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Access Denied

Some Families Face Barriers to Credit

A new report by Christian E. Weller finds that low-income and minority families face more credit constraints and higher borrowing costs than other families.

Few families in the United States today could pay cash for a home, their children’s college education, a new car, or a major family medical emergency. Most families need to borrow money to create economic opportunities for themselves or protect their financial security. Access to credit helps families get ahead in life—to start a new business or pursue an education—and ensure that unforeseen setbacks, such as a temporary decline in income, do not result in unpaid bills or sharp cuts in living standards.

For many families, especially minorities and those with low incomes, access to credit opens doors that were previously closed—literally so in the case of homeownership. In the wake of the recent subprime home lending crisis, however, access to credit is becoming more restrictive across all credit products, from credit cards to home mortgages, car loans to consumer installment lines of credit, even while persistent differences in access to credit and in the cost of that credit are still based on race, ethnicity and income.

Specifically, African American and Hispanic families are still denied credit more often than white families with the same income, and low-income families are more often denied access to credit than middle-income and higher-income families—even when low-income families apply for credit in line with their income and creditworthiness. This type of discrimination in the credit marketplace remains pervasive despite a number of regulatory efforts to make access to credit non-discriminatory and to make access to credit for low-income families on par with that for wealthier families.

This report extrapolates from the most recent data and existing literature two overarching reasons for persistent discrimination: product steering, in which financial institutions decide which products to offer to which borrowers and on which terms; and industry segmentation, in which different financial institutions specialize in lending to different kinds of customers. Some of these discriminatory patterns appear to be intentional; others are the result of the growth and breadth of today’s credit markets.

The laws of our nation and our common values dictate that access to credit and the costs of credit should not be determined by one’s race, ethnicity or even income. If someone is creditworthy, that person should have access to credit at the same price as everyone else. As the detailed findings of this report demonstrate, there is clear evidence of continuing discrimination. Specifically:

  • Loan denials are more likely for low-income and minority families. African American families were about twice as likely as white families to be denied credit in 2004, the last year in which complete data are available. Hispanics and low-income families are also more likely than their white or wealthier counterparts to be denied credit. These differences in loan denial rates persist even after other factors, such as credit history, are taken into account.
  • Minority families and low-income families feel discouraged from applying for loans. The share of minority families who felt discouraged from applying for a loan was more than four times larger than that of white families in 2004. And the share of low-income families who felt discouraged from applying for credit was more than twice that of middle-income families and almost nine times that of high-income families. Large differences persist even after accounting for other factors, such as credit history.
  • Differences in credit constraints by race and ethnicity persist. The difference between African Americans and whites with respect to credit constraints—loan denials and being discouraged from applying for a loan—widened to a gap of 95.8 percent between 1998 and 2004 from a gap of 82.9 percent between 1989 and 1995.
  • Credit constraints affect a wide range of loans. The most frequent denials of credit because of race and ethnicity occur with credit card applications (43.5 percent), but other forms of credit also make up substantial shares of loan denials. For instance, 22.5 percent of denied applications for Hispanics were for car loans between 1995 and 2004.
  • Minority families and lower-income families face higher costs of borrowing. Both the share of debt payments to debt as well as the rate of interest charged on that debt tend to be higher for minority families and lower-income families. These differences in the costs of credit persist even after controlling for other factors.
  • Cost differences persist over time: Minority families and lower-income families were consistently more likely than their white or wealthier counterparts to have higher debt payments relative to debt. The difference in borrowing costs for African Americans and for whites has diminished over time but is still evident.
  • Higher costs of borrowing are tied to different credit products: Minority families and lower-income families have larger shares of loans in the form of credit card debt and consumer installment loans. Eleven percent of Hispanic families, for example, borrowed from finance companies in 2004, compared to only 7.3 percent for whites. The cost of this credit was also higher for Hispanic families than for white families. The median interest rate on installment loans was 9.9 percent for whites in 2004 in contrast to 13.3 percent for Hispanics.

Clearly, fair and equitable access to credit remains a problem for low-income and minority families. The data point toward persistent differences across race, ethnicity, and income even though there are certain trends that show progress in some areas. For example, while credit market discrimination with respect to loan denials has remained high for African-American families, the cost differential with white families has decreased.

Still, the data indicate that lower-income and minority families had less access to credit than white families and higher-income families. In the wake of recent financial market turmoil, especially in the home mortgage marketplace, there are concerns that credit access will decrease and especially affect those who may need it the most—low-income and minority families.

One fear is that the deterioration of loan quality will lead banks to restrict their lending. Indeed, since the middle of 2006, the quality of banks’ loan portfolios has deteriorated as foreclosures and loan defaults have risen. Data from the Federal Deposit Insurance Corporation show that the share of mortgages that were delinquent in the first quarter of 2007 was the highest since FDIC began collecting these data in 1990.

In addition, the Mortgage Bankers Association reported recently that the share of mortgages that entered into the foreclosure process in the first quarter of 2007 was the highest since 1979. Other measures of household economic distress, such as credit card default rates and bankruptcy rates, also rose throughout 2006. Faced with this decline in loan quality, banks have begun to tighten credit standards. Data from the Federal Reserve show that loan officers have become stricter in their mortgage lending standards than at any point since 1991.

Given the findings in this report that low-income and minority families have less credit access than more wealthy families and white families, it is reasonable to assume that minorities and low-income families will disproportionately feel the effects of the current credit tightening.

These families will have fewer chances to create economic opportunities for themselves or build assets to ensure their future economic security.

In this report, the analysis will first examine the most sweeping data on credit access to establish a baseline for more a detailed multivariate analysis of the same data to highlight continuing discrimination in the credit marketplace.

The positions of American Progress, and our policy experts, are independent, and the findings and conclusions presented are those of American Progress alone. A full list of supporters is available here. American Progress would like to acknowledge the many generous supporters who make our work possible.


Christian E. Weller

Senior Fellow