Truthdig: Borrowing While Poor

Borrowing While Poor
Posted on Apr 21, 2010


By Moshe Adler


Congress is in the midst of investigating why Alan Greenspan and the Federal Reserve did not prevent the subprime fiasco, and now the SEC is suing Goldman Sachs for fraud. But neither the investigation nor the suit addresses the most repugnant aspect of subprime lending, which is the fact that poor people are charged higher interest rates than rich people when they purchase homes, and that this is perfectly legal.

The justification that economists give for this is that the poor have a higher risk of default and must therefore pay a premium for presenting this higher risk. But it is not the borrower who is in default who pays this premium; it is the other borrowers—the ones who do not default—who pay the premium and thus cover the losses caused by the ones who do. Why should a poor borrower be held more responsible than a rich borrower for the default of another poor borrower?

This discrimination against homebuyers based on income is produced by market competition. A rich family is less likely to default, so in order to attract such families lenders offer them a lower interest rate. But someone has to pay to cover the losses from bad loans, and if rich families are given a way not to pay for these losses, then poor families end up getting stuck with the bill. While the motivation for this discrimination may be totally innocent, the result is that it frees rich families from what should be a shared responsibility, shifting it all to the poor.

Although income discrimination is similar in some ways to racial discrimination, the remedies must be radically different. Under anti-racial-discrimination laws, a lender is not guilty of discrimination if her decision not to lend to a particular individual is motivated by economic considerations. But while it’s legitimate to use the level of a borrower’s income to determine whether that borrower is creditworthy, it should not determine the level of the interest rate she is charged. ........(more)

The complete piece is at: http://www.truthdig.com/report/item/borrowing_while_poor_20100421/