Race-Based Lending: The Right Way to Promote Social Justice?


The Neighborhood Assistance Corporation of America (NACA) has announced a lending program for minority-owned businesses it calls “Economic Justice Loans,” with the stated goal of helping historically underserved populations build generational wealth.

The political-progressive organization’s action raises the question of whether people of color are still being denied access to credit in 2022.

“This lending model provides the foundation for hundreds of millions of dollars in additional lending,” NACA’s founder and CEO Bruce Marks said in a press release. “We have learned that if you build it, they will come. NACA’s Best in America Mortgage targeting underserved communities started with a few million dollars in commitments and now has over $20 billion. We expect the same outcome with extraordinary terms and community-based decision process built into the Economic Justice Loans program.”

The loans have a fixed interest rate of 3 percent, which applicants can apply for without consideration of credit, lengthy paperwork, or prohibitive requirements. Applicants must demonstrate “how their loans will positively affect their communities or address economic and social inequality.”

NACA’s program adds to the list of comparable efforts, going all the way back to 1977’s Community Reinvestment Act, which was designed to counteract “redlining.” That’s where banks and lenders withhold services from potential customers who resided in neighborhoods classified as ‘hazardous’ to investment – which frequently belongs to minorities.

Opinion is divided on how prevalent the problem still is. For example, Bloomberg recently reported that 87 percent of Whites are approved for mortgage loans while the rate for Black applicants is just 70 percent. While that may appear to be clear evidence of bias, the data is more complicated.

Reports alleging discrimination frequently don’t control for three key factors in the mortgage decision-making process: Debt-to-income ratio, combined loan-to-value ratio, and credit score.

“Our research has found that what many characterize as race-based differences in lending, thereby requiring remedies based on racial justice, are in large part due to differences in socioeconomic status (SES),” AEI Housing Center Director Edward Pinto told the Mortgage Note. “Lower SES certainly reflects a legacy of past racism and lingering racial bias, leaving Blacks at a large income (and wealth) disadvantage relative to most Whites.”

For example, Pinto’s organization looked at a study released last year by the Associated Press and the non-profit website The Mark-Up that allegedly showed racial bias in loan approval. The analysis did not include applicant credit scores, which are highly predictive of defaults.

Because minority loan applicants have higher default rates, they are also more likely to fail to qualify for loans.

“When looking at strictly inputs, but ignoring outcomes, the protected classes have higher denial rates than Whites,” according to an AEI report at the time.

Pinto argues remedies designed to address the income and wealth gap, rather than explicitly focusing on race, are more likely to succeed.

“In lending, this would be lending techniques that have been proven to result in sustainable loans,” Pinto said. “While I have not seen any performance statistics related to Economic Justice Loans, history has shown that all too often programs designed to help minority borrowers, in fact, end up harming them. The road to lending Hell is paved with good intentions.”