New Orleans The Community Reinvestment Act (CRA) was passed in 1978 banning racial discrimination in lending. The Home Mortgage Disclosure Act (HMDA) was passed as well, forcing banks to supply the data on where they approved mortgages and the racial and ethnic information on the borrowers. Reporting and enforcement is under the jurisdiction of the Federal Reserve banking system.
This is called redlining. There have been recent settlements in this area in Buffalo, Milwaukee, Providence, Rochester, and St. Louis. Hudson City Savings Bank, the 7th largest savings bank in the US and the largest in New Jersey with offices in New York and Connecticut as well, and a merger candidate for the larger M&T Bank Corporation, settled a case with the Department of Justice and the Consumer Financial Protection Bureau without admitting guilt but by agreeing to a fine of over $30 million for discrimination. The New York Times reported that that “In 2014, Hudson approved 1886 mortgages in the market…federal mortgage data show. Only 25 went to black borrowers.” Hudson claimed innocence, arguing that it bought mortgages on the secondary market, that the bank felt was sufficient to satisfy its CRA obligations. Attention to the discrimination was brought to the authorities by New Jersey Citizen Action and that’s about the only good news in any of this.
The bank’s argument is perverse. They seem to believe that racial discrimination can be handled like climate change with a “cap-and-trade” type agreement where it is alright to discriminate in your home markets, just like you can pollute in your home countries, as long as you purchase an offset in some other way by buying mortgages or helping protect a rain forest. What a load of hooey! I’m also troubled about the non-existent role of the Federal Reserve in the Hudson story, especially because any pending merger like the one playing out with M&T would have triggered a review by the Fed on the CRA banking record and requirements. Without a doubt the CRA has been steadily weakened over the last almost forty years, but has the Federal Reserve decided to be completely derelict in their duty and shuffle this over to no one or by luck have some other agencies like the CFPB and the DOJ pick up the slack. This is not reassuring.
Nor is it uncommon. Without data or taking the time to collect and study it when it is available, it becomes easy to simply say with the banks that there is no discrimination. I heard that repeatedly in the United Kingdom when discussing the need for a CRA and HMDA for British banking. Data now exists that allows some evaluation of credit, mortgage, and small business loans in the UK, but the initial reactions have been ho-hum, indicating no surprise that there is more action on lending in higher income areas than lower income ones. The finer data is not available, and the raw data is deliberately opaque.
As long as there are bankers that will welcome deposits from lower income families and minorities and still maintain that they have no community responsibility, even though they are chartered with such obligations, and justify their practice based on aversion to risks rather than embracing more robust and generalized rewards, there will be discrimination. There’s always smoke, we just need to make sure that many are still also continually looking for the inevitable fire hidden beneath the smokescreens.