But the outlawed lending practices weren’t fair. My next door neighbor took forever to get a business loan even though he was an excellent risk. The new system was also broken, but the old one wasn’t good.
Edited to Add: To be more specific, his white wife handled the application and it was all smooth sailing until he walked in to sign the bottom line, and then the offer was unceremoniously retracted with no explanation.
Incidentally, when these lending rules came into effect and he did get a loan, his business boomed and he paid it off without incident. So...
I disagree. The claim is that they were discriminated against unfairly and this can be proven by your anecdote that someone didn’t fail to repay a loan. Yet in aggregate, there was a lot of non-repayment going on.
The question is much less about whether he actually did repay the loan. It’s about the decision process.
Everything looked great until they realized they were about to lend to a black man.
That is fucked up. And it doesn’t happen in isolation.
Whether he actually managed to pay the loan off or not is almost aside from the point, though his success is indeed frosting (from the argument’s PoV—obviously rather more important to us personally).
Everything looked great until they realized they were about to lend to a black man. That is fucked up. And it doesn’t happen in isolation.
No, it’s not. It’s useful information. What you’re emoting about is like saying
Everything looked great until they realized they were about to lend to a bankrupt man. That is fucked up. And it doesn’t happen in isolation.
Whatever rates they estimated as just barely covering the risk of nonpayment and allowing them to eke out a profit based on their estimate from his personal wealth and existing track record is not the rate they would have estimated after learning additional stuff. Being black is some of that additional stuff.
I think we should both slow down. I’ve slipped up, and you’re slipping up. You’re saying I’m emoting and then tripping up in two dramatic ways that you really should have caught.
A) Going bankrupt would be part of that existing track record.
B) He could have dealt with a slightly higher rate. He wasn’t offered a slightly higher rate. He wasn’t offered any rate at all.
Okay. Taking some more time to think.
Being black may provide some information, but it is almost entirely screened by the information from the admissible parts of the track record. The banks were screwing up this calculation, and in doing so were not only hurting themselves but causing extreme damage to the world around them.
Adding a bunch of unbiased actors with relevant expertise, guts, and enormous amounts of capital would have solved the problem, but so would unicorns, and we had just as many of those. Regulation brought problems, but they were different problems.
A) Going bankrupt would be part of that existing track record.
And why can’t being part of a minority group be part of a track record? In both cases, the party thinking of giving the loan has learned new and material information.
B) He could have dealt with a slightly higher rate. He wasn’t offered a slightly higher rate. He wasn’t offered any rate at all.
So? If they had offered a loan at 100% interest, people would be bitching anyway about discrimination. Maybe it is a calculated PR move that people will complain less about not getting a loan than about getting a loan at +2% interest; maybe it has to do with the fixed overhead of servicing loans; maybe they only had so much appetite for risk even if the interest rate were raised to make the loan +EV again; maybe this is an unexpected consequence of the millions of words of regulation governing banks.
Being black may provide some information, but it is almost entirely screened by the information from the admissible parts of the track record.
I doubt that and I suspect you have no good reason to believe that.
I doubt that and I suspect you have no good reason to believe that.
Maybe for people with a really thin track record. Not for people who’ve run a profitable business for a decade, have a solid business case, etc.. Just what independent information does being black provide, here? (No need to respond to this point here—you can put it in response to TheOtherDave’s parallel comment)
Now, I freely grant that if you only look at the bankers’ side of things, regulation doesn’t make sense. They should be perfectly informed and make the ideal decisions as to who will succeed or not! And if they can’t make perfect use of that information, that’s their problem!
But of course, it’s not only their problem, and the purpose of the law is not solely to help the bankers get money.
A ‘being black’ penalty even of only 2% on loans would be colossal. Think how much debt a growing business has to incur, and compound that over the years. Apply it to choices of housing, of auto financing. Everyone in the community has less money, so they can’t buy as much, so businesses have a harder time growing, so people earn less. It’s self-perpetuating.
But it wasn’t that mild. Instead, the loans were simply turned down. The near-total absence of capital was crippling.
