Credit to the Community

Community Reinvestment and Fair Lending Policy in the United States

Dan Immergluck

• Publisher: Routledge
• Year: 2016
• Print ISBN:
  9780765612588
• eBook ISBN:
  9781315498119
• Topic: Business
• Subtopic: Business General
• Index: Business

This book provides the most comprehensive examination of community reinvestment and fair lending problems and policies currently available. It outlines the history of lending discrimination and redlining in U.S. mortgage and small business lending markets, and documents the persistence of such problems today. The author explains the role that government has played in developing banking and credit markets in the United States, from the creation of Alexander Hamilton's First Bank of the United States to the ongoing support government provides through the subsidization of secondary markets and through maintenance of critical regulatory infrastructure. Immergluck takes issue with those calling for deregulation of financial services - especially in the arena of fair lending and consumer protection - and gives new voice to rationales for social contract policies such as the Community Reinvestment Act. He provides new long-term analysis of the failure of federal bank regulators to enforce the CRA, and also shows how increased community activism and media attention have led to sporadic periods of stronger CRA enforcement. Finally, he recommends a number of policy changes that are needed to modernize the nation's fair lending and community reinvestment laws and make them more relevant for the 21st century.

CHAPTER 1

Introduction

Public utility is more truly the object of public banks, than private profit. And it is the business of government to constitute them on such principles, that while the latter will result, in a sufficient degree, to afford competent motives to engage in them, the former be not made subservient to it.

—Alexander Hamilton, Secretary of the Treasury, Report on a National Bank, December 13, 1790.¹

The regulators seem to think we’re all living in Lake Wobegon. Like the children of the fictional village, U.S. lenders are all above average. Almost all get high ratings year after year and almost none is ever held back.

—Senator William Proxmire, 1988.²

Full responsibility for CRA enforcement has always been the job of people in the neighborhoods.

—Gale Cincotta, National People’s Action, 1999.³

This book is about access to credit and basic financial services in the United States. It focuses on how public policy has—and sometimes has not—worked to improve such access for households and small businesses in lower-income and minority communities. For many middle- and upper-income white Americans, access to reasonably priced credit has become so ubiquitous that it may be hard to understand why there would be much concern about these issues. In lower-income and minority communities, however, poor access to fairly priced credit remains a key concern and a major barrier to economic security and neighborhood stability. The Community Reinvestment Act (CRA), the Home Mortgage Disclosure Act (HMDA), the Fair Housing Act (FaHA), the Equal Credit Opportunity Act (ECOA), and their hundreds of pages of attendant regulations and guidance are little known to the average citizen. Yet these policies have played important roles—ones that I will argue have been positive but far below their potential—in enabling working-class families of all ethnic and racial backgrounds to fare better in improving and maintaining their economic status. Beyond the impact on families and small businesses, these laws have worked to slow, and in some cases have been a key force in the reversal of, neighborhood decline.

At the turn of the twenty-first century, public confidence in the ability of federal policy to make a positive contribution to society (particularly in modest-income urban neighborhoods) may be at an all-time low. The trend over the last twenty-five years has largely been to reduce the federal role in business regulation, as well as in issues of social and economic justice. Those favoring such reductions sometimes argue that the declining confidence in the efficacy of these efforts justifies the policy pullback. Weak arguments—rarely supported by empirical evidence—have often won the day politically. Some have pointed to the persistence of urban poverty and decline in many cities to argue that policies such as CRA have not been successful. These arguments ignore the forces—from both the private and public sectors—that have typically dwarfed the scale of federal efforts supporting urban neighborhoods. They fail to recognize how much worse things would be without CRA and other pro-urban policies. They also ignore the substantial investments in many lower-income neighborhoods throughout the country that have been bolstered by CRA, as well as the significant reductions in concentrated poverty that occurred in the 1990s when CRA was more aggressively enforced (Jargowsky 2003). Opponents of CRA and fair lending laws disregard the great missed potential of CRA and fair lending policies, that is, what these policies would have produced if they were more consistently and vigorously enforced over a substantial period of time. In the entire twenty-seven year history of CRA, for example, the law was enforced vigorously only during a couple of brief two- or three-year periods.

