Credit Companies May Be Using Racial Profiling
There is a lot in the news these days about racial profiling in America. Be it in Arizona where new laws allow Police to request proof of citizenship when no law has been broken, or in airports where people of Arab descent might be more likely to receive closer scrutiny in security checks. What might not be as widely known is that often what many consider racial profiling is used by creditors when offering products to potential customers.
First let's be clear. Racial profiling is the inappropriate use of an individual's race or ethnicity as a key factor in making assumptions about the individual. This is a broad statement and can be further boiled down to uses by law enforcement, airports or marketing companies. Of course marketing companies may be able to better serve their customers by using ethnicity to better anticipate needs, but there is a fine line here that is quickly crossed when certain products are never offered or even made unavailable to market segments of a specific race or races.
The Federal Reserve Board recently did a study looking into how credit card companies and other lenders decide on what products to offer individuals and what interest rates are appropriate. One of the problems they found was that some creditors were using what the consumer was purchasing to affect future interest increases. Purchases made at pawn shops, discount stores, as well as buying used items or even living in a zip code where there are many foreclosures were all items being considered. These types of purchases that creditors were considering risky tend to be made more often in minority neighborhoods than elsewhere. That being the case, those living in these neighborhoods were being targeted unfairly for interest rate increases and lower spending limits.
Adjusting Credit Limits Based Upon Ethnicity?
The Federal Reserve Board's study included a survey finding that:
Specifically, a survey of the 100 largest issuers of general-purpose bank credit cards plus 75 other institutions selected to be representative of all but the smallest remaining bank card issuers found that during the three-year period preceding the mailing of the survey, 6 commercial banks or savings institutions used one or more of these practices as a basis for adjusting credit limits on active accounts; of those 6 issuers, 2 also adjusted interest rates on accounts, and 4 also closed accounts.
It would seem some creditors are gathering and using additional data in order to sidestep the Equal Credit Opportunity Act (ECOA) passed in 1974 that prohibits lenders from collecting information on the race or ethnicity of their credit card customers.
So, 6% of the businesses surveyed were using what the Federal Reserve Board considers inappropriate information to profile its customers. This seems like a small number unless that percentage maintains across the board with all U.S. lenders. If that were the case there would be scores of lenders using unfair practices on minority groups. This is racial profiling by definition and creditors guilty of this behavior should be stopped.
One Credit Card Offer For English, Another For Spanish?
A more specific example is that of Rich Aguirre. Rich lives in Arizona and is a credit expert currently working as a counselor for the non-profit organization Take Charge America. Two types of credit card offers come to Rich's address, one in English and one in Spanish. This isn't the only way they differ however. The offers in English have interest rates around 9.9% with spending limits up to $5000.00, while the offers in Spanish offer 19.9% interest and $500.00 limits. Clearly Mr. Aguirre's ethnicity is having a profound effect on what credit he is being offered, and if he didn't speak English he would have never known. How many times is this happening and going unreported?
To read the full survey prepared for Congress please visit the Federal Reserve Board.
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