Author
Is the Community Reinvestment Act a necessary and effective tool for eliminating discrimination in lending?
How might it be improved?
That was the question under discussion by 11th and 12th grade high school students from throughout the Ninth District who entered the Minneapolis Fed's sixth annual essay contest.
The contest culminated in a workshop at the Minneapolis Fed for 30 finalists selected from nearly 200 entries. Federal Reserve Governor Lawrence Lindsey, who chairs the committee that oversees the Fed's Consumer and Community Affairs division, presented the awards and discussed how perceptions can influence lending decisions.
Gabe Pass from Minnehaha Academy, Minneapolis, earned $500 in U.S. savings bonds with his winning essay "Discrimination in Spite of the CRA" (reprinted below). Pass also received $250 from the Mortgage Bankers Association of Minnesota, who had asked to support the essay contest program with an additional prize.
Each finalist received a $100 savings bond, and the second place winner, Chi Huynh from Park Center High School, Brooklyn Park, Minn., won an additional $200 in savings bonds. Both first and second place essays are reprinted on the bank's Kimberely electronic database.
Discrimination In Spite Of The CRA
The Community Reinvestment Act was enacted in 1977 because of a deepening sense that, in spite of "wars on poverty" and Model City Programs, inner-city neighborhoods and minority financial prospects continued to decline. Community experience with red-lining of poor neighborhoods and minority populations by financial institutions gave rise to concerns to which the CRA was a response.
It was felt that financial institutions, which receive financial backing from the government and ultimately from the taxpayers in the form of federal deposit insurance, have a special obligation to serve the tax- paying public. At the same time, discriminatory lending practices targeting specific geographical areas and minority individuals were experienced in sufficient degree to make the need for new legislation prohibiting this discrimination obvious. For this reason, Congress passed the Community Reinvestment Act.
We are now at the end of 16 years of governmental efforts through the CRA to facilitate non-discriminatory lending practices on the part of American banking institutions. Yet we face as a country continued and even more radical decline in home ownership and quality of life in low- and moderate-income families, especially minorities in America's urban areas. I believe it is long overdue to ask why. I would like to argue that, though the CRA has been somewhat useful in curbing both obvious and subtle forms of discrimination against financially acceptable loan applicants from a variety of ethnic groups and geographical areas, it has been unable to prevent a more serious form of lending discrimination arising out of the conditions which have created marginalized neighborhoods in the first place.
"Poor, physically deteriorated and socially isolated neighborhoods don't create themselves," writes Robert Halpern in the fall 1993 Journal of Sociology and Social Welfare. They arise from the choices and social arrangements of the larger society; and these neighborhoods produce a steady stream of poor minorities already segregated out of the loaning process. Most of these minorities will never be in the position for the issue of discrimination against qualified borrowers to arise. Most will not be in a position to make a major purchase requiring a large loan, nor will many be acceptable as qualified borrowers under any imaginable alteration of the standards.
Because poverty tends to follow racial lines, the inability to be involved in the loaning process has been racialized long before the trip to the bank. Therefore, if eliminating discrimination in lending meant ending race-based exclusion, I believe the CRA has been of little significance.
The Community Reinvestment Act requires financial institutions to serve the needs of the entire community. This is interpreted to mean that residential mortgage loans and loans for small farms and businesses should be equally obtainable by any qualified borrower regardless of race, age, sex, color, national origin, marital status or receipt of income from public assistance. Banks are assessed on the basis of their levels of compliance with these obligations.
Also a bank is expected to extend credit to geographical areas of low- and moderate-income populations and maintain branch offices there. It should be involved in community projects and facilitate community awareness of its credit services, especially in both poorer and minority areas. While regulations are left intentionally vague in order to allow for special local needs and creativity, banks are expected to actively pursue and facilitate such an open loan policy.
Yet banks are also expected to be strong, financially sound institutions. Clearly, to expect banks to live up to these requirements is a tall order. In 1989 further amendments were added requiring assignment of a CRA performance rating to each bank, which was to be made available to the public. The CRA was now to be part of a continuous process of both encouragement and regulatory requirement tying the bank more closely to the communities it serves. Banks are expected to map out and strategically involve themselves in the restorative and preservative processes going on in these communities.