Another approach of critics of CRA and fair lending regulations is to rely on the gospel of neoclassical economic theory to argue that regulation and policy interventions result in more negative, unintended consequences than positive, intended ones. One of the purposes of this book is to provide wider access to evidence that can counter the arguments based in a knee-jerk, anti-government paradigm that gained steam in the 1970s and 1980s. Evidence of the positive, though limited, impacts of the CRA is strong and robust in favor of the law’s improving access to credit.

At the same time, another purpose of the book is to alarm those concerned about cities and urban neighborhoods and about fair access to economic opportunity for minority and lower-income families. The potency of federal policy in this area has been waning for at least the last ten to fifteen years, and this decline has become steeper during the last five years. In the name of allowing what are now only nominally domestic financial institutions to be more competitive in the global financial marketplace, proponents of deregulation have effectively stymied any efforts to improve—or even maintain—the effectiveness of federal reinvestment and fair lending laws. Moreover, when states look to fill the void left by the absence of meaningful regulation by federal regulatory agencies and legislators, they are increasingly preempted by federal policymakers who seek to cater to the deregulatory desires of these global firms.

Why Care About Credit?

Access to fairly priced credit is a critical component of a community’s economic infrastructure. For families to become and remain home owners, credit is needed at fair prices and terms. For small businesses to maximize their productivity, they need fair credit to convert receivables into capital for continued production and to invest in necessary equipment. Consumers need reasonably priced credit to purchase automobiles and other durable goods. Greater access to fairly priced credit improves the efficiency and productivity of local and national economies. It increases what economists call the “velocity” of money, which then circulates more throughout the economy, distributing and magnifying the benefits of trade and commerce.

Access to credit is more than a macroeconomic issue. It affects individual families and particular neighborhoods. In the 1950s and 1960s, when blacks in many cities had difficulty obtaining credit as they began to increase their incomes, they were forced to purchase homes from real estate speculators on a “land contract” basis (Bradford and Marino 1977; Helper 1969, 45). Speculators would purchase homes at fairly low prices—sometimes obtained via blockbusting real estate techniques in which speculators would scare white home owners by warning of rapid racial change—and then sell houses, typically to black buyers, at inflated prices. These homes were financed not with formal mortgages but with abusive land contracts, under which the buyer would make monthly payments to the speculator/owner. These contracts did not allow for the buyer to build up owner equity in the home as he made monthly payments. Only after every scheduled payment over the life of the contract was paid did he obtain ownership. If a family missed just one, even one of the last payments, ownership could revert to the speculator.

Though many situations—including the ability of minorities to get home purchase loans—have improved due to fair lending laws and CRA, a new set of access-to-credit problems has arisen forty years later. Many of these patterns are the result of an explosion of new high-cost, high-risk, “fringe” lenders. In 2003, in a lower-income neighborhood on the South Side of Chicago known as “Back of the Yards,” Neighborhood Housing Services (NHS) of Chicago, a nonprofit community development lender, was working to save a community from what had become a foreclosure epidemic—one that has been repeated in many communities across the country. In NHS’s Back of the Yards target area, more than one in ten homes began the foreclosure process in 2002 alone (Neighborhood Reinvestment Corporation 2003). Approximately one-half of these home owners were expected to lose their homes through foreclosure. And in neighborhoods like this one, foreclosures often result in abandoned, boarded-up homes that lead to lower property values and increased crime. The bulk of these foreclosures were due to high-cost “subprime” loans, which are loans priced at higher rates and generally intended for borrowers with blemished credit. Significant numbers of subprime loans carry abusive terms and conditions.

Credit access also plays a crucial role in neighborhood economic development. Poor access to credit remains a significant barrier to small business development and growth among minority-owned firms and businesses located in modest-income urban neighborhoods. Bates (1993) has shown that levels of credit and capital are key determinants of business viability for small, young firms. Yet, even after controlling for a wide variety of firm and owner characteristics, including credit history, black firms are denied small business loans at twice the rate as white-owned firms (Bostic and Lampani 1999; Cavalluzzo, Cavalluzzo, and Wolken 1999). And firms located in black neighborhoods receive fewer loans than those in white neighborhoods, even after controlling for a variety of neighborhood characteristics, including the credit scores of local firms (Immergluck 2002).