Do you think this is a problem? What might you do about it?
In the scales of values, where does
“equal opportunity”
rank up against
“allowing each individual to make the best choices available to them personally without regard to the impact that choice has on what choices other individuals get”?
(No need to respond to this point here—you can put it in response to TheOtherDave’s parallel comment)
(Responded.)
But it wasn’t that mild. Instead, the loans were simply turned down. The near-total absence of capital was crippling.
To repeat myself:
So? If they had offered a loan at 100% interest, people would be bitching anyway about discrimination. Maybe it is a calculated PR move that people will complain less about not getting a loan than about getting a loan at +2% interest; maybe it has to do with the fixed overhead of servicing loans; maybe they only had so much appetite for risk even if the interest rate were raised to make the loan +EV again; maybe this is an unexpected consequence of the millions of words of regulation governing banks.
Moving on:
A ‘being black’ penalty even of only 2% on loans would be colossal. Think how much debt a growing business has to incur, and compound that over the years. Apply it to choices of housing, of auto financing. Everyone in the community has less money, so they can’t buy as much, so businesses have a harder time growing, so people earn less. It’s self-perpetuating.
So, are you arguing that the ‘being black’ penalty is not accurate here? That the 2% penalty is compensating for risk that does not exist? If so then that’s quite an opportunity: a free 2% price cut. Especially in the current low-interest rate environment, that’s a lot of money being left on the table.
Or are you arguing that the penalty is accurate and anyone who tried to offer at non-penalty rates would lose their shirts as tons of loans defaulted?
I thought you were arguing against the latter, before… If you’ve changed your mind, it’d be good to say so clearly and explicitly before going on.
You persist in only looking at the effect on the banker. As I said, the regulation won’t make much if any sense from that point of view alone. Your pointing this out once more doesn’t really change anything.
That said, considering that the regulated banks had a low default rate until everything went screwy because of the (non-regulated) predatory lenders, I think I’ll stick with the theory that there was a market inefficiency.
Now, it wasn’t a simple barrier-free market inefficiency. If only one bank had moved, it could well have lost its shirt. Being the sole investor in a dead area is rough. It’s a bit like a many-player game with ‘staying out’ having a positive payoff from being able to invest elsewhere, and ‘going in’ having a payoff that starts out negative with no other cooperators, increases with cooperators for a while, peaks above ‘staying out’, then declines down to the ‘staying out’ level once the market is fully competitive (then below if it becomes saturated). When no one is there, you’d be crazy to move first.
Changing the rules so the banks had to serve their localities guaranteed a minimum level of going in, which made it no longer a bad move to go in.
Just so I understand that last part… are you claiming: 1) …there is no factor or set of factors X such that X screens off skin color for purposes of calculating loan EV, 2) …there may be such an X, but we don’t know what it is and/or have no way of measuring it, 3) …we know what X is, but the admissible parts of the track record don’t include it, ...or something else?
#1 seems really unlikely to me, so if you think it likely I’m interested in your reasons. #2 seems plausible. #3 also seems plausible, but if true, suggests that talking about the admissability of skin color is a herring of unspecified hue; as a bank, I should be trying to get X admitted instead.
I am claiming that you have jumped to the conclusion that claims 1-n must all be false and hence the cancellation is a Bad thing. For my purpose, any of 1-3 can be correct, and I don’t need to argue for any specific one especially if you already find plausible any of them.
If you want to overrule the bank’s reaction, you need a lot of local domain-specific knowledge, and that’s something neither you nor I have.
Here’s an example of the sort of obscure knowledge you might need: are you familiar with the term “minority fronts”? This is when a government or other entity attempts a form of affirmative action in which minority-owned businesses or organizations get financially favored for grants or bidding on contracts; yet of course there aren’t very many competent minority-owned businesses (that’s why they’re doing it in the first place), so this immediately leads to fraud in which a person meeting the minority criteria is put in place as the straw owner of a company actually run by other people of other groups and then the business bids on business as a minority-owned business, frequently simply passing on the work and money to a normal business minus the straw owner’s share. Naturally, this is largely meaningless for a white-owned business as whites are not considered a minority. Now, remembering that the ‘owner’ in such cases has stooped to conspiracy and felony fraud to steal possibly millions, do you think that their shell business is a better or worse credit risk than an equivalent white owner matched on other observables like income?
