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Reinventing the Community Reinvestment Act: What’s at stake for Dayton?

Of the 100 CRA-covered banks that originated loans in Montgomery County in 2020, fewer than half loaned money to small businesses.


By Stephen Starr, Elevate Dayton


In 1977, Congress passed the Community Reinvestment Act (CRA) to combat redlining—a once government-sanctioned practice that intentionally restricted investment in parts of American cities based largely on the race of the people who lived there—and other forms of discrimination. 


This summer, CRA is undergoing its first major update since 1995, and many see it as a critical opportunity to ensure an equitable economic recovery for lower-income neighborhoods and communities of color have been the hardest hit by COVID-19. Today, Aug. 5, is the deadline for commenting on the new rules.


Many of the proposed changes are designed to expand access to credit, investment, and banking services in low- and moderate-income communities (LMI), which are predominantly communities of color. These communities, not coincidentally, are the same ones disproportionately affected by the COVID-19 pandemic.


“The CRA is one of our most important tools to improve financial inclusion in communities across America,” Federal Reserve Vice-Chair Lael Brainard said in May, “so it is critical to get reform right.”


When it comes to securing mortgages, it’s well-documented that minority communities in the Dayton region have suffered through some of the country’s worst redlining. While mortgage and business loans flowed to White families, allowing them to purchase new homes and build equity, families living in redlined areas were denied the same opportunity, resulting in low rates of homeownership that has continued to exacerbate the wealth divide between White and minority households in the region.


Such discriminatory lending practices aren’t limited to would-be homeowners: entrepreneurs and business owners from minority backgrounds continue to deal with bias and other systemic barriers when trying to access bank financing. 


CRA provides a mechanism for monitoring lending practices and ensuring that banks meet the credit needs of the communities where they do business, especially LMI neighborhoods.


Every three years, banks are evaluated by federal regulators—the Federal Deposit Insurance Corporation (FDIC), Federal Reserve Board, and the Office of the Comptroller of the Currency (OCC), and assigned one of four CRA ratings: outstanding, satisfactory, needs to improve, or substantial noncompliance. Poor ratings can negatively affect a bank’s application for new charters, new branches or relocation of an existing branch, bank mergers and consolidations, and other similar corporate activities.


But CRA isn’t just about compliance. It’s a powerful tool to drive housing and business development and also to improve conditions that affect a wide range of health risks and outcomes, according to the National Community Reinvestment Coalition (NCRC), a nonprofit that champions fairness in access to banking, housing and finance.


Despite CRA, wealth and lending gaps persist

Since 1996, according to an NCRC analysis of bank lending data, CRA-covered banks issued almost 29 million small business loans in LMI tracts, totaling $1.156 trillion, and issued another $1.179 trillion in community development loans that support affordable housing and economic development projects benefiting LMI communities. Between 2009 and 2020, CRA-covered banks loaned nearly $653 million to businesses in LMI Census tracts, according to federal data.


However, redlining continues to have lasting and devastating impacts on low-income communities and people of color. A recent report on the legacy of redlining from The Digital Scholarship Lab and NCRC shows how the racial segregation that resulted from historic redlining practices impacts health through poor housing conditions, disparities in educational and employment opportunities, inadequate transportation infrastructure, access to healthcare and economic instability. Moreover, the racial wealth divide is not improving, and inequality is, by many measures, increasing.


A tool on NCRC's website shows how much CRA-qualified lending occurred in Dayton from 2009-2020.


As federal agencies consider CRA modernization, advocates say expanding the definition of community and economic development to include financing for civic infrastructure like childcare centersfood banksequitable mediadisaster preparedness and climate resiliency is critical to boosting long-term economic growth in the LMI communities the agencies aim to aid. Banks, they argue, will be more likely to invest in such programs if they can be sure they will receive CRA credit. 


Incentives, however, are only one aspect of reform. Advocates are also pushing financial agencies to make CRA exams more rigorous, expand data collection and improve communication around merger reviews, and to ensure that banks caught discriminating fail their CRA exams


In 2020, NCRC published a detailed report highlighting how lending institutions in the Los Angeles region continue to discriminate against Black and Hispanic women-owned businesses. 


“Race should be explicitly listed in CRA as an area that banks should be graded on.”— Jason Richardson, NCRC senior director of research 


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.


“We feel that race should be explicitly listed in CRA as an area that banks should be graded on,” says Jason Richardson, senior director of research at the NCRC.


Moreover, experts say that grade inflation—when financial institutions receive positive ranking for adhering to CRA without significantly supporting communities—is an issue. Ninety-eight percent of banks get a passing grade; most of them get outstanding certifications.


