A Renewed Crackdown on Redlining

Clea Benson, Business Week, May 9, 2011

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}

{snip}

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.

{snip}

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  • Question Diversity

    For those of you locals who might remember, Midwest Bank Centre used to be called Lemay Bank, and was mainly a South and Southwest St. Louis County concern. Therefore, it general service areas have very few blacks, so it stands to reason that very few blacks would apply for mortgages from this bank, and therefore, very few would have mortgages from this bank.

    Gateway Bank, the area’s only black-owned bank, never issued any subprime mortgages.

  • Eric

    Of course. Let’s play the same game that destroyed the economy the first time. Demand that banks give loans to blacks and browns that have no way or intention of repaying. Sheer madness.

  • Anonymous

    Liberals refuse to accept that their ideology is the direct cause of the housing bubble and the ensuing worldwide credit collapse, they won’t even admit to contributing to it, so of course they are ready to repeat history. Knowing that their constituents don’t pay taxes, they have little to lose if the economy collapses again. let’s hope the banks aren’t dumb enough to get in bed with the govt again, because Fannie Mae won’t be able to buy up all the bad loans, and the financial markets won’t be fooled twice.

  • AWG (AVERAGE WHITE GUY)

    In five years, after many blacks lose their homes to foreclosure, they will blame the banks for “predatory lending.”

  • E Pluribus Pluribus

    The key source of the lending discrimination myth is a Boston Fed study of 1992. This study has been debunked by four separate research teams. Timeline:

    1992 – July – A Federal Reserve Bank of Boston study indicates that “even after controlling for financial, employment, and neighborhood characteristics, black and Hispanic mortgage applicants in the Boston metropolitan area are roughly 60 percent more likely to be turned down than whites.” The study suggests racism is behind the higher loan denial rate.

    1993 – Forbes Magazine queries Boston Fed Senior Vice President and Research Director Alicia H. Munnell on the default rates of black and white mortgage holders in the Boston Fed’s 1992 study purporting to show that racism is behind the higher loan denial rate for blacks. The reporters learn that default rates on loans of whites and minorities are equal. This indicates no discrimination, they point out to Munnell. “[That] is a sophisticated point,” she replies. “You need that [lower default rates for blacks] as a confirming piece of evidence. And we don’t have it.”

    Forbes: Did you ever ask the question that if defaults appear to be more or less the same among blacks and whites, that points to mortgage lenders making rational decisions?

    Munnell: No . . . I do believe that discrimination occurs.

    Forbes: You have no evidence?

    Munnell: I do not have evidence . . . No one has evidence. (1)

    1996 – A study by the Federal Reserve System and academic specialists finds — like the 1993 Forbes investigation — no evidence “of substantial levels of bias in mortgage lending.” Quoting from the abstract of the study:

    “Results of the analysis fail to find evidence of better performance on loans granted to minority borrowers. Indeed, black borrowers are found, all else being equal, to exhibit a higher likelihood of mortgage default than other borrowers. These findings argue against allegations of substantial levels of bias in mortgage lending.”

    1998 – October – Economists Stan L. Liebowitz and Theodore Day investigate the 1992 Boston Fed study suggesting racism in the mortgage market. They are “shocked at the poor quality” of the the data:

    ‘“When we attempted to conduct a statistical analysis removing the impact of . . . obvious data errors, we found that the evidence of discrimination vanished. Without discrimination there would be no reason to try to ‘fix’ the mortgage market. Nevertheless, our work largely evaporated down the memory hole as government regulators got busy putting the results of the Boston Fed study to use in creating policy. That policy, simply put, was to weaken underwriting standards.”