Personally, I’d say worse. This is just a cute example of why race can be a salient factor in loans and why a white owner might be different from a black owner; I bring it up to stand for the larger class of relevant details and possibilities, not being a banker or economist or risk specialist. So before you can say that the ‘discrimination’ is purely irrational and unjustifiable, you need to know about all these details. Do you? I don’t think you do.
EDIT: Ran into an international example of the abuse of affirmative action in The Economist:
The same goes for civil-service quotas. When jobs are dished out for reasons other than competence, the state grows less competent, as anyone who has wrestled with Indian or Nigerian officialdom can attest. Moreover, rules favouring businesses owned by members of particular groups are easy to game. Malaysians talk of “Ali-Baba” firms, where Ali (an ethnic Malay) lends his name, for a fee, to Baba (a Chinese businessman) to win a government contract.
Although these policies tend to start with the intention of favouring narrow groups, they spread as others clamour to be included. That American federal programme began by awarding no-bid contracts to firms owned by blacks, Hispanics and Native Americans; now it covers people with ancestry from at least 33 countries. In India 60% of the population are eligible for privileges as members of scheduled castes, tribes or “other backward classes”. Such policies poison democracy by encouraging divisions along lines drawn by discriminatory rules. The anger thus stoked has helped stir bloody conflicts in India, Rwanda and Sri Lanka. And such rules, once in place, are almost impossible to get rid of. In 1949 India’s constitution said quotas should be phased out in ten years, but they are now more widespread than ever. America’s policies have survived decades of legal pushback, though not unscathed.
For my purpose, any of 1-3 can be correct, and I don’t need to argue for any specific one especially if you already find plausible any of them.
OK.
you have jumped to the conclusion that claims 1-n must all be false
If that’s true, I haven’t noticed. If you feel like summarizing the evidence for believing I’ve reached that conclusion, though, I’ll certainly listen.
If you want to overrule the bank’s reaction, you need a lot of local domain-specific knowledge
I certainly agree that overruling the bank’s decision about loans without knowing about as much about loans as the bank does is going to have unexpected consequences, so unless the bank is currently pessimizing for my values I’m probably going to be less happy with the result than I am now.
And I certainly agree that I don’t know about all the details that go into making decisions about loans.
If the solution didn’t work, maybe one should consider the possibility that whatever problem there was, it wasn’t what one thought it was.
The solution actually wasn’t THAT bad- the community banks actually regulated by the community reinvestment act had/have lower rates of foreclosure then the national average, and lower rates of foreclosure on their loans to minorities.
Edit: this is because they are generally required to keep more skin-in-the-game, not BECAUSE they were regulated by the CRA (most fall under various patches of the regulations put in place after the S&L crisis). My point being, community banks were able to responsibly lend to a diverse population, and certainly the CRA wasn’t causal in the foreclosure crisis.
The solution actually wasn’t THAT bad- the community banks actually regulated by the community reinvestment act had/have lower rates of foreclosure then the national average, and lower rates of foreclosure on their loans to minorities.
That doesn’t necessarily address my point: if there were unjust discrimination, discrimination which was not a rational reaction to the credit risk, then saying “well, they didn’t cause as many losses as some aggregate measure of loss during the greatest period of property-related losses in the history of America” isn’t proving that. To prove that, you need to show something like that the loans turned out to have been made profitably on net in the long-term after adjusting for risk and opportunity cost etc.
To prove that, you need to show something like that the loans turned out to have been made profitably on net in the long-term after adjusting for risk and opportunity cost etc.
I’m not sure thats true, I think what you would want to show is that the loans ‘forced’ on the community banks are at-least-as-profitable as the loans the banks voluntarily took on. Given the bizarre financial period we just lived through, the losses on loans is going to be markedly higher across all institutions.