The Urban Context for Community Reinvestment and Fair Lending

The economic and social conditions of many lower-income and minority urban neighborhoods in the United States deteriorated during the middle and later parts of the twentieth century (Jargowsky 1997; Zielenbach 2000). Many communities lost substantial amounts of population and jobs and saw poverty increase. One of the causes of these problems was industrial restructuring—changes in the technologies, methods, and locations of industry. In the first half of the twentieth century, growing or at least steady demand for industrial labor, combined with a strong union movement, provided a sellers’ market in industrial labor across the nation’s cities. This meant that even those with weaker connections to unions and job networks could often find living-wage jobs that would support their families and provide the income on which their neighborhoods depended. The emergence of international competition, the flight of jobs overseas, and changes in production technologies took their toll on lower-skilled and, particularly, minority workers. This economic restructuring was accompanied by a spatial restructuring of urban areas, with employers fleeing central-city locations for green-grass sites in far-off suburbs.

While deindustrialization and the suburbanization of employment were accelerating, residential suburbanization was also taking its toll on central-city neighborhoods. Suburbanization was not a new phenomenon in the post-World War II era, but it accelerated in many places (Jackson 1985). White flight out of older central-city neighborhoods was strong as blacks migrated into northern and Midwestern industrial cities (Lemann 1992). Blockbusting by real estate agents, redlining by banks and mortgage companies, and other forms of discrimination in real estate markets hastened the racial and economic polarization of metropolitan areas (Abrams 1955; Massey and Denton 1993).

Urban researchers and historians have argued about the importance of various causes of urban decline. Some argue that global and national economic forces, including shifts from manufacturing to service employment, international competition, and the demand for suburban space by homeowners and businesses, have been the primary drivers of urban decline (Wilson 1996). Others have argued that discrimination in housing and mortgage markets has been a larger factor (Massey and Denton 1993). Still others have pointed to public policy, especially federal policy, as a key promoter of suburban development and institutionalized redlining that were forces of urban decline (Jackson 1985).

Much has been made of the arguments between these different factions. However, the complexity of cities and the likely interactive and cumulative causation involved with urban problems will tend to preclude any strong consensus over which factors have been the most important. Once we examine any one cause of urban decline, we tend to find it related to at least two or three other causes. For example, it is very difficult to isolate a “demand” for outer suburban locations by manufacturers from a desire by discriminatory employers to avoid minority workers. Moreover, the debates over whether highway construction was in response to a demand by employers and new suburban residents or a cause of such development will rest primarily on one’s view of government’s role and responsibilities. Acknowledging the importance of economic restructuring on urban decline does not preclude the argument that a public policy significantly exacerbated urban decline or, in other cases, slowed it. Scholars often lack the humility to acknowledge that they cannot precisely measure the various contributions of different factors. In addition, many research methodologies work to model highly complex systems in reductionary ways, thereby constraining the potential findings in the research design itself.

Flows of private-sector credit have been important factors in shaping the vitality and prospects of urban communities. Disparities in access to credit and capital have played a key, but not always independent, role in urban decline, and efforts to reduce these disparities have had some significant positive impacts. While community reinvestment and fair lending are ingredients to a more complex recipe for urban revitalization, policies in this area have had demonstrable impacts.

In the face of daunting and complex urban problems and the political obstacles to their solutions, some may suggest that low- and moderate-income urban neighborhoods and their residents should be abandoned. But others are working to counter these trends, to spur investment and jobs for residents of central cities, and to rebuild communities. They recognize that policies that work to maintain or increase the social and economic isolation of these neighborhoods carry grave short- and long-term costs to entire metropolitan regions. In the short term, the lack of access to economic opportunity means more poorly educated workers, more crime, and greater tensions between those with resources and those without. In the long term, this isolation and the continuous fleeing of people and businesses with resources away from lower-income areas cannot be sustained either environmentally or economically. The residents of these communities provide the labor on which regional economies depend, and, to a large degree, these neighborhoods will provide the future middle-class consumers and home owners that will sustain the economy of tomorrow. But if these communities continue to be neglected, they will not constitute a strong labor force or have the ability to improve their economic status. The persistence of these economic inefficiencies and inequities creates a drag on regional economies and the entire nation.

While attacking these problems requires multiple and mixed approaches, one strategy that needs to be pursued more vigorously is improving access to fairly priced credit and financial services for home owners, home buyers, and small businesses in lower-income and minority communities. This will require reshaping the tools provided under CRA and fair lending laws and enforcing these regulations more aggressively.