    The two economists warn: Bad loans today will mean dispossessed minorities tomorrow:

    “After the warm and fuzzy glow of ‘flexible underwriting standards’ has worn off, we may discover that they are nothing more than standards that led to bad loans . . . If this is the case, current policy will not have helped its intended beneficiaries if in future years they are dispossessed from their homes due to an inability to make their mortgage payments.” (2)

    1999 – Finance professors at the University of Illinois and at Wichita State University disclose findings on the creditworthiness of minorities consistent with the 1993 Forbes report, the 1996 Federal Reserve study cited earlier, and the 1998 findings of Liebowitz and Day:

    “[E]verything else being the same, minority applicants are probably less creditworthy, on average, than whites. Therefore, in the absence of fair lending laws, it is likely that minorities would be denied loans more frequently than whites and would pay higher interest rates and fees on approved loans . . . [F]air-lending laws have the perverse effect of forcing lenders to cross-subsidize minority borrowers from the higher profits they earn on white borrowers. Such cross-subsidization is inherently ‘unfair’ because it works as a tax on one group that is used as a subsidy for another.”

    NOTES:

    1) “The Hidden Clue,” By Peter Brimelow and Leslie Spencer, VDARE.com, first published in Forbes, Jan 4, 1993.

    2) “Mortgage Lending to Minorities: Where’s the Bias?” by Theodore Day and Stan J. Liebowitz. Economic Inquiry, January 1998): 1–27.

  • GWS

    Just one of the reasons our country will repeat the financial crisis of 2008:

    The Libs are incapable of allowing anything, loans included, based on merit.

    If the races don’t balance out in whatever category they are measuring, “Racism” is the immediate call.

    The end result will be disaster when reality meets their wishful thinking.

    Libs never learn.

  • sbuffalonative

    “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 doesn’t matter to them. They happily destroy anything that doesn’t benefit them. If they can’t have what they want, no one can. They have the brain development of selfish toddlers.

  • Question Diversity

    3: Not only that, a lot of the constructs and maneuvers of the financial industry before 2008, such as credit default swaps, the “mortar” which made the “bricks” of affirmative action mortgage lending possible, are now either blatantly illegal, or are quasi-illegal, ironically thanks to the Dodd-Frank bill.

  • Eric D

    I think it would be useful to show how often banks extend credit and mortgages in primarily Asian communities. This could serve to show whether banks are discriminating against non-white people due to racism or simply extending credit to where they can reasonably expect to be repaid. (I tend to think that Asians are pretty good at repaying loans, although I don’t have data at my fingertips at this time to back it up.)

  • rjp

    Until laws that are enforced against giving a mortgage to someone who based on income history cannot afford it and against falsifying data to obtain a mortgage that the seeker’s current verifiable income cannot repay.

    People are going to have to go to “debtor’s prison”.

    That will never happen without some kind of a revolution.

  • Anonymous

    Redlining = Dangerous black neighbourhoods.

    The minority group are well organised and that’s why they will get what they want. The big financial guys are afraid of them and will pander without complaining. Oh, don’t forget – the government will stay on their ass too.

  • Anonymous

    Whites need to say enough is enough to preserve what is left of this country/Western civilization. Just stand firm, what is the government going to do? Simple logic, why should a bank/business keep giving to high risk borrowers which in turn put themselves at risk? It is a business not a welfare agency. Hopefully, the tide will change soon by the type of people running for political office that truly cares about this country. The blacks/hispanics will turn this country into a third world county and it still will not be enough. All they want are the free handouts. They do not care if they live in a hell hole once they run this country into the ground. Look no further than Mexico, Africa, Haiti, etc. One cannot fix inferior genes by money, social programs, Head Start, Race to the Top, affirmative action, etc.

    Lately, the media is running the brainwashing story of “freedom riders” during the “Civil Rights” era. That was the undoing of this country and the blacks themselves. Blacks were better off socially prior to the “Civil Rights”. They at least stayed married, had children after marriage, stayed in school, held down jobs, etc. Read what DuBois had to say about his own people (blacks). He observed that sudden emancipation of blacks after the Civil War led to more crime by blacks and disassociation to reality. He also advised his people to stop producing like vegetables. Quality was more important than quantity.

  • HH

    I am only surprised that it took this long! This one was about as predictable as they come, sadly.

  • Luke

    I must say that I am greatly disappointed by a quick scan of the comments posted thus far, because I see no mention of the angle on this that should be transparently obvious.

