Black borrowers have faced higher hurdles to getting loans, even before the Great Recession's infamous credit crunch. But one subsection of the community has managed to evade financial institutions' discriminatory practices, a new study from the University of Iowa shows.
According to the study's lead author, University of Iowa sociologist Sarah Harkness, lenders perceive African-American women just as favorably as white males, and would lend them as much money. The reason: African-American females are generally perceived as single mothers who are industrious and hardworking, Harkness concludes.
To test her theory, Harkness gave the study participants -- which included hundreds of undergraduate students and alumni from West Coast universities -- a hypothetical $1,000 and asked them to look at fictional loan applications and determine how much money to loan. While the gender, race and education of applicants varied, their financial profile was the same.
What she found was that cultural stereotypes consistently influenced how much money the study participants were willing to lend, with African-American males and white women being perceived more negatively and least likely to receive funding.
"This meant being less forgiving of small errors such as typos. It also meant making unfavorable assumptions about the nature of the applicants’ employment (whether it was temporary versus permanent, for example) and their level of intelligence," as a release on the study notes.
To the contrary, perceptions about African-American women were largely positive, Harkness explains. “There was an assumption that the African-American woman was on her own raising a family and was therefore a motivated, hardworking and self-confident breadwinner.”
In a study of loans conducted by Prosper.com, a peer-to-peer lending website, last year, researchers found that black borrowers are 25 to 35 percent less likely to receive funding than a white borrower with similar credit.
The findings were tied to less stringent regulations in the online lending market, but did not diverge from the kind of discriminatory lending practices seen at brick and mortar institutions as well.
"The historical absence of affordable credit in communities of color and for applicants of color, which created a market void into which subprime lenders grew, was not accidental," said Jacob Faber, a doctoral fellow at NYU's Furman Center for Real Estate and Urban Policy, who co-authored a similar study indicating that black and Latino applicants are two times more likely to be denied home loans than whites. "While it is not possible, in this study, to identify personal prejudice on behalf of lenders, racial disparities in subprime lending are nonetheless part of a long trajectory of structural, race-based disenfranchisement," Faber added.
Race aside, Harkness contends that a thoughtful and well-crafted loan application helps a borrower’s chance at success. Her study found that regardless of race, all borrowers’ chances were hurt –- though not always equally –- by typos and grammatical errors in the loan application.