Disaster #10 - Disparate Impact on Minorities
Part 10 in a series: Disastrous Debt Interactions
Debt collection tactics disproportionately impact the poor and nonwhite. But, lenders can help by resolving debts early and amicably, while avoiding sales to debt buyers who file mass lawsuits.
Is there something wrong with this picture? Subprime car ad targets Black buyers.
No matter who wins the election seven weeks from now, bankers can relax: it won’t be Bernie Sanders, Elizabeth Warren or anyone else promising draconian new financial regulation.
But that won’t protect against the very real possibility that the protestors now marching against the police, will take on your bank as their next target…
…Or that the next viral video inflaming the millions, will not be of a cop beating a Black suspect, but a creditor forcibly removing a Black debtor from his or her auto, business or home.
After all, whether it’s enforcing the law, or a debt, is there not disparate impact between rich and poor, white and nonwhite?
Of course there is!
A 2015 report by ProPublica’s investigative journalists found the rate of court judgments for unpaid debts was twice as high in Black vs. white neighborhoods – even when incomes are similar. To quote the report:
“These findings could suggest racial bias by lenders or collectors. But we found that there is another explanation: That generations of discrimination have left Black families with grossly fewer resources to draw on when they come under financial pressure.”
A little known but pervasive shift in debt collection
The report continues:
“Over the past year, ProPublica has investigated a little-known but pervasive shift in the way debt is collected in America. Companies now routinely use the courts to pursue millions of people over even small consumer debts.
“With the power granted by a court judgment, collectors can seize a chunk of a debtor’s pay…Collection suits — typically over smaller amounts like credit card debt — fly across the desks of local judges, sometimes hundreds in a single day. Defendants usually don’t make it to court, and when they do, rarely have an attorney….
“…in all three of the cities ProPublica studied, debt buyers filed the most suits of any type of plaintiffs between 2008 and 2012. In the Newark area, more than half of the 66,000 court judgments won against residents of mostly Black neighborhoods stemmed from debt buyer lawsuits.
“…Debt buyers primarily buy defaulted credit card accounts, but the data shows that they routinely sue over smaller balances than banks do.
OK, so what are the consequences of these mass lawsuits for the poor and nonwhite?
To start with, wage garnishment from families already earning too little to satisfy all of life’s necessities.
A second-class lifestyle of substandard housing, decrepit or non-existent cars and even menial jobs because, in 39 states, bad credit can get you rejected for employment.
Actual physical danger when families are forced to live in crime-ridden housing projects, or don’t have a working car to evacuate during a natural disaster or escape from a domestic violence crisis.
$327/month for a 7-year-old minivan…and then being sued for $6,900 more
Damaged credit relegates one to being gouged on nearly every aspect of life, but subprime auto lending is particularly egregious. For Cari Winfield, a working Black mom in St. Louis interviewed by ProPublica, it meant paying $327 a month for 7-year-old Dodge Caravan at 30% APR. With good credit, that payment gets you a brand-new car at 0% interest.
18 months later, when Winfield fell behind on payments, the dealer repossessed the van, claiming Winfield still owed $4,900 for remaining loan balance minus the van’s resale value. Compounding at 30% interest, the debt mushroomed to $6,900 by the time the dealer obtained a judgment, garnishing nearly $500/month from Winfield’s paycheck.
Avoiding court is a win win for both creditor and debtor
Taking a debtor to court - or selling the debt to a buyer who does – is usually a last-ditch effort and despite the obscene judgment gained in the used car example above, the typical creditor recovers only a few cents on the dollar across the entire portfolio involved.
In fact, the creditor almost always comes out ahead by offering a discounted payment plan or settlement at the earliest sign of trouble. Even if that means slashing the interest rate. And, even if it means taking a “haircut” on the principal.
That’s because the likelihood of collection declines so rapidly with every additional month that goes by without a payment.
In short, allowing an account to go into delinquency – and eventually to charge off, debt sale, and court judgment – is the lazy creditor’s way to manage a receivable, with disastrous consequences for the poor and minority debtors involved.