Maybe the next decade of CRA type lending won’t be contaminated by massive changes in the financial sector and a large crash- in which case maybe the questions of discrimination will become easier to untangle. For the last decade, the housing market underwent major changes, and the community banks were such a negligible sliver of the overall market that the CRAs effects are on community banks are higher order corrections to higher order corrections.
I’m not sure thats true, I think what you would want to show is that the loans ‘forced’ on the community banks are at-least-as-profitable as the loans the banks voluntarily took on.
No, because you’re comparing apples and oranges. If the banks were forced to take on loans to the groups in question due to political pressure despite having been previously correct in demanding higher interest to compensate them for the loans, and also simultaneously engaged in an epic miscalculation about the safety of loans to other groups based on naive models, then you could produce this inversion. They made a mistake, and then made an even larger mistake; this doesn’t make the original mistake not a mistake.
No, because you’re comparing apples and oranges. If the banks were forced to take on loans to the groups in question due to political pressure despite having been previously correct in demanding higher interest to compensate them for the loans, and also simultaneously engaged in an epic miscalculation about the safety of loans to other groups based on naive models, then you could produce this inversion.
Only if the loans were in different asset classes. Because these are all housing loans, the underlying model of the housing market is an input to both group’s loans, with minority status as an additional adjustment.
Anyway, I don’t think looking at CRA and pre-CRA loans to minorities you can answer discrimination questions with any kind of precision. The data seems to lean in the direction of former discrimination, but massive structural changes to finance dwarf the tiny changes created by the CRA.
But the outlawed lending practices weren’t fair. My next door neighbor took forever to get a business loan even though he was an excellent risk. The new system was also broken, but the old one wasn’t good.
Edited to Add: To be more specific, his white wife handled the application and it was all smooth sailing until he walked in to sign the bottom line, and then the offer was unceremoniously retracted with no explanation.
Incidentally, when these lending rules came into effect and he did get a loan, his business boomed and he paid it off without incident. So...
“You say X on average, but a friend of mine did ~X, so you must be wrong!”
It was often enough that it got to be a nationally known problem that needed a solution, right? That the solution was terrible doesn’t change that.
If the solution didn’t work, maybe one should consider the possibility that whatever problem there was, it wasn’t what one thought it was.
The solution DID work. It just came with a bunch of other problems. Unforeseen consequences do not negate the original problem.
Actually, they sorta do. (“The operation was a complete success! Unfortunately, the patient died.”)
It is possible to construct examples where they are connected like that.
The topic at hand is not one of them.
I disagree. The claim is that they were discriminated against unfairly and this can be proven by your anecdote that someone didn’t fail to repay a loan. Yet in aggregate, there was a lot of non-repayment going on.
The question is much less about whether he actually did repay the loan. It’s about the decision process.
Everything looked great until they realized they were about to lend to a black man.
That is fucked up. And it doesn’t happen in isolation.
Whether he actually managed to pay the loan off or not is almost aside from the point, though his success is indeed frosting (from the argument’s PoV—obviously rather more important to us personally).
No, it’s not. It’s useful information. What you’re emoting about is like saying
Whatever rates they estimated as just barely covering the risk of nonpayment and allowing them to eke out a profit based on their estimate from his personal wealth and existing track record is not the rate they would have estimated after learning additional stuff. Being black is some of that additional stuff.
I think we should both slow down. I’ve slipped up, and you’re slipping up. You’re saying I’m emoting and then tripping up in two dramatic ways that you really should have caught.
A) Going bankrupt would be part of that existing track record.
B) He could have dealt with a slightly higher rate. He wasn’t offered a slightly higher rate. He wasn’t offered any rate at all.
Okay. Taking some more time to think.
Being black may provide some information, but it is almost entirely screened by the information from the admissible parts of the track record. The banks were screwing up this calculation, and in doing so were not only hurting themselves but causing extreme damage to the world around them.
Adding a bunch of unbiased actors with relevant expertise, guts, and enormous amounts of capital would have solved the problem, but so would unicorns, and we had just as many of those. Regulation brought problems, but they were different problems.
