This article begins with an almost humblebrag.
In April 2020, just as America’s COVID death toll was beginning to rise, I received a random call from a politician. I immediately recognized the voice as someone who sporadically called me to basically say: “This thing is happening to Black people, no one is paying attention and The Root should be covering it.”
Most of our conversations went this way: I would say something brilliant that I had thought about for a long time. Then she would explain exactly why I was wrong and she was right. And she was always right. Not only did she know a lot about a lot of things, but there was also almost nothing she didn’t know…
This particular time, she wanted to talk about how the pandemic would disproportionately affect Black people. But instead of focusing on health issues, she wanted to talk about how the pandemic would affect voting rights and economic inequality. “This issue of homeownership and housing security is highlighted in a profound way during this pandemic,” she explained, before going into a long explanation about Black homeownership and wealth inequality.
Finally! Now, this was something I knew about. “The problem is with the banks,” I added, reeling off data about how the financial industry is rife with systemic inequality.
“But that’s not where the problem is,” she interjected.
I knew I had her beat. I had taught, researched and covered this issue for decades. I explained how homes in Black neighborhoods are systematically undervalued, but she already knew that. I recounted the studies that show how Black people are charged higher interest rates.”
“But those aren’t the biggest reasons for the gap in Black homeownership,” she interjected.
“So tell me what it is,” I replied, eager to hear her answer, yet reluctant to be wrong again. Unlike the other times, she did not offer an extended explanation. Even though her response only consisted of two words, she succinctly encapsulated the entirety of all the studies, research and data on the issue:
Dammit, Kamala Harris was right again.
Is credit racist?
Unlike what people on both the left and the right believe, racism doesn’t require animus or intent. Words have meaning and—in this context—racism is defined as “the systemic oppression of a racial group to the social, economic, and political advantage of another.”
By any measure, America’s credit reporting companies fit the definition. And if any human being on the planet disagrees, they should be prepared to answer one simple question:
How do you know?
Last week, The Markup and the Associated Press released the results of an investigation that included more than 2 million mortgage applications from 2019. The “complex statistical analysis” even adjusted for 17 different factors used by home loan companies in determining whether someone qualified for a mortgage loan. In the end, the researchers found banks were “more likely to deny home loans to people of color than to white people with similar financial characteristics—even when we controlled for newly available financial factors that the mortgage industry has in the past said would explain racial disparities in lending.”
The Associated Press reports:
Holding 17 different factors steady in a complex statistical analysis of more than 2 million conventional mortgage applications for home purchases reported to the government, we found that, in comparison to similar white applicants, lenders were:
● 80% more likely to reject Black applicants
● 70% more likely to deny Native American applicants
● 50% more likely to turn down Asian/Pacific Islander applicants
● 40% more likely to reject Latino applicants
These are national rates.
When we examined cities and towns individually, we found disparities in 90 metros spanning every region of the country. Lenders were 150% more likely to reject Black applicants in Chicago than similar white applicants there. Lenders were more than 200% more likely to reject Latino applicants than white applicants in Waco, Texas, and to reject Asian and Pacific Islander applicants than white ones in Port St. Lucie, Florida. And they were 110% more likely to deny Native American applicants in Minneapolis.
There was, however, one factor that investigators could not include in their comparison. “It was impossible for us to include credit scores in our analysis,” The Markup explained. “[B]ecause the CFPB [Consumer Financial Protection Bureau] strips them from the public version of the data—in part due to the mortgage industry’s lobbying, citing borrower privacy.”
When Reveal News did a study similar to The Markup’s, it looked at 31 million applications and discovered that banks in some cities consistently deny loans to Black potential homebuyers at rates as high as five times the white turndown rate. A 2016 project by the National Consumer Law Center found that credit reports and scores “reflect stunning racial disparities.” The National Fair Housing Alliance found the same thing. In 2012, the Consumer Financial Protection Bureau examined 200,000 consumers’ scores and found that people who live in white zip codes have higher credit scores. The Federal Trade Commission noted the racial biases in 2007. The Federal Reserve said the same thing. So did the Brookings Institution. Harvard too.
As Yemi Rose, founder of financial services platform OfColor, noted in an article for The Root: “The racial wealth gap is larger today than it was when the United States passed the Civil Rights Act of 1964. The average white family currently holds about 10 times the wealth of a Black one, and the average income from the labor of white families stands at about two times that of Black ones (pdf).” A large piece of the wealth disparity puzzle is homeownership—the number one determinant of wealth in America. According to the Census Bureau, the homeownership rate for non-Hispanic White households was 74.2 percent in the second quarter of 2021, while the Black homeownership rate was 44.6 percent.
But credit scores don’t just affect the ability to buy a home. Employers use credit reports to rate job candidates. Insurance companies use them to determine prices. Auto lenders, student loan companies, rental agencies and even utility companies all use the information supplied by the three credit reporting agencies.
Although these credit scores have an outsized impact on individual lives, they are necessary. Lenders and financial institutions need to assess the risk of lending money and services to consumers. And what better way to assess risk than by a person’s past payments and financial history?
That’s a great question, except for one small thing:
That’s not how credit scores work.
How we think credit scores work, explained.
