Lender discrimination might be bankrupting black churches

A long line of research shows that black consumers pay higher rates for credit, including mortgages and car loans. A new study suggests the same kind of financial discrimination may apply to black churches.

Of the 654 religious congregations to file for Chapter 11 bankruptcy protection between 2006 and 2013, 60 percent had black pastors or predominantly black membership, according to a just-published paper by Pamela Foohey, an associate professor at the Indiana University Maurer School of Law. Meanwhile, black churches make up only 21 percent of U.S. congregations, according to a 2012 analysis.

The large number of reorganizations may be the result of black churches paying higher rates for real estate loans, including “balloon, step increase, and other ‘weird’ mortgages—the equivalent of subprime loans,” writes Foohey, who sifted through 80,000 bankruptcy petitions and interviewed more than 100 church leaders and bankruptcy lawyers for her draft study. Creditors may be less lenient with black churches, insisting on Chapter 11 to modify loans that other church borrowers might seek to modify through informal negotiations.

All those bankruptcy reorganizations increase borrowing costs for black churches, according to the paper, forcing them to spend thousands of dollars on lawyers and filing fees.

“The question is, why wasn’t there a deal outside of bankruptcy for these churches?” said Foohey in an interview. “It could be that the congregation didn’t have the wealth, or it could be that the lenders didn’t want to cut a deal with these particular pastors. Is it bias? The paper can’t say definitively.”

Foohey became interested in the financial tribulations of black churches during her research on nonprofit bankruptcies, when she realized the majority of nonprofits filing for Chapter 11 were religious institutions. She spent the next year and a half digging through bankruptcy cases, looking for filers whose names sounded like churches. She defined churches as black when they had a black pastor or a denomination traditionally associated with black worshippers.

Outright racial discrimination isn’t the only possible explanation why some black churches wind up in bankruptcy. They're often less likely to belong to broader organizations, such as Catholic or United Methodist churches, that because of their size can bring more leverage to creditor negotiations. Black congregations that wind up in Chapter 11 are often poorer—an important consideration, since many churches rely on individual giving to stay afloat.

Foohey said black churches are more likely to file for bankruptcy even when controlling for denomination and geography, though she stressed that her findings aren't definitive because she didn’t have access to loan data needed for a complete analysis. But even without more granular detail, she said the findings bear noting: “It shows that race matters in consumer bankruptcy.''