Question

The brutal killing of Mr. George Floyd, an African-American in Minneapolis, MN at the hand of law enforcement officers (earlier this week) and the subsequent riots nationally symptomize the underlying flaws and problems of discrimination and uneven treatment of minorities. Even the deaths related to Covid-19 among minorities can be traced to poverty and access to timely and affordable healthcare.

Unfortunately, even in the financial sector, we find that discrimination, redlining and predatory lending impacting minorities (especially African Americans) and women. Often, these groups are denied credit through traditional banking sources for mortgage lending, commercial and business loans and personal loans. Often, these problems are intertwined with poverty, education, credit history and socio-economic conditions associated with segregation and discrimination.

• Trace the extent to which these practices exist in society today
• The premiums (additional private and social costs) which the members of these communities pay when receiving credit
• Identify the alternate markets which are serving the needs of these communities and the problems associated and

Public policies (regulations) from the federal government and Federal Reserve to address these problems and if they have been successful

Answer 1

The premiums and additional costs which the members pay are higher because traditional loans are often not accessible to them which is why they borrow from NBFI's which charge a higher interest rates as african americans often don't have the strong asset base which is why they are considered a risky investment. Even when qualified players who earn in millions want to trade privately in order to gain travel discounts and event invitations they face discrimination and excuses wherein they don't get better deals on loans. Forget getting a loan at a higher interest rate, they often don't get loans from eligible players in the market. Their interest rates are often 0.06% to 0.09% higher than what are charged for the white americans, which increases their chances of being indebted further.

In order to seek alternate sources of credit, these communities often seek pitch competitions wherein an individual wins prize money if they win the competition. But they also borrow from individuals and small scale moneylenders which proves harmful in terms of high interest payments and debt costs associated with it. Students often seek federal loans because they don't have anyother eligible access.

Public policies such as Equal credit opportunity act and fair housing act are the two main acts which prohibit discrimination in lending, but even then there are circumstances wherein big institutions have paid hefty fines as they have been charged for race discrimination, which has not stopped other banks from resorting to such measures. Thus there are more comprehensive measures required to address such issues of discrimination such as more hefty fines and creating a loan book with percentage of black and white borrowers so as to track number of people who have sought credit and those who have received.