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excerpted from: Charles Lewis Nier III, The Shadow of Credit: The Historical Origins of Racial Predatory Lending and its Impact upon African American Wealth Accumulation, 11 Journal of Law and Social Change131-194, 131- 135, 191-194 (2007-2008) (416 footnotes omitted)

Responding to a controversy regarding incendiary remarks that surfaced in the media from his former pastor, Reverend Jeremiah A. Wright Jr., United States Senator and Democratic presidential candidate Barack Obama came to the City of Philadelphia to deliver a major address on the issue of race in the United States. In a remarkable and widely-praised speech delivered on March 18, 2008, Senator Obama grounded his examination of the "complexities of race" on an analysis of the historical legacy of discrimination faced by African Americans. After invoking the words of William Faulkner for the proposition that "'The past isn't' dead and buried. In fact, it isn't even past,"' he proceeded to explain that "... many of the disparities that exist in the African American community today can be directly traced to inequalities passed on from earlier generation that suffered under the brutal legacy of slavery and Jim Crow." He proceeded to elaborate on some of the specific historical reasons behind racial inequalities, explaining:

Legalized discrimination - where blacks were prevented, often through violence, from owning property, or loans were not granted to African American business owners, or black homeowners could not access FHA mortgages, or blacks were excluded from unions, or the police force, or fire departments - meant that black families could not amass any meaningful wealth to bequeath to future generations. That history helps explain the wealth and income gap between black and white, and the concentrated pockets of poverty that persists in so many of today's urban and rural communities.

Senator Obama explained that only when the white community comes to an understanding of the historical dimension that often serves as the basis for anger in the black community will it be possible to establish a path to a "more perfect union."

While Senator Obama's eloquent comments on racial inequality are rare in the political realm, a number of scholars in the academic sphere have also examined the issue of racial wealth inequality and have demonstrated the existence of a continuing significant wealth gap between whites and African Americans. In 2002, the median African American household had a net worth of $5,998. In contrast, the median white family had $88,651 in net worth, fifteen times that of African Americans. Furthermore, such scholars have demonstrated the profound implications that the wealth gap has upon African Americans in education, employment, family, and life opportunities.

These scholars have also argued that the single most important means of accumulating assets is homeownership. Indeed, Melvin Oliver and Thomas Shapiro state that: "Home ownership is without question the single most important means of accumulating assets" and thus increasing wealth. As a result, one of the explanations for the enormous racial wealth disparity is the substantial gap in the homeownership rates between white and African American households. Indeed, despite efforts by Presidents Bill Clinton and George W. Bush to make minority homeownership a national priority, in 2003, the African American home ownership rate was 26.7 percentage points below the white rate. Furthermore, while it has fluctuated, the gap has consistently exceeded twenty-five percent throughout the 20th century.

As demonstrated by numerous scholars, such a durable homeownership gap between African Americans and whites, in large measure, is attributable to the nation's history of racial discrimination in the housing markets as exemplified by such practices as discriminatory zoning ordinances, racial steering, blockbusting, racially restrictive covenants, and physical violence. This article will argue that the greatest obstacle confronted by African Americans, however, was the inability to obtain credit or the increased cost of obtaining credit for the purchase of property. Indeed, this article will show that since the Emancipation, African Americans have often been foreclosed from traditional sources of credit available to whites and forced to turn to other informal, and often predatory, sources of credit. As a consequence, this article will demonstrate that one of the primary explanations for the large racial disparities in terms of wealth is a direct consequence of discrimination in credit markets which acted to limit African American access to home ownership and increase the cost of achieving home ownership.

While scholars do provide some brief background context, they do not provide a comprehensive historical analysis of credit discrimination and predatory lending and its impact upon African American efforts to achieve homeownership and, thus accumulate assets. Furthermore, scholars often overlook the role of legal instruments such as the crop lien and installment contract, in examining predatory lending practices. This article will seek to provide a historical and legal dimension to the debate on racial wealth inequality through the lenses of credit and homeownership.

This article first examines in Part II the efforts of African Americans to accumulate wealth during the Slavery era. Such an analysis will focus on legal impediments erected to preclude property accumulation among both slaves and free African Americans. Next, Part III of this article evaluates the largely unsuccessful efforts of land reform in the Reconstruction era as well as the efforts of African Americans to define their freedom through land ownership. Part IV of the article explores the post-bellum era with a focus on the rise of sharecropping and the integral role of credit in such a labor system. In particular, this section focuses on the role of merchant in providing predatory credit and the role of the crop lien in the credit transaction. Despite crippling obstacles, the successful efforts of African Americans to acquire land will be discussed in Part V.

