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Andrea Freeman

Andrea Freeman, Racism in the Credit Card Industry, 95 North Carolina Law Review 1071 -1159 (May, 2017) (560 Footnotes Omitted) (Full Article)

I'm Kan, the Louis Vuitton Don Bought my mom a purse, now she Louis Vuitton Mom I ain't play the hand I was dealt, I changed my cards I prayed to the skies and I changed my stars I went to the malls and I balled too hard Oh my god, is that a Black Card?' I turned around and replied, why yes, but I prefer the term African American Express Kanye West, Last Call

andreafreemanWhen Karyn Morton applied for a Capital One credit card online, the company's website offered her two cards based on information gathered from a data mining company after Karyn clicked once on the company's website. To its credit, Capital One accurately identified Karyn as a Black, Detroit homeowner who reads major metropolitan newspapers and watches the NAACP Image Awards. But Capital One also got a lot wrong. It assumed that Karyn was over sixty-five years old and retired and that she had no children and some high school education. In fact, Karyn was thirty-three years old, had a five-year-old child and a law degree, and earned a salary three times higher than Capital One predicted. Based on the algorithm that assessed Karyn, Capital One classified her in its "City Roots" segment and showed her two credit cards. Both cards sought to lure her in with a zero interest, six-month "teaser" rate. After half a year, the interest rate shot up to either 24.9% or 13.9%.

In contrast, analyzing Thomas Burney after he clicked once, Capital One correctly labeled him as a White college graduate who skis but predicted a salary higher than his actual one. The company's data *1074 software classified Thomas in its "God's Country" segment and offered him a card with a relatively low 11.9% interest rate.

This type of discrimination against credit card applicants through algorithms and data mining is an unregulated, but increasingly common, phenomenon. Further, this example of discrimination and the ones that follow demonstrate ubiquitous racism against credit card consumers in settings that include an applicant's initial inquiry, retail shopping with credit, and the collection of unpaid bills. Collectively, they illustrate the hostile climate in which Black and Latino consumers interact with credit and the need for significant reforms to industry practices, law and policy, and social attitudes in order to alter this environment.

In February 2015, three Black women, Kimmell Mcintosh, Maxine Henry, and Melanie Henry, were enjoying a girls' day out birthday celebration at Brooklyn's Massage Envy Spa when several New York Police Department ("NYPD") officers disrupted their day by entering the spa to question them. The officers then hauled the women into the station to detain them on suspicion of credit card fraud. A spa employee had incorrectly reported that the women used a stolen credit card because the card's number was very close to another client's card, but the officers failed to check for this simple mistake before making their dramatic and unnecessary bust. Outraged by the officers' assumptions of their criminality, the women subsequently planned to bring a suit against NYPD and the spa for false arrest and racial profiling.

Similarly, in 2013, Robert Brown, star of the HBO series Treme, bought a $1,350 Movado watch at Macy's for his mother as a graduation present. After he made the purchase, NYPD officers loudly accused *1075 him of credit card theft, handcuffed him, paraded him through the crowded Macy's store, and detained him. In response, Brown filed a class action suit against Macy's for racial profiling, which the parties settled for an undisclosed amount.

In the same year, four NYPD officers disguised in plain clothes stopped and accused twenty-one-year-old Black nursing student Kayla Philips of credit card fraud in the middle of the street, three blocks away from Barneys, where she had just purchased a long-coveted $2,500 orange suede Celine purse after cashing a tax return. Barneys settled her case for $525,000 and promised to stop discriminating against Black and Latino customers. This incident came on the heels of a lawsuit filed by eighteen-year-old Trayon Christian against Barneys and the NYPD. After Christian purchased a Ferragamo belt for $349, undercover NYPD officers followed him from the store, claimed his card was a fake, and detained him in a holding cell. Christian eventually received a $45,000 settlement from the city.

These incidents inspired protests and captured media attention, particularly in the wake of Oprah Winfrey's "shopping while Black" experience of racial discrimination in Switzerland, where a store clerk refused to show her a crocodile purse because it was too expensive. Despite remonstration, however, racial profiling against Black and Latino credit card users persists. It also takes place in the debt collection phase of credit card use.

