Has Community Reinvestment Become the Ghetto of the Banking Industry?

12.12.12-HousesNew Orleans   Since the financial crisis many of us who believe in decent and affordable housing have spent time making sure the Community Reinvestment Act (CRA) didn’t become the goat for the financial meltdown and banking scandals. And, don’t get me wrong, that’s important!

In a 2015 Federal Reserve study the conclusion was clear: CRA was blameless. Only 6% of loans by banks in CRA-qualified census tracks would have qualified as high risk. The repayment rate for CRA-based loans was equal or better than other loans in banking portfolios.

Nonetheless recently I finally felt like I might have stumbled on a disturbing pattern when I started thinking about the array of CRA officers populating various banks and I then started to worry that there might be another side to the CRA story that needs attention, and that’s whether or not it has become a banking ghetto populated more by politicians and promises than real efforts to move families into housing and desperately needed resources and loans into lower income communities.

For example, the National Community Reinvestment Coalition claims that approximately $4 trillion in CRA commitments was promised between 1997 and 2005. And, that’s good news and ACORN’s experience was that much of it was delivered on our agreements, as I detailed in my 2009 book, Citizen Wealth. On the other hand the word “promised,” when it comes to minority lending and lower income communities always makes you wonder. The Federal Reserve report for example quoted testimony given by JPMorgan Chase to the Financial Crisis Inquiry Commission that “less than one-fourth of the loans pledged in the largest-ever CRA commitment ($800 billion by JPMorgan Chase) were to the lower-income borrowers and neighborhoods targeted by the CRA.” When forced to fess up, Chase essentially was admitting that their pledge was a scam. They also quoted a “Citigroup managing director… that most CRA commitments ‘would have been fulfilled in the normal course of business.’” Having dealt with Citigroup for years, that’s simply a lie. Nonetheless, it’s worrisome that these big hitters in the CRA lending world are essentially saying they were playing all of us for fools. Admittedly, they were also trying to save their skins before the Commission, but I’m afraid the truth may also have been slipping out.

And, then there’s a pattern I started to wonder about when thinking about the CRA officers we run into from bank to bank these days. There’s a high incidence of what seem to be political appointees rather than real bankers who might be able to move money rather than simply bring calm to stormy seas. On the local scene just to think about a random selection, there were several current African-American legislators still in office, a relative of a former Mayor, and a social friend of the CEO…are you starting to see the picture? Nationally, I remember dealing with an African-American former mayor of Minneapolis and the scion of a long standing black political powerhouse family from Buffalo.

Maybe we need some solid research of our own on whether or not big and little banking is really committed to CRA objectives and non-discriminatory lending in minority and lower income communities, or whether or not we’re being played by politicians in banker’s suits making promises while continuing to grip the money with an ever tightening fist?

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Housing Discrimination is Back! Did it Ever Leave?

hudson-city-savings 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.

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