    Engage brains, fellow AR readers. Think: Who was primarily responsible for financing and funding the presidential campaigns of both Obama and McAmnestyMcCain? Goldman-Sachs, right? So, they hedged their bets and bought both horses in the 2008 race, which means they owned both sides of the coin. Right? So, since we all should know by now that the first subprime mortgage toxins were poisoned seeds that were deliberately planted during the Bush-Cheney-Rove administrations – and this trio of crooks were also heavily in bed with the Wall Street Bankster-gangsters, it is my strong belief that they knew that this whole scam would eventually blow up in their faces. Which was why they had to buy both Obama and McAmnestyMcCain.

    And, why was this necessary? Simple. Goldman-Sachs and the rest of their crooked banker pals had to have the POTUS in their pocket so they could (1) Avoid being prosecuted and thrown directly into jail, and (2) Use their financial control over the White House and Congress to finagle what was clearly a CRIMINAL transfer of all their bad debts – due to their subprime lending to unqualified minorities – onto the mostly white tax payers backs. End result? One of the biggest and most profitable criminal swindles in US history – with the full and criminal complicity of the US Government, over $27 TRILLION dollars of our hard earned money was handed to these crooked bankers, and the haughty arrogance of these swindlers was promptly displayed when they began to rub our noses in our own stupidity by awarding massive bonuses to themselves, using the very money that they and our criminal government stole from you and I.

    And, now – my instincts tell me that these greedy parasites are so full of themselves, so cocksure of themselves, so mind-numbingly arrogant for having gotten away with their thievery last time – that they want to pull the same rip-off all over again. And, Obama is helping to set the stage all over again.

    You know, many trained and experienced criminologists have written that criminals will often return to the scene of their original crime and try to repeat their past successes.

    Engage brains, fellow AR readers.

  • shaunantijihad

    Just replace the word “Community” with “Communist” and the article will make some sense. That both Communism and Fascism were originally funded by the secret owners of the Federal Reserve and the Bank of England should also be a wake up call that Communism in well advanced in the takeover of the West, after trampling over the respective constitutions of Western nations.

  • Anonymous

    To Comment #14: Actually, this article concerns pandering to black/hispanics. This pandering/catering goes back to the Kennedy era which then greatly expanded under Johnson/Great Society (Welfare State). Johnson had an inferiority complex next to the Kennedys. The loaning to high risk minorities greatly expanded under Clinton (the first Black president). Bush could not stop those loans otherwise the hollering of racism would be endless. The banks tremendously took advantage of a situation created and encouraged by Clinton. Mellon Bank at first resisted but Clinton as what would to done to the bank mentioned in this article would make doing business extremely difficult. As to the Feds, Bernanke initially refused to perceive how serious the subprime situation was. The only one sensing the possibility of a system collapse early on was Daimem of JP Morgan. Then eventually, Paulson tried to work with Congress to lessen the impact of a full blown collapse. Frank and others stood in his way. They wanted to continued the mindless high risk loaning. So it was the Democrats pandering for votes that created this subprime mess. Obama will continue the path in running this country to the ground.

  • white is right, black is whack

    Many blacks and hispanics displaying they want handouts, money, jobs, education without playing by the rules and without being held accountable. They want ‘equality’ but don’t want to be punished when they break the law. They want to dress and act like thugs, but don’t want us to have the freedom to disassociate ourselves from them. I’m against forced inequality as much as I am against forced equality. People need to be free to do business with who they want to or associate with who they want to without getting bullied or sued.

  • john

    As a retired new car dealer I’ve often wondered why the feds and state regulators don’t seem notice that blacks typically pay auto finance rates well in excess that of the public at large.

    This has absolutely nothing to do with discrimination, but is simply a reflection of their credit histories and bureau scores, which are generally far below those of most other racial and ethnic groups. To be sure, there are many exceptions, and these applicants are normally granted best rates by the banks and captive finance companies.

    But it’s pure fantasy that financing, whether of automobiles or homes, is function of race.