Maria Guadalupe Mejia's life became fraught with anxiety when Portfolio Recovery Associates, a company that collects on credit card debt, relentlessly pursued a lawsuit against her for a $1,000 debt that wasn't hers. Mejia, a Latina from Kansas City, Missouri, shared,
My husband and I were already struggling just to keep the children fed and the lights on. The lawsuit terrified me. I feared they would take my house and I feared they would arrest me. I was very shocked that they sued me for one year and three months [until the court dismissed the case] even though I never had the credit card. And after they dismissed the case, they said they might sue me again. A jury awarded Mejia more than $82 million in damages, but this type of compensation is rare. Most harassment from credit card debt collectors goes unremedied. Also, although there are no significant *1077 differences in how many times Black and White credit card users pay their balances late, a survey found debt collectors make harassing phone calls to seven out of ten Black borrowers but only five out of ten White borrowers.

In a social and financial climate characterized by deep racial and socioeconomic divide, racism against credit card applicants and consumers is a core piece of the systemic, structural inequality that perpetuates dramatic disparities in wealth, employment, health, and education. Each of the preceding stories represents one aspect of both the explicit and structural racism that complicates credit card use by consumers of color. These incidents arise from cultural misperceptions shaped by racial stereotyping and historical discrimination. Further, the attitudes and conduct of police, merchants, and bill collectors against consumers of color provide context for how credit corporations perceive and interact with non-White consumers. They also demonstrate the benefit of applying a critical race theory perspective to understand discrimination against credit card consumers and to guide the formulation of effective responses.

Over several decades, credit cards have evolved into an essential tool for lower- and middle-class families to maintain financial stability through strategic balancing between debt and disposable income. Now, without a credit card, many households would not be able to meet the basic needs of their families. These households rely on credit for basic subsistence as well as to cope with financial emergencies. Credit card companies take advantage of this reality, imposing exploitative fees, interest rates, and other conditions on consumers who have no choice *1078 but to use their products. Even worse, the companies do so in a racially discriminatory way, burdening Black and Latino customers with the worst credit card terms, compared to White consumers, and often unrelated to credit risk.

For example, a 2008 survey found that, although Black borrowers carried lower balances on their cards, they paid more interest. Specifically, a Black family that carried consumer debt with an average interest rate that made average monthly payments paid at least $100 more in interest on the debt than an average White family, despite the fact that the Black family borrowed less. This type of consumer racism dates back to the Reconstruction era and reflects an unbroken chain of laws and policies cementing racial economic inequality. Social norms and stereotypes serve to make this inequality appear cultural and personal, instead of structural.

Unfortunately, although the financial precarity caused by institutional and corporate racism against credit card consumers is a vital and urgent issue, similar to the racial disparities in the treatment of mortgage and home consumers that capture national attention, both the media and legal scholars have largely neglected this issue. This Article seeks to fill that gap. By focusing a critical race theory lens on predatory and discriminatory practices of the credit card industry, it opens the door to innovative approaches to reducing economic inequality. This perspective goes beyond the traditional legal formula of individual remedies for individual acts of discrimination by proposing systemic relief for communities besieged by institutionalized, structural racism supported by social and cultural stereotypes.

*1079 This Article is the first to apply a critical race theory analysis to the problem of racism against credit card consumers, using this framework to propose a solution grounded in rehabilitative reparations theory. Beginning from the premise that the credit card industry's success depends on a business model that both perpetuates and exploits structural inequality, the Article explores the specific role that credit discrimination plays in maintaining the racial economic divide. Critically, it crosses the bridge between theory and practice, inviting regulators to make concrete, fundamental changes to consumer law that would simultaneously deter acts of discrimination and alter the broader racial economic landscape.

The Article begins in Part I with a history of race and wealth in the United States that outlines the laws and policies precipitating the existence of a 20:1 wealth gap between White and Black Americans following the 2008 mortgage and financial crisis. This crisis likely led to increased dependence on credit for Black households. Further, statistically, there are racial disparities in every aspect of credit card use, from the application process to the terms of agreements to the need to *1080 forego necessary medical treatment and abandon educational opportunities due to excessive debt. Part I describes the dramatically different experiences that White and Black households have with credit and the intersection of corporate conduct and structural inequality that accounts for these differences. Then, it explores the role that stereotypes about Black consumers play in creating and justifying racial disparities in credit. These stereotypes focus the blame for bad credit squarely on the individual, making legal reform and corporate responsibility appear both futile and unnecessary.

Part II looks closely at the two laws designed to address racial discrimination and inequality in credit, the Equal Credit Opportunity Act ("ECOA") and the Community Reinvestment Act ("CRA"). This Part investigates the legislative history behind these statutes, identifying the problems that the laws' proponents sought to solve with their enactment. It then outlines the major substantive and procedural aspects of these laws, describing the weaknesses that render them unable to fulfill their intended purposes. Acknowledging that these laws neither deter nor provide effective relief for racial disparities and discrimination in credit, Part II then calls for a new approach to consumer credit law founded on the insights of critical race theory.

