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A Primer on Redlining: Racial gaps in lending persist despite CRA

More than half a century after redlining was abolished, the discriminatory policy continues to dictate the racial makeup of neighborhoods and hinder their prosperity. 

 

Compiled by Elevate Dayton

(Illustration: ©MQ-Illustrations/Adobe Stock)

 

Between 1935 and 1940, the Home Owners’ Loan Corporation, a federal agency,  legitimized racial discrimination by creating color-coded maps for cities across the country to indicate risk levels for long-term real estate investment. Neighborhoods that received the highest grade of A, colored green on the maps, were considered “best.” Those that received the lowest grade of D, colored red, were regarded as “hazardous,” the practice known as redlining. 

 

Urban areas with a large share of Black families were most likely to be redlined, while neighborhoods made up mostly of white families were most likely to be deemed “best” and colored green. In redlined neighborhoods, it was virtually impossible to get a loan.

 

Redlining was outlawed in the 1960s, and in 1977, Congress passed the Community Reinvestment Act (CRA) to combat its effects by requiring banks to meet the credit needs of people where they do business, especially low- and moderate-income neighborhoods. 

 

Yet redlining remains a major factor in the country’s already substantial wealth gap between Black and White families.

 

SEE RELATED STORY: Could a banking law designed to end redlining drive more capital into local journalism?

 

According to 2020 Census data, 8.25 million people live in neighborhoods identified by the federal government 80 years ago as “hazardous” and redlined since that time. More than three-quarters of these Americans identify as belonging to a minority group. The average redlined neighborhood is predominantly Black (32%) and Hispanic (30%). Black homeowners are nearly five times more likely to own in a redlined neighborhood than in a greenlined neighborhood, resulting in diminished home equity and overall economic inequality for Black families. 

 

Case in point: A typical homeowner in a neighborhood that was redlined for mortgage lending by the federal government has gained 52% less—or $212,023 less—in personal wealth generated by property value increases than one in a greenlined neighborhood over the past 40 years, according to a report from Redfin, the technology-powered real estate brokerage.

 

"More than half a century after it was abolished, redlining continues to dictate the racial makeup of neighborhoods and Black families still feel the socioeconomic effects of such a discriminatory housing policy," said Redfin chief economist Daryl Fairweather.

 

"Black families who were unable to secure housing loans in the neighborhoods where they lived have missed out on one of the major ways to build wealth in this country. And even families who were able to buy homes in their neighborhood after redlining ended haven't earned nearly as much home equity as people who bought homes in neighborhoods that were considered more valuable."

 

SEE RELATED STORY: Reinventing the Community Reinvestment Act: What's at stake for Dayton?

 

In 2020, Chicago public radio station WBEZ and the nonprofit newsroom City Bureau examined records for every home purchase loan made in Chicago that was reported to the federal government from 2012 through 2018 — 168,859 loans totaling $57.4 billion for residential properties ranging from condominiums and single-family homes to large apartment complexes. The loans were made by traditional banks but also “non-bank” mortgage companies, which now give out more than half of all home loans in Chicago.

 

Their reporting found that for every $1 banks loaned in Chicago’s White neighborhoods, they invested just 12 cents in the city’s Black neighborhoods and 13 cents in Latino areas. That’s despite the fact that there are similar numbers of majority-White, Black and Latino neighborhoods in the city. Lenders invested more in a single majority-white neighborhood—Lincoln Park—than they did in all of Chicago’s majority-black neighborhoods combined, their investigation found.

 

WBEZ and City Bureau also identified instances where banks take in millions of dollars in deposits but give out few home loans. For instance, JP Morgan Chase has two branches in Chatham that hold a total of $80 million in deposits, but from 2012 through 2018, the bank made just 23 home purchase loans there. That’s roughly three loans per year in the historically middle-class black neighborhood.

 

This kind of disparity is what CRA was created to address. Yet CRA exams do not currently factor in the race of borrowers or the racial makeup of neighborhoods when evaluating bank performance and assigning ratings. Exams will penalize banks if they engage in illegal discrimination, but exams must also assess the extent to which banks are serving people of color and communities of color. This has become a major rallying point for fair housing and lending advocates working to strengthen and modernize CRA.

 

According to the Federal Reserve Bank of Atlanta, here is what regulators do look at when evaluating a bank’s CRA compliance:

 

Standards for Large Banks

Large banks—those with total assets of $250 million or more or that are affiliates of holding companies with assets of $1 billion or more—are evaluated in three areas: lending, investment, and service.

 

Lending. When evaluating a bank's lending activities and the borrowers it reaches, examiners analyze loans for home mortgages, small businesses, small farms, and community development (as well as consumer loans, in some cases). They look at information about:

  • the total number and total dollar amount of loans;
  • the geographic distribution of loans—that is, the proportion of the bank's total loans made within its assessment area; how these loans are distributed among low-, moderate-, middle-, and upper income locations;
  • the characteristics of borrowers—how loans are distributed to people at various income levels and to small businesses and small farms;
  • the bank's activity in community development—how many and what dollar amount of loans benefit low- and moderate-income people or geographic areas? how many and what size loans promote small business or small farm development? how complex or creative are these loans?
  • whether the bank uses flexible lending practices to address the credit needs of low- or moderate-income individuals or neighborhoods.

Investment. When evaluating a bank's investments, examiners look not only at a bank's assessment area but also at a broader statewide or regional area surrounding it. Examiners want to know:

  • how much money the bank has invested,
  • how innovative or complex the investments are,
  • how well the investments respond to credit and community development needs, and
  • whether the investments are a different type from those provided by most other investors.

Service. When evaluating retail and community development services, examiners focus on how well these services help meet the credit needs of the institution's community. In the area of retail banking, examiners look at:

  • how branches are distributed throughout the community;
  • the bank's history of opening and closing branches, particularly those serving low- or moderate-income people or geographic areas;
  • what alternative systems (such as ATMs or telephone, computer, or by-mail banking services) the bank provides for delivering services to low- and moderate-income areas and individuals; and
  • whether the range of services provided meets the needs of various neighborhoods at all income levels.

Examiners also consider how responsive and creative a bank is in providing or helping other organizations provide financial services that address special credit needs in the community or region—for example, more affordable housing or more available credit.

 

Standards for Small Banks

Small banks—those with total assets of less than $250 million, either independent or an affiliate of a holding company with total assets of less than $1 billion—are evaluated by more streamlined standards than those used for larger banks. At a small bank, examiners look at:

  • the share of the bank's deposits used to make loans,
  • the percentage of loans made within the bank's assessment area,
  • its record of lending to borrowers of different income levels as well as businesses and farms of different sizes,
  • the geographic distribution of its loans, and
  • its record of taking action in response to written complaints about its performance in helping meet the community's credit needs.

Sources: National Community Reinvestment CoalitionWBEZFederal Reserve Bank of Atlanta


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