A Renewed Crackdown on Redlining

Community activists in St. Louis became concerned a couple of years ago that local banks weren’t offering credit to the city’s poor and African American residents. So they formed a group called the St. Louis Equal Housing and Community Reinvestment Alliance and began writing complaint letters to federal regulators.

Apparently, someone in Washington took notice. The Federal Reserve has cited one of the group’s targets, Midwest BankCentre, a small bank that has been operating in St. Louis’s predominantly white, middle-class suburbs for over a century, for failing to issue home mortgages or open branches in disadvantaged areas. {snip}

Lawyers and bank consultants say regulators and the Obama Administration are scrutinizing financial institutions for a practice that last drew attention before the rise of subprime lending: redlining. The term dates from the 1930s, when the Federal Housing Administration drew up maps using red ink to delineate inner-city neighborhoods considered too risky for lending. Congress later passed laws banning lending discrimination on the basis of race and other characteristics. “The agencies have refocused on redlining because, in the wake of the subprime explosion and sudden implosion, they are looking at these disadvantaged neighborhoods and not seeing any credit access,” says Jo Ann Barefoot, co-chair at Treliant Risk Advisors in Washington, D.C., which consults with banks on regulatory issues.

The 1977 Community Reinvestment Act (CRA) requires banks to make loans in all the areas they serve, not just the wealthy ones. {snip}

At the Justice Dept., a new 20-person unit dedicated to fair lending issues received a record number of discrimination referrals from regulators in 2010 and has dozens of open cases, according to a recent agency report. Potential penalties can reach into the millions of dollars. {snip}

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Mortgage refinancing activity doubled in white neighborhoods but dropped sharply in minority neighborhoods in a sample of major U.S. cities in 2008 and 2009, according to Paying More for the American Dream, an April study by a group of seven community development nonprofits. {snip}

Bank lobbyists say the stepped-up government scrutiny could backfire if financial institutions decide to shrink their operations rather than yield to pressure to do business in areas that don’t make sense for them. “It would do a disservice to communities for a bank to suddenly pull back,” says Robert Rowe, vice-president and senior counsel at the American Bankers Assn.

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