“That’s not really an effective measure of how well they are doing if everybody gets an ‘A’,” says Richardson.


Evidence of banking discrimination hasn’t been confined to California.


In 2016, the Department of Justice settled with Union Savings and Guardian Savings banks—two institutions that share common ownership and operate in and around the Dayton region—following accusations of their redlining practices in majority-Black districts of Dayton, Columbus, Cincinnati and Indianapolis between at least 2010 and 2014.


The DOJ’s complaint alleged that “the banks located their branches to avoid serving majority-black neighborhoods; trained and incentivized their loan officers to focus their activities in predominantly white neighborhoods.”


Part of the 2016 settlement required that the banks open two new branches.


Repeated calls and emails to the CRA officer and the community development officer for Union Savings and Guardian Savings banks by Elevate Dayton, seeking details on the location of these branches and if/when they have opened, among other information, went unreturned.


While more banks are focusing their operations on online services, access to physical branches still matters, especially in low-income communities, where access to the internet may not be prevalent, experts say.


“We are in a period where a lot of merger activity in the banking world is taking place, which in turn is leading to increasing numbers of bank branches closing,” says NCRC’s Richardson. “That often hits low-income communities hardest.”


CRA lending in Dayton area

Because banks are not currently required to collect and report racial and gender data under CRA, we do not know if local banks are meeting the credit needs of women and entrepreneurs of color. But the data does make it possible to see which banks are loaning—or not loaning—money to small businesses.


An Elevate Dayton analysis of CRA data shows that of the 100 small business lenders that originated loans in Montgomery County in 2020, only 47 loaned any money to businesses with gross annual revenues of $1 million or less. And of the $686 million in loans originated, only 26 percent worth $176 million went to small businesses.


The top small business lender was PNC Bank, which made 590 small business loans worth $37 million, followed by Fifth Third Bank (446 loans worth $30 million), The Huntington National Bank (385 loans worth $28 million), Civista Banks (175 loans worth $16 million), and JP Morgan Chase (436 worth $9 million).


Fifth Third Bank, with 21 branches in Montgomery County, is the Dayton area’s largest financial institution. Of the 749 loans the bank issued in 2020, 60 percent went to businesses with revenues of $1 million or less. Fifth Third Bank received a CRA score of ‘outstanding’ in 2016.


By comparison, JPMorgan Chase, the second-largest bank in Montgomery County and which has a ‘satisfactory’ CRA rating, issued a similar number of loans but for one-third the investment made by Fifth Third Bank.


Last October, Fifth Third Bank announced it would close five area branches. Fifth Third’s next CRA exam is scheduled to be held this year. Several emails and voicemails left with Fifth Third Bank’s community development and diversity officer went unanswered.


Fifth Third isn’t the only bank that has closed branches. In the past two years, KeyBank and JP Morgan Chase both closed branches in downtown Dayton, an area where 65 percent of residents live in LMI neighborhoods.


Such changes to the financial landscape not only disproportionately affect low- and moderate-income residents, they raise questions about the CRA’s current assessment architecture.


“The assessment area issue is based on the concept of banking that existed in 1977, which is that banking was represented by the branch,” says Richardson. “Imagine a world where there are very few bank branches, and we still regulate banks based on where they are. That doesn’t make a lot of sense.”


Data from the Federal Financial Institutions Examination Council analyzed by Elevate Dayton displays some telling details about where banks are giving business loans—and where they are not.


In one tract east of Salem Avenue in West Dayton that encompasses the district of Wesleyan Hill, a single small business loan—defined as a loan made to an organization with a gross income $1 million or less—of $3,000 was originated in 2020. Seventy-nine percent of residents there are considered low- or moderate-income earners. Another tract in West Dayton, saw two loans of just $5,000 originated in 2020. Just over half of residents in that tract are considered low- or moderate-income residents.


Some tracts may encompass residential areas and therefore contain fewer businesses, while others may be business hubs. Still, these figures are in sharp contrast with, for example, a tract in Centerville (no. 0404.01), south of Dayton, where 21 percent of residents are considered to be low- or moderate-income earners and where 203 small businesses received loans worth $13.6 million—an average of $67,000 each—in 2020.


“A lot of businesses we interact with are self-censoring, stopping themselves from applying for financing, with the presumption that they will be turned down anyway,” says David Lyttle, construction specialist at the Minority Business Assistance Center, a component of the Ohio Development Services Agency.


At the same time, Lyttle believes it’s important for entrepreneurs to keep trying.


“You’re crippling yourself by not exploring the possibility of financing.”


Are you a small business owner? Learn more about the Community Reinvestment Act and what it means for your business here.

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