The Politics of Banking and Deregulationist Ideology

Contrary to what many might assume, the history of banking and formal credit markets in the United States is filled with interesting stories of highly charged public policy debates and political struggles. Some of these struggles involved fundamental notions of societal organization, states’ rights versus centralized government, civil rights, and the appropriate power of the corporation. In many ways, access to credit has always been a controversial topic in the United States, from colonial-era arguments about the need for a central bank to current debates over predatory mortgage lending. The nature and specific subjects of the debates have changed, but the role of credit is such a powerful determinant of the life chances and economic opportunity of individuals and communities that, by their very nature, credit markets and their structure will always be politically contested. In her history of banking policy, Susan Hoffman argues that

Public policy has made banks…. The banking process is political. Banks … decide where credit will flow throughout society and thus what human initiatives will flourish and which will wither. People, ventures, regions win and lose. This is the stuff of high politics, not calculus. (Hoffman 2001, 2, 3)

Credit is so political in large part because it is a key and necessary instrument to accessing economic opportunity, generating income, and building wealth. It is instrumental and necessary for acquiring what the philosopher John Rawls referred to as “primary” economic goods (Rawls 1971, 90–95). Moreover, access to credit means more than access to current resources. It helps to determine future access to primary goods such as income, wealth, and a home. Credit is a potent signal of one’s life chances and the life chances of one’s children. In the twenty-first century, as credit history is increasingly used to determine everything from the price of auto insurance to the ability to rent an apartment or gain employment, and is distilled into one numerical score, credit access has become a sort of an economic opportunity rating. It is a label that can work to restrict one’s opportunities in all sorts of markets.

Credit is also the subject of political debate and social construction because its provision is so lucrative to banks, finance companies, and other suppliers. Political decisions regarding financial services regulation have driven the industrial structure of financial markets. At every stage in the historical development of U.S. financial markets, different types of firms have seen the prospects of great gain or great loss in public policy, and have waged correspondingly intense lobbying battles. Regulation has not just been a matter of an industry bearing the “cost” of consumer protection regulation. Rather, finance generally has been a highly public matter, with large doses of public-sector involvement in the design, regulation, and even management of the operations of banks and credit providers. Moreover, the close involvement of government in financial services has greatly benefited the sector. Banking and securities markets were nurtured by state and federal government throughout much of U.S. history because policymakers recognized how important these industries were to local and national economic development and opportunity.

Certainly, there have always been entrepreneurial responses in financial markets in the United States that have not been provoked by government action. That is a clear component of the mixed economy in U.S. financial services history. In the last three decades, however, there has been a deliberate and organized movement, aggressively promoted by the financial services sector, Congress, and many federal regulators, to reduce the public-sector oversight of the financial services sector. Those “deregulationists” arguing in favor of this shift suggest that such a system benefits from the efficiencies of freer markets.⁴ They apply the logic of a market for doughnuts or buttons to the market for home loans or small business credit. Less government involvement is almost always seen as a superior model for any form of interpersonal exchange. This is the neoclassical paradigm that has dominated so much of federal policy in the last thirty years, beginning with the strong deregulatory moves in the late 1970s and 1980s.

The recent shift to deregulationist ideology has been at least as political as any other phase of financial services history in the United States Some argue that the recent victory of deregulationist forces is related, both as a cause and as a result, to the increasing concentration of wealth in the United States. In a vicious circle, those owners of capital served well by deregulation push for even more deregulation. But Hays (1995), Hoffman (2001), and Stone (2001) argue that public policies are shaped by more than a simple competition of interests; they are shaped by the competition of ideas. I believe both inte...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of Tables and Figures
• Acknowledgments
• List of Acronyms
• 1. Introduction
• 2. The Visible Hand of Government in U.S. Credit Markets
• 3. Discrimination, Redlining, and Financial Restructuring in Business Credit Markets
• 4. A Brief History of Mortgage-Lending Discrimination and Redlining
• 5. From Fair Access to Credit to Access to Fair Credit
• 6. Mobilizing for Credit: Community Activism, Policy Adoption, and Implementation Through 1987
• 7. Community Reinvestment from 1988 to the End of the Twentieth Century: Struggles for Bank and Regulator Accountability
• 8. The Predatory Lending Policy Debate
• 9. The Community Reinvestment Act and Fair Lending Policy in the Twenty-first Century
• Notes
• Bibliography
• Index