Banks are Building “Credit Deserts” in Birmingham and Elsewhere

182984189-465119Edinburgh   We have real deserts like Sahara, the Gobi, Mohave, or Chihuahuan in the world. We have food “deserts” in many lower income communities with little choice but mom-and-pops, corner stores, kiosks, and bodegas to serve millions. Now there’s increasing evidence that banks have been allowed to build “credit deserts” in many cities, and work in Birmingham, the second largest city in the United Kingdom, makes it clear the map of the desert is also the outline of lower income communities in the city.

It shouldn’t be a surprise. Reportedly, British banks have shut down 42% of their branches over the last 15 years, and of course a huge percentage of the closures have been in lower income areas. Fleeing from the responsibilities of community banking has long been a trend in the United States of course, but in the United Kingdom the concentration of most banking in a handful of companies exacerbates the crisis. The U.K.’s antitrust regulator, the Competition and Markets Authority, recently said that Britain’s retail banking market isn’t competitive enough, but then didn’t do much about it and made no proposals for forcing the country’s big lenders from making any radical changes to their businesses. U.K retail and business banking is dominated by four banks: Lloyds Banking Group , Royal Bank of Scotland Group , Barclays and HSBC Holdings holding approximately 70% of personal current accounts and 80% of business accounts in the U.K.

Now as data is becoming available in recent years on where small businesses, mortgage loans, and smaller consumer loans are being given by banks, the city council of Birmingham did some number crunching, and then laid out the results on a map. In general Birmingham citizens had less access to credit than virtually any other part of the UK, but more specifically when a comparison was made on where loans were NOT being made, the overlap with lower income communities was precise. There is no question that banks are discriminating against low and moderate income families as a matter of policy and as a key part of their business plan.

While the banks build a “credit desert,” the vultures that sweep in to feed on the people are of course the payday lenders and cities in the UK, just like the US and Canada are seeing a feeding frenzy. ACORN organizers not only in Birmingham but in other cities in England and Scotland were quickly able to rattle off the names and addresses of payday lenders, pawn shops, and other quick money spots in our neighborhoods.

While visiting we looked up the regulations on payday lenders in the UK. Not much hope for relief there in the credit desert. Pretty much everything goes if the interest rate on the loans was less than 100% of the loan itself. Checking the popular internet money lender, Wonga, to our shock they boldly displayed an APR or annual percentage rate for their lending rate at 1509%.

The plan seems to be to discriminate in lending and then open the door wide so that the pockets of lower income families can be picked clean.

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“Payday Loan Song”by Erich Vieth

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Wholesale Bank Retreat from Lending to Lower Income and Minority Borrowers

cra1New Orleans      The Community Reinvestment Act (CRA) passed in 1978, more than 35 years ago, was straightforward. Banks could no longer redline, meaning they could not use the deposits from lower income and minority neighborhoods to finance mansions for the rich in the sprawling suburbs. More plainly stated, they could not discriminate in their lending. As importantly, under the Home Mortgage Disclosure Act (HMDA), they couldn’t hide their lending records, but had to make them transparent enough for regulators and the rest of us to know that they were doing right. Fair enough, and this worked not perfectly, but pretty well, for almost 30 years until the Great Recession by meeting the huge demands in our communities for homeownership.

Without being willing to come right out and say so, banks have gone to war against the CRA and lending to low-and-moderate income and minority communities without formally revealing that they have agreed to a declaration. They don’t want to say they don’t want to loan anymore to lower income working families and minorities, but they just don’t want to do so.

The war is being led by the biggest of the banks, especially JP Morgan and Bank of America. JP Morgan’s Jamie Dimon, indicated that the bank has reduced its exposure in the market for FHA insured loans that are targeted to first-time homeowners with “little wealth, especially minorities, because it allows borrowers to make down payments of just 3.5%.” A year ago Morgan accounted for 12.7% of these loans, but most recently it revealed that its share is down to 2.3%, which is to say, knocking on the door to doing nothing. Bank of America has also retreated, claiming it will focus primarily on servicing his existing customers with accounts at the bank.

And, what is their rationale for the retreat? Well, this is interesting, because it goes to the issue of transparency and accountability for lending, which was at the heart of HMDA as well.  First and foremost is the fact that they don’t want to hold the loans on their books. For right now this is why 80% of their loans are pushed into programs with various federal guarantees. A new accounting rule proposed for 2018 could make this even dicier, because they will be required to write off a portion of the loan at the same time they are making the loan, which you just know will scare the heck of them. Here’s the rub. Dimon is whining because his bank and a pack of the others are now paying fines, $614 million for Chase, because they defrauded FHA by claiming that some loans they packaged met the FHA requirements that didn’t, and even after an internal audit discovered this, they tried to continue the cover-up and not inform the FHA that they had swindled them until an internal whistleblower spilled the beans.

So, let’s all understand, Morgan got caught cheating the government, so now the big whine from CEO Dimon is that they lost money on the scam, because they are having to pay a penalty for doing wrong. They essentially want some kind of do-over rule that allows them to cheat, say I’m sorry without a fine, and keep doing whatever they feel like doing.

And, one thing Morgan, Bank of America, and others don’t feel like doing anymore is lending to first timers, working families, and minorities it seems. Unfortunately the way the CRA has had its teeth pulled over the years makes this possible, along with the fact that the Federal Reserve is the police watching over the banks and their CRA obligations, and they have tended to play patty cake on these lending obligations for years.

We need to look at the coming CRA numbers more and more rigorously, because whether we know it or not, we’re in a fight to keep money in our communities, and we’ve got a huge body count already and no sign of any cavalry coming to save us.

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