And why can’t being part of a minority group be part of a track record? In both cases, the party thinking of giving the loan has learned new and material information.
So? If they had offered a loan at 100% interest, people would be bitching anyway about discrimination. Maybe it is a calculated PR move that people will complain less about not getting a loan than about getting a loan at +2% interest; maybe it has to do with the fixed overhead of servicing loans; maybe they only had so much appetite for risk even if the interest rate were raised to make the loan +EV again; maybe this is an unexpected consequence of the millions of words of regulation governing banks.
I doubt that and I suspect you have no good reason to believe that.
Maybe for people with a really thin track record. Not for people who’ve run a profitable business for a decade, have a solid business case, etc.. Just what independent information does being black provide, here? (No need to respond to this point here—you can put it in response to TheOtherDave’s parallel comment)
Now, I freely grant that if you only look at the bankers’ side of things, regulation doesn’t make sense. They should be perfectly informed and make the ideal decisions as to who will succeed or not! And if they can’t make perfect use of that information, that’s their problem!
But of course, it’s not only their problem, and the purpose of the law is not solely to help the bankers get money.
A ‘being black’ penalty even of only 2% on loans would be colossal. Think how much debt a growing business has to incur, and compound that over the years. Apply it to choices of housing, of auto financing. Everyone in the community has less money, so they can’t buy as much, so businesses have a harder time growing, so people earn less. It’s self-perpetuating.
But it wasn’t that mild. Instead, the loans were simply turned down. The near-total absence of capital was crippling.
Do you think this is a problem? What might you do about it?
In the scales of values, where does “equal opportunity” rank up against “allowing each individual to make the best choices available to them personally without regard to the impact that choice has on what choices other individuals get”?
(Responded.)
To repeat myself:
Moving on:
So, are you arguing that the ‘being black’ penalty is not accurate here? That the 2% penalty is compensating for risk that does not exist? If so then that’s quite an opportunity: a free 2% price cut. Especially in the current low-interest rate environment, that’s a lot of money being left on the table.
Or are you arguing that the penalty is accurate and anyone who tried to offer at non-penalty rates would lose their shirts as tons of loans defaulted?
I thought you were arguing against the latter, before… If you’ve changed your mind, it’d be good to say so clearly and explicitly before going on.
You persist in only looking at the effect on the banker. As I said, the regulation won’t make much if any sense from that point of view alone. Your pointing this out once more doesn’t really change anything.
That said, considering that the regulated banks had a low default rate until everything went screwy because of the (non-regulated) predatory lenders, I think I’ll stick with the theory that there was a market inefficiency.
Now, it wasn’t a simple barrier-free market inefficiency. If only one bank had moved, it could well have lost its shirt. Being the sole investor in a dead area is rough. It’s a bit like a many-player game with ‘staying out’ having a positive payoff from being able to invest elsewhere, and ‘going in’ having a payoff that starts out negative with no other cooperators, increases with cooperators for a while, peaks above ‘staying out’, then declines down to the ‘staying out’ level once the market is fully competitive (then below if it becomes saturated). When no one is there, you’d be crazy to move first.
Changing the rules so the banks had to serve their localities guaranteed a minimum level of going in, which made it no longer a bad move to go in.
Just so I understand that last part… are you claiming:
1) …there is no factor or set of factors X such that X screens off skin color for purposes of calculating loan EV,
2) …there may be such an X, but we don’t know what it is and/or have no way of measuring it,
3) …we know what X is, but the admissible parts of the track record don’t include it,
...or something else?
#1 seems really unlikely to me, so if you think it likely I’m interested in your reasons.
#2 seems plausible.
#3 also seems plausible, but if true, suggests that talking about the admissability of skin color is a herring of unspecified hue; as a bank, I should be trying to get X admitted instead.
I am claiming that you have jumped to the conclusion that claims 1-n must all be false and hence the cancellation is a Bad thing. For my purpose, any of 1-3 can be correct, and I don’t need to argue for any specific one especially if you already find plausible any of them.