For most people, the idea that credit scores discriminate against people of color is an absurd notion. After all, a FICO score is just a math problem. And what could be fairer than math? The word “fair” is right there in the name!
Many borrowers believe their credit score is an algorithm based on their past payment history. Therefore, if a person pays their debts, they figure they will have a good credit score. They assume this three-digit number is an objective, unbiased summary of their past financial history. And, because Black people are generally paid less and have less wealth, it stands to reason that Black people have lower credit scores than white people with similar incomes and payment histories. So how can an objective equation be racist?
To understand why credit scores exemplify “the systemic oppression of a racial group to the social, economic, and political advantage of another,” we must first understand how credit scores actually work.
How credit scores actually work, explained.
No one knows.
OK, maybe there’s a little bit more.
Credit-reporting scores are created by an algorithm that considers payment history, credit utilization, new credit, and some other stuff. The credit score was invented in the 1956s by engineer Bill Fair and mathematician Earl Isaac—two decades before the Equal Credit Opportunity Act was amended to made it illegal for banks and loan officers to discriminate against Black borrowers. The Fair Isaac Corporation’s (FICO) proprietary score still dominates the mortgage industry, but each of the three major credit reporting agencies (Equifax, TransUnion and Experian) have their own formulas. Some institutions create their own scores, each with its own algorithm. Although the individual results may vary, they all serve the same purpose
But here’s the thing: Fair, Isaac Corporation never intended for its algorithm to reflect a consumer’s borrowing and payment history; it was always meant to predict future behavior. Instead of determining a credit seeker’s ability to pay, a credit score answers a more obtuse question—will the customer choose to pay? As Time notes, credit scores “answer this essentially moral question—and to compel ‘good’ behavior.”
Although different institutions use different metrics, they are all assessing the same factors. However, what you consider to be “good behavior” is totally different than what a bank considers it to be. Paying off a loan can actually lower your score, which is why people with high debt statistically have higher credit scores. Until recently, telephone and utility bills didn’t even appear on credit reports, even though they make up the most voluminous part of a person’s payment history. But, because most people have to pay these bills or be without electricity or shelter, they only reflect one’s ability to pay, not their willingness to pay.
Take rent, for example. While mortgages are factored into that all-important three-digit number, “the most commonly used versions of the FICO score don’t use rental payment information in calculating scores. But, according to an analysis by the Urban Institute and the National Fair Housing Alliance, a person with a low credit score but a spotless history of rent payments is more likely to pay their mortgage on time than someone with a high credit score.
So, in calculating credit scores, the algorithm whose sole purpose is to predict behavior excludes the most predictive factor. And, because two-thirds of white households own their homes and most Black households don’t, this system disproportionately affects Black people and helps white homeowners.
And don’t forget, there’s some “other stuff.”
Some agencies’ algorithms actually include SAT scores, whether the consumer graduated from college and even how many times they changed addresses, all of which negatively affect nonwhite people. African Americans and Latinos are more likely to move, more likely to attend college and generally score lower on college entrance exams. African Americans carry more student debt and more medical debt than whites. But, even if these debts are paid on time, the payments don’t positively affect credit scores as much as liabilities from credit card companies, which again favors white debtors.
Most importantly, the “other stuff” is a secret.
That’s right, while it is your right to know what’s on your credit report, the formulas used to come up with the numbers that affect each person’s life are considered trade secrets. Although it is possible to dispute something that is wrong on a credit report, you can’t actually challenge your credit score. In fact, there are millions of people who don’t have credit scores, even though they pay rent, utilities and borrow money from non-traditional sources.
So how do we fix this? Some people want a publicly funded Credit Reporting Agency. Kamala Harris has proposed that credit agencies should include utilities, rent and other payments. Others suggest credit agencies shouldn’t be allowed to keep their calculations a secret. Some think we do away with credit scores altogether because—intentional or not—the current system favors white people and economically disempowers nonwhites. Ultimately, credit scoring does not do what it is supposed to do. It does not reflect a person’s ability or willingness to pay. It doesn’t reflect one’s financial history. It is definitely not race-neutral.
The entire system of credit reporting contributes to “the systemic oppression of a racial group to the social, economic, and political advantage of another.”
It is literally the definition of racism.
This story ends with a humblebrag.
This story was inspired by a guy who had a neat trick. Without even looking at a person’s name, he could sit down with a calculator and their credit report and figure out if the person was white or Black. He learned this trick while working part-time at a mortgage company.
People had all kinds of theories on how he did it. Maybe there was secret racial designation on credit reports. Perhaps he was calculating certain risk factors. Maybe he was just guessing. This was before FICO publicly revealed the broad strokes of how it calculate credit scores.
The guy eventually teamed up with a Black woman who taught him the mortgage business and started a company called “The Solution.” Their target demographic was Black people who couldn’t traditionally qualify for a home loan along with Black people who had been duped into high-cost mortgages.
One day, the co-owner of the company convinced him to teach her how to do his trick. He explained that after looking at so many credit reports, he thought he’d figured out how to calculate a credit score. He showed her his self-created formula and told her to try it, so she used her own credit report. After a few minutes, she was exasperated.
“Am I doing something wrong?” she asked. “It’s not working for me.”
“Exactly,” he replied. “That’s how it works.”
It turns out, he did know.
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