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Marcus Cole on a New Law Harming African-American Borrowers in Chicago.--

Marcus Cole of Stanford is guest-blogging at BlackProf.com. Coincidentally, earlier today I was quoting Marcus to my colleagues.

Cole takes aim at a new Illinois law mandating government review with the power to order credit-counseling for prospective home-buyers in several poor neighborhoods in Chicago:

On Tuesday, in addition to Mrs. King's passing and Justice Alito's elevation, the State of Illinois enacted a law that requires all mortgage applications within nine Chicago zip codes to undergo a process of review by the state's Department of Financial and Professional Regulation. The department's review process determines whether mortgage applicants in these neighborhoods must undergo compulsory credit counseling. If they must, then the mortgage lender must pay the cost of the counseling.

Anyone familiar with Chicago geography and demography knows these nine zip codes. They are all neighborhoods on the South and Southwest side of Chicago. They are predominantly African-American neighborhoods. These neighborhoods are some of the most impoverished in the City of Chicago, and indeed, the nation. On Tuesday, they suddenly became much poorer.

Although the legislators responsible for the new law were motivated by good intentions, they failed to consider the inevitable consequences of their bill. They wanted to protect poor homeowners in certain neighborhoods from high interest rates and predatory lending practices. The new law, however, necessarily increases the costs, time and uncertainty associated with mortgage applications in these black neighborhoods. The cost of credit counseling will be born by and charged to mortgage applicants. This, in turn, will necessarily decrease the price that new home-buyers can afford to pay for homes in these neighborhoods. If they can choose to buy in other neighborhoods, where housing money is more affordable, they, on the margin, will. Furthermore, recent studies of credit counseling programs suggest that these programs have little effect on borrower behavior. The end result is that homeowners in these poor black neighborhoods suddenly have less equity in their homes than they had on Monday.

Legislation like this is often motivated by an unspoken belief that poor black people are incapable of making important decisions for themselves. We see this belief reflected in the protection of failed public schools, and now with respect to personal finances. But the very people for whom such a law was enacted were responsible and wise enough to save to make the down payments necessary to buy these homes in the first place. Suddenly, these same people must have their choices reviewed and second-guessed by state bureaucrats who have no stake in the outcome, or accountability for incorrect or unresponsive decisions. It is hard to imagine the fate of a similar but broader law imposing credit counseling upon all Illinois residents, including white professionals residing in the Chicago suburbs of Evanston, Winnetka, or Kennilworth. Would there have been enough votes in Springfield to impose these "benefits" on everyone, rather than just the residents of the Southwest side of Chicago?

CCB (mail):
Any lender suggesting this sort of blatant discrimination would be severely (and rightly) hammered. That government can legally redline is appalling.
2.2.2006 10:36pm
anonymous22:
Yes, the bill is paternalistic, but guess what-- poor people are more vulnerable to these types of practices. Bad credit is a HUGE problem in poor areas, as are predatory lenders. I'd like to see what Mr. Cole's solution would look like.
2.3.2006 1:51am
SteveW:
The quoted material seems to contradict itself about who pays for the credit counseling.

From the first quoted paragraph: "The department's review process determines whether mortgage applicants in these neighborhoods must undergo compulsory credit counseling. If they must, then the mortgage lender must pay the cost of the counseling."

From the third quoted paragraph: "The cost of credit counseling will be born by and charged to mortgage applicants."

Perhaps Cole is arguing that mortgage applicants will indirectly bear the cost of the counseling. "[C]harged to" suggests that it is directly charged to the mortgage applicant.
2.3.2006 8:24am
Redman:
Sentences like this one always make me roll my eyes:

Although the legislators responsible for the new law were motivated by good intentions, they failed to consider the inevitable consequences of their bill.

When will we learn that this is simply not true? The legislators, lobbyists, staffers, etc., who are responsible for laws like this one ARE NOT MOTIVATED BY GOOD INTENTIONS at all. They are, as is very often the case with laws that disproportionately affect minorities, motivated to "keep minorities exactly where they are" in low income neighborhoods, in poor schools, and in the unemployment office. What probably motiviated this law is that somebody somewhere who donates a good deal of money to lawmakers wants to get into the credit counselling business and wants the government to pick up the tab. These programs exist all over the country and the main beneficiaries are the people who run whatever type of business it is that the government has created the demand for.
2.3.2006 11:12am
Redman:
Oops . . . should have said "private businesses to pick up the tab."
2.3.2006 11:14am
TomH (mail):
Well, how anyone could possibly argue with a government program intended to help the poor and minorties is beyond me. I thought that was the entire democrat agenda.

And if it is the indirect cost of the program that is hurtful, why don't we talk about corporate taxes. Who pays the taxes on any business? Here's a hint, it ain't the business. And before I get flamed for that observation, let me piunt out that the costs of over-regulation and taxes are regressive so products/services purchased by poor are a greater percentage of income for them than for the rich folk.
2.3.2006 1:36pm
Dave T (mail):

The quoted material seems to contradict itself about who pays for the credit counseling.

From the first quoted paragraph: "The department's review process determines whether mortgage applicants in these neighborhoods must undergo compulsory credit counseling. If they must, then the mortgage lender must pay the cost of the counseling."

From the third quoted paragraph: "The cost of credit counseling will be born by and charged to mortgage applicants."


He means that in a competitive marketplace (which the mortgage market does seem to be), any additional cost on the lender's side is just passed dollar-for-dollar back to the consumer. In a competitive market the lenders will always lend at exactly their marginal cost. When that cost increases, so does the cost of the loan. Econ 101.
2.4.2006 4:20am