If you want to overrule the bank’s reaction, you need a lot of local domain-specific knowledge, and that’s something neither you nor I have.
Here’s an example of the sort of obscure knowledge you might need: are you familiar with the term “minority fronts”? This is when a government or other entity attempts a form of affirmative action in which minority-owned businesses or organizations get financially favored for grants or bidding on contracts; yet of course there aren’t very many competent minority-owned businesses (that’s why they’re doing it in the first place), so this immediately leads to fraud in which a person meeting the minority criteria is put in place as the straw owner of a company actually run by other people of other groups and then the business bids on business as a minority-owned business, frequently simply passing on the work and money to a normal business minus the straw owner’s share. Naturally, this is largely meaningless for a white-owned business as whites are not considered a minority. Now, remembering that the ‘owner’ in such cases has stooped to conspiracy and felony fraud to steal possibly millions, do you think that their shell business is a better or worse credit risk than an equivalent white owner matched on other observables like income?
Personally, I’d say worse. This is just a cute example of why race can be a salient factor in loans and why a white owner might be different from a black owner; I bring it up to stand for the larger class of relevant details and possibilities, not being a banker or economist or risk specialist. So before you can say that the ‘discrimination’ is purely irrational and unjustifiable, you need to know about all these details. Do you? I don’t think you do.
EDIT: Ran into an international example of the abuse of affirmative action in The Economist:
OK.
If that’s true, I haven’t noticed.
If you feel like summarizing the evidence for believing I’ve reached that conclusion, though, I’ll certainly listen.
I certainly agree that overruling the bank’s decision about loans without knowing about as much about loans as the bank does is going to have unexpected consequences, so unless the bank is currently pessimizing for my values I’m probably going to be less happy with the result than I am now.
And I certainly agree that I don’t know about all the details that go into making decisions about loans.
The solution actually wasn’t THAT bad- the community banks actually regulated by the community reinvestment act had/have lower rates of foreclosure then the national average, and lower rates of foreclosure on their loans to minorities.
Edit: this is because they are generally required to keep more skin-in-the-game, not BECAUSE they were regulated by the CRA (most fall under various patches of the regulations put in place after the S&L crisis). My point being, community banks were able to responsibly lend to a diverse population, and certainly the CRA wasn’t causal in the foreclosure crisis.
That doesn’t necessarily address my point: if there were unjust discrimination, discrimination which was not a rational reaction to the credit risk, then saying “well, they didn’t cause as many losses as some aggregate measure of loss during the greatest period of property-related losses in the history of America” isn’t proving that. To prove that, you need to show something like that the loans turned out to have been made profitably on net in the long-term after adjusting for risk and opportunity cost etc.
I’m not sure thats true, I think what you would want to show is that the loans ‘forced’ on the community banks are at-least-as-profitable as the loans the banks voluntarily took on. Given the bizarre financial period we just lived through, the losses on loans is going to be markedly higher across all institutions.
Maybe the next decade of CRA type lending won’t be contaminated by massive changes in the financial sector and a large crash- in which case maybe the questions of discrimination will become easier to untangle. For the last decade, the housing market underwent major changes, and the community banks were such a negligible sliver of the overall market that the CRAs effects are on community banks are higher order corrections to higher order corrections.
No, because you’re comparing apples and oranges. If the banks were forced to take on loans to the groups in question due to political pressure despite having been previously correct in demanding higher interest to compensate them for the loans, and also simultaneously engaged in an epic miscalculation about the safety of loans to other groups based on naive models, then you could produce this inversion. They made a mistake, and then made an even larger mistake; this doesn’t make the original mistake not a mistake.
Only if the loans were in different asset classes. Because these are all housing loans, the underlying model of the housing market is an input to both group’s loans, with minority status as an additional adjustment.
Anyway, I don’t think looking at CRA and pre-CRA loans to minorities you can answer discrimination questions with any kind of precision. The data seems to lean in the direction of former discrimination, but massive structural changes to finance dwarf the tiny changes created by the CRA.