While the CRA requirements are viewed by banks as a major regulatory burden, still these requirements have caused banks to produce a multiplicity of new efforts and valuable services for a newly visible clientele. Norwest and other Twin Cities banks now offer loan counseling and home ownership classes tailored to low- and moderate-income loan seekers. This large bank is also involved with linking its loan operations with government and private funds to assist reinvestment in the poorest neighborhoods in Minneapolis, particularly Phillips on the south side. It employs banking personnel that have schooled themselves in awareness of the special character and needs of each minority group comprising the Phillips population. Southeast Asians, Native Americans and blacks can be found newly involved in financial dialogue in their Lake Street and Chicago Avenue offices, which are open for services at the heart of one of the poorest and most violent prone parts of town.
Huntington National Bank in Columbus, Ohio, is using churches in black neighborhoods to channel its loan programs to black clientele. The South Dallas-Fair Park area of some 80,000 mostly black residents received its first bank branch only last year after two decades without one. This branch went beyond its prospected number of consumer loans by 40 percent. Similar advances can be found throughout the country.
Clearly, all these efforts are valuable and begin a process where some minorities are becoming involved with and assisted by the country's financial sector in a new and more positive way. So not only has the CRA, with its additional new amendments requiring public disclosure, proven to be useful as far as it goes in stopping discrimination in lending practices for some minorities and people from marginalized areas, but it has generated these new positive results.
These advances, however, come in the face of the fact that statistics show the number of shelter poor households has increased from 18.7 million in 1970 to 26.5 million in 1986, an increase of 42 percent. Two problems must be faced. First, given conditions in poor urban areas, there is enormous disincentive for bank investment because of unprofitability already experienced by many lenders in the inner city. Lending is profit- driven, like most financial investments, and is based on the notion that there is money to be made, an idea at risk in the inner city.
A few stories will demonstrate this problem. Rick Stanton, a Honeywell engineer, purchased a home for about $60,000 about six years ago in Phillips, the poorest neighborhood on the south side of Minneapolis. He hoped to be a neighborhood activist. However, four houses across the street were rented to drug dealers. The noise, gunfire, violence and open drug dealing were unstoppable after many efforts by the block club. He moved recently, receiving $49,000 for his home. Linda Leonard, a single mother, just purchased another Phillips home for $33,000, after about a $15,000 restoration by the bank. The bank had received it back, destroyed, after the previous borrower's default. The house had sold three years earlier for $65,000. Nearby, a triplex with a mortgage held by a bank in Texas went into default on its $75,000 loan. The loaning banks had taken a serious loss, and property values in the area had plummeted.
The second serious problem is that even if compliance were maximally obtained from banking institutions, the most serious lending discrimination inevitably arises out of the fact that very few minority individuals can even begin to qualify for a loan. Despite major efforts on the part of banks to reach out and educate communities, few minority borrowers come forth to even apply. Finding potential loan seekers is a real difficulty for their programs, say Norwest officials. Meanwhile enormous numbers of homeless and willing-to-work poor continue to crowd homeless shelters, while boarded homes stand empty and unused in the inner city.
It is out of this situation that the actual discrimination emerges, the structural relations in the community which give rise to so many people being in this situation. According to sources:
- From 1977-1988 the average family income in the poorest decile of families fell by nearly 15 percent, while that of the top 1 percent increased by nearly 50 percent
- In the 1980s federal housing funds were cut more than any other category of domestic expenditure
- Only 20 percent of white renters and 4 percent of black renters have enough savings to come near to standards required by banks for home ownership loans, even for those requiring only a 10 percent down payment
- Poverty among children in the United States is higher than in any other advanced industrialized country.
- From 1973 to 1983 manufacturing jobs in suburban areas increased by over 1.7 million, while the central city lost almost one-quarter of a million jobs.
We can no longer only "Do no harm," as Federal Reserve Governor Lawrence Lindsey says in a 1992 address, but must adopt a more proactive stance and intervene. Serious financial disincentive and the radical lack of personal financial resources in poor urban areas mean that any final answer must involve greater direct governmental assistance.
While this may seem a pessimistic solution and one that most hoped to avoid, when continued disinvestment in the inner city persists and large numbers of families with children must live with the sound of nightly gunfire, a radical change in policy seems in order. Government partnership with private investment plus a return to real estate tax incentives, greater financial strengthening of schools, and serious job creation are a few possibilities which would assist in the emergence of a loan seeker who is not already racially excluded. Only in this way can lending discrimination be meaningfully seriously challenged.