  • sedonaman

    The whole idea of a loan application is to ***discriminate*** between those more able and likely to repay and those who are less.

    Thomas Sowell, in an interview long before the collapse, stated that “default rates for blacks were about the same as that for whites” and that this is an indicator that black loan applicants were being evaluated essentially the same as whites, and “any lowering of the standards for black applicants will increase their default rate.”

    Which is exactly what happened. So, here we go again.

  • Anonymous

    16 — Anonymous at 12:27 PM on May 13

    The big problem with that post is that it is so well done as a selective review of the history. After 9/11, GW Bush got completely behind the mortgage run-up because it provided a political impression that he was leading an economic recovery. I personally recall him making the comments nationally that “Now all everyone can realize the American Dream of home ownership.” As long as people on any side of an issue are willing to refrain from frank, objective, honesty, they are perpetuating the problems that have already been caused and certainly do not impress those of us with better memories. I don’t see the hope in replacing one liar with another.

  • Hadenough

    Again, we have the typical liberal political protocol. Who can name a liberal government policy, scheme or program that’s been successful? How many government run agencies aren’t black holes that taxpayer money disappears down (Amtrak, the U.S. Postal Service)? Liberals are insane – they keep trying the same things over and over again hoping to get different results!

    When you refer to the good sense practice of lending institutions NOT to loan money to people with poor credit histories (blacks happen to have a disproportionate number with bad credit), you are engaging in a “sinister” and “racist” practice called redlining. Instead of blacks being held accountable for their bad behavior and poor choices, it’s now those evil and racist lending institutions who are at fault. Nothing blacks do is ever their fault in this country. It’s because of those racists out there that lurk under every white bed.

  • Anonymous

    Re #21:

    Who can name a liberal government policy, scheme or program that’s been successful?

    That question raises other questions: What do liberals consider successful? What are the liberals’ goals? What are the means used to achieve them? I don’t know.

    For example, liberals claim that they want to help the poor oppressed blacks, but the liberals have turned schools into playpens where blacks learn neither employment skills nor good work habits. Meanwhile liberals import millions of immigrants that compere for the jobs which blacks used to fill. I am perplexed.

  • Anonymous

    To post #20: What did you expect Bush to say? We have to stop the high risk loans to minorities? Bush came into office when Clinton’s fooling around in the last 8 years came into full fruition. From the economy, social programs to minorities, to the relaxed attitude toward terrorism. Did you forget, the economy was already tanking when Clinton left office? The economy under Bush was fine until Clinton’s social program of high risk loans to minorities hit the fan. Now we have another self serving Democrat sitting in the White House. Matter of fact, it is even worse, an affirmative action product all his life = questionable abilities. He was mainly elected due to his skin color. Logic and objectivity by whites went out the window. His main focus until 2012 will be how to get re-elected. He is clever in how he represents himself to appeal to foolish whites and self-centered hispanics.

  • Question Diversity

    23: “Stop?” Bush *accelerated* such mortgage lending. And he did so for lamestream conservative motivations — The Jack Kemp mush-brain notion that black ghettos were so bad because its denizens didn’t “own” their domiciles, and that if they only “owned” their houses, then they would have “skin in the game” and not commit as many violent crimes. (“Enterprise Zones,” proven to be a big flop, came out of the same Kemp mindset. In other words, ghetto blacks are poor because they don’t live within walking distance of jobs.) Of course, nobody really “owns” real estate, but that’s another discussion for another day.

    Too, not once in my life have I ever lived in an “owned” house. When I was growing up, my parents always lived in rental units, and in college then on my own, I always lived in dorms (technically a rental unit) and then and currently apartments or other rental property. (sarcasm)That obviously means I should run out and kill people and deal dope and rape women.(sarcasm)

    Ironically, to make affirmative action subprime lending possible, most previous logical time honored lending standards, such as a relatively hefty down payment, had to be set aside, because of their “disparate impact” on minorities. Therefore, for these minorities to have “skin in the game,” they literally didn’t have to have skin in the game.