Next, in Part VI, the article turns its examination to the Great Migration, as thousands of African Americans left the rural South for the urban cities of the North. Part VII will present a review of the historical origins of the dual housing finance market encountered by whites and African Americans. In particular, this aspect of the article reviews the racially discriminatory policies of the Home Owners Loan Corporation and the Federal Housing Administration and their impact upon African American homeownership. Part VIII of the article evaluates alternative, often predatory, financing arrangements utilized by African Americans in the absence of traditional financing to purchase homes, including, the installment land contract. Finally, this article offers concluding remarks regarding the overall impact of such discriminatory credit practices upon African American homeownership and their historical relationship to the recent issues of predatory lending in the subprime mortgage lending market.

. . .

Beginning in 2006, the subprime mortgage market began to collapse, creating a major credit and foreclosure crisis in the United States, causing estimated total losses of 1.2 trillion dollars. The subprime credit market proclaims it provides a source of credit to borrowers who may be unable to obtain credit from the prime market due to a variety of reasons, such as poor credit histories, high debt levels, or limited incomes. However, the subprime market provides such credit at a premium price due to the perceived risks and increased costs associated with lending to such a borrower. The growth of subprime lending has been disproportionately concentrated among African Americans and in African American neighborhoods. In 1993, subprime refinancing loans accounted for just eight percent of home loans in African American neighborhoods and one percent in white neighborhoods. By 1998, the number of subprime refinancing loans had dramatically increased to fifty-one percent of the total loans in African American neighborhoods compared to only nine percent in white neighborhoods. Such concentrated subprime lending remained relatively constant for a number of years. Indeed, in 2005, fifty-two percent of the total mortgage loans to African Americans were subprime loans, in contrast to nineteen percent for whites.

While the subprime market may serve a socially beneficial function, it is also more susceptible to abusive lending practices, often resulting in more foreclosures than in the prime market. One study estimated that 15.6 percent of all subprime loans originated during the time period from 1998 to 2004 would result in foreclosures and loss of homeownership. Further, since African Americans receive a disproportionate share of subprime loans, they also are more susceptible to abusive predatory lending and foreclosure. Indeed, in 2005 alone, a study estimated that 47,101 African Americans would lose their home due to foreclosures on subprime mortgage loans. The resulting loss of wealth for African Americans caused by the subprime lending debacle is estimated between 72 and 93 billion dollars.

In short, the subprime mortgage market represents yet another example of the impact of the discriminatory allocation of credit upon African American wealth accumulation. Such wealth impediments are a manifestation of historical process of discrimination and racism which have existed since the founding of the United States. Indeed, as economist Andrew Brimmer explained:

[t]o a considerable extent [lack of wealth] can be traced to a long history of deprivation in this country. This means that blacks have had much less opportunity than whites to earn, save or inherit wealth. Because of this historical legacy, black families have had few opportunities to accumulate wealth and to pass it on to their descendants.

As this article has argued, a major example of this historical deprivation is discrimination in the credit markets which acted to limit African Americans access to homeownership and increased the cost of achieving home ownership.

Indeed, following Emancipation, African Americans rapidly became ensnared in the clutches of a labor system that was dependent upon credit. Not surprisingly, the credit was provided on predatory terms in several regards. First, African Americans paid higher prices for necessary goods purchased on credit. Second, African Americans also were charged an additional interest rate on the purchase. The combination resulted in exorbitant interest rate charges that ranged from forty percent to as high as seventy-five percent. Third, such debts were typically secured with a crop lien that effectively limited the ownership rights of African Americans. Finally, African Americans were subjected to discriminatory practices at settlement time, often depriving them of the fruits of their labor and perpetuating credit debt. The combination of a malignant credit system and white racism had a devastating impact upon African Americans, relegating them to debt peonage and impeding homeownership.

In an effort to escape the economic hardships, African Americans commenced the Great Migration, leaving the rural South to move to the urban areas of the North. Again, however, their dream of homeownership was stymied by yet another discriminatory credit system. In particular, the federal government in the form of the HOLC, FHA, and VA implemented the practice of redlining whereby African American neighborhoods were effectively denied access to traditional forms of credit. Since African Americans were unable to obtain credit from the formal market, they were either precluded from property acquisition or forced to turn to other sources of credit. While such informal sources, such as installment land contracts, provided credit to African Americans, they generally did so in a predatory fashion with significantly higher costs and increased risks. In conclusion, this article has demonstrated that one of the primary explanations for the large racial disparities in terms of wealth is a direct consequence of discrimination in credit markets which has acted to both limit minorities' access to home ownership and to increase the cost of achieving home ownership. Until such racial wealth disparities, the result of the haunting legacy of slavery and Jim Crow, are addressed in a substantive manner, it will continue to impede the realization of Dr. Martin Luther King, Jr.'s "beloved community" and Senator Barack Obama's "more perfect union" in the United States.