The gap got wider as black and white Americans grew older, the Fed found. By age 75, the average black consumer’s credit score still had not reached the national average.
“It’s one more way that credit scoring . . . sort of sets in stone income and wealth disparities between minorities and whites,” said Chi Chi Wu, a lawyer with the National Consumer Law Center. “The playing field was never level.”
Banks and industry groups often cited low credit scores as one of the main reasons black consumers were denied loans at higher rates than whites. According to the 2000 Census, less than half of black households owned their homes, compared with nearly three-quarters of whites. Consumer advocates said the lack of credit in black neighborhoods was so pervasive it is dubbed “redlining.”
The housing boom helped change that. New financial instruments created by Wall Street helped generate enormous pools of money for mortgage lenders to distribute — and blacks were one of the largest untapped markets. Riskier borrowers with lower credit scores qualified for mortgages, albeit with higher interest rates and fees or unconventional terms.
At first, the shift was heralded as a way to help boost homeownership in black neighborhoods. The move also dovetailed with federal initiatives to promote fair lending. And the financial industry uncorked a lucrative new market that created jobs and drove the economy.
“There was a loan for almost anybody who wanted a loan. It was just priced differently based on credit,” Andrew Sandler, a lawyer for Wells Fargo, said of the industry at the time.
But the movement backfired. Borrowers with the new breed of subprime loans defaulted at alarming rates, sending the economy into a tailspin. Many of those mortgages were made using false information or shoddy underwriting. Instead of helping black communities build wealth, the lending boom destroyed it.
A Pew Research Center analysis last year found that the wealth of blacks plunged 53 percent during the recession, driven by falling home prices. The average net worth of a black household in 2009 was $5,677, according to the study, the lowest of any racial group. After years of record prosperity, homeownership rates among black Americans have plunged to the lowest level in 16 years. Unemployment has reached levels not seen since the 1980s.