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
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
"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
- 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.