder of the Project

A review of the literature relevant to the problem investigated is presented in Chapter 2 of the project. The literature review develops a comprehensive development of the problem investigated. The findings of the investigations of the research questions are presented in Chapters 3 and 4 of the project. Chapter 3 is devoted to the findings relevant to discrimination in residential lending, while the findings relevant to discrimination in business lending are presented in Chapter 4. The conclusions drawn from the research findings are presented in Chapter 6.

Chapter Two
REVIEW OF LITERATURE

Literature is reviewed in this chapter that is relevant to the issue of discrimination in bank and government-guaranteed lending in relation to racial and ethnic minorities in the United States. Topical areas covered in this literature review include (1) the general issue of discrimination in lending, (2) bases of discrimination in lending, and (3) the CRA.

The Issue of Discrimination in Lending

Discrimination in bank lending for business purposes is a hotly debated topic. The general contentions of the criticisms of lending practices in relation to businesses is that members of ethnic and racial minority groups, low-income persons, and women are denied access to business credit to greater extents than are white people, middle- and upper income individuals, and men. Most lenders reply that, while the intent of programs to make credit more accessible to all persons is worthy, the implementation of the programs fail to recognize the realities of the financial marketplace.

The relationship between discrimination in bank lending for business purposes and discrimination in lending generally is interlocking to the extent that an assessment of one aspect of discrimination in lending cannot proceed effectively without addressing the other half of the discrimination in lending equation. Further, any investigation of discrimination in lending based on socioeconomic status cannot be divorced from discrimination based on ethnicity, race, and gender because of the strong ties among the four variables in relation to accessibility to credit.

Discrimination in the extension of credit is volatile issue in the United States. Although federal government efforts to end such discrimination have been pursued for two decades, critics contend that much work is still required.

(Continues...)



Excerpted from Truth in Business and Home Lending Discrimination by Wilbert Smith Jr. Copyright © 2007 by Wilbert Smith Jr.. Excerpted by permission.
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Table of Contents

Contents
List of Tables....................xi
Chapter 1: INTRODUCTION....................1
Definitions of Terms....................1
Problem Statement....................3
Research Questions....................5
Methods....................7
Preview of the Remainder of the Project....................9
Chapter 2: REVIEW OF LITERATURE....................11
The Issue of Discrimination in Lending....................11
Bases of Discrimination in Lending....................15
The CRA....................18
Chapter 3: DISCRIMINATION IN RESIDENTIAL LENDING....................19
CRA Requirements....................19
Assessment of Recent Mortgage Lending Practices....................23
Chapter Conclusion....................25
Chapter 4: DISCRIMINATION IN BUSINESS LENDING....................35
Background on the Issue....................35
Investigatory Approach....................37
Research Results and Findings....................41
SBA Loan Approval Rates....................41
SBA Loan Amount Means....................41
SBA Loan Amount Totals....................42
Chapter Conclusion....................43
Chapter 5: SUBPRIME LENDING AND DISCRIMINATION....................45
Chapter 6: CONCLUSION....................51
References....................59
Endnotes....................61
Bibliography....................67

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