Part III proposes amendments to the Consumer Accountability Responsibility and Disclosure ("CARD") Act designed to reduce or eliminate racial discrimination by credit card companies, as well as to promote economic growth in underserved communities. Rehabilitative reparations theory provides the model for these proposals. Accordingly, Part III provides an overview of the history and philosophy of rehabilitative reparations theory, edifying its focus on uplifting communities instead of making individuals whole. Next, Part III details the history and success of slavery disclosure laws. These laws, which require certain companies to disclose their past ties with slavery, seek to create corporate accountability for racial harms. Part III argues for similar, but stronger consumer laws requiring credit card companies to disclose any racially discriminatory conduct and to compensate for it through significant investments into the harmed communities. The Article concludes by briefly engaging potential counter arguments to this proposal and acknowledging the major obstacle posed by the financial industry's influence over politics.

* * * *

Regulatory reform of the credit card industry is essential to protect consumers from exploitative practices that have dire consequences. Unfortunately, however, the powerful influence that some banks and other credit lending institutions have on Congress has heretofore disabled most serious attempts to shield consumers from companies' predatory tactics. Approximately $11.6 million of the political action committee money given to the 2016 federal electoral candidates came from finance and credit card companies. The size of these contributions suggests the existence of regulatory capture that is difficult, if not impossible, to dislodge.

Consumer advocacy is a target of the Trump administration. In January 2017, Republicans threatened to dismantle the Consumer Financial Protection Bureau, based largely on its lack of accountability to elected officials. To this end, an executive order called for a report on the efficacy of the Dodd-Frank Wall Street Reform and Consumer Act, putting its continued existence into doubt.

It is therefore appealing to consider remedies to this problem that do not require increased regulation or financial sacrifice by the corporations, such as financial education for consumers. But, although there is no doubt that every individual can benefit from full information regarding smart financial choices, consumer education cannot replace structural reform as a gateway to reducing financial and credit disparities. Realistically, even an individual armed with the best information possible cannot control the effects of structural, institutionalized discrimination.

Another argument against stronger regulation of credit card companies is that these companies will respond by ceasing to lend to the communities they currently exploit, forcing them into even more dire financial constraints or exploitative lending conditions. This outcome is highly unlikely, however, because of the high profit margin in subprime lending. Therefore, even with a reduction in opportunities to *1159 discriminate, credit card companies will most likely continue to issue cards to borrowers who make monthly payments, regardless of the amount of those payments.

A significant obstacle to achieving meaningful reform in this area is that it requires a major cultural shift. Social perceptions, shaped by a steady diet of popular culture and media, infiltrate individuals' daily lives. The stories they hear and the corresponding stereotypes they embrace inform their financial decisions and transactions, in addition to their perceptions of equality and justice. Social movements have always been at the forefront of major changes in the law, such as the Civil Rights Act and the Supreme Court cases recognizing marriage equality. Occupy Wall Street began a conversation about economic equality that, perhaps fatally, failed to link its struggle to racial equality. An intersectional movement that understands the connection between different forms of oppression is therefore necessary to guide legal reform.

From a much broader perspective, it may be unrealistic to try to solve this problem from within the system. Perhaps it is a mistake to strive for reform instead of revolution. To function, capitalism relies on economic winners and losers, and systemic, structural racism identifies and perpetuates a racial class of losers that serves an essential role in this economic model. It is possible that only by imagining and adopting a completely new economic system can the law eliminate racism in the consumer credit industry or in any other sector.

This powerful vision surfaces in the critically acclaimed television show Mr. Robot, where masses take to the streets to celebrate after hackers infiltrate the world's largest bank and erase all consumer debt. This may be the Utopia for which we must strive. Until that moment, any social critique that focuses on the actions of the consumer instead of the credit card companies misguidedly redirects a conversation about structural inequality and exploitation to one about personal choices.

It is the role of the law to protect consumers from exploitation and discrimination. In the context of consumer credit, the law has failed to do so. Adopting disclosure and investment requirements for credit card *1160 companies would signal to consumers and corporations alike that the law will not tolerate predatory practices, and significantly raise the standards for corporate and social practice in the United States.

Visiting Professor, U.C. Berkeley School of Law (Spring 2017); Assistant Professor of Law, University of Hawaii at Manoa William S. Richardson School of Law; J.D., U.C. Berkeley School of Law; B.A., University of Toronto.