Homeownership is a hallmark of the American Dream; it’s one of the few paths to building generational wealth and achieving financial freedom. Unfortunately, for many, it can feel like a pipedream.
According to a recent report from the U.S. Census, the homeownership rate has dropped to 63.1%, its lowest rate since 1970. Moreover, the outlook for individuals from minority communities is even more bleak. Based on a report from the National Association of Realtors in 2021, the homeownership rate among Black homeowners (43.6%) and Hispanic homeowners (50.6%) significantly lagged behind Asian homeowners (62.8%) and white homeowners (72.7%).
Much of the gap can be attributed to historical policies and practices, such as redlining, that prevented minorities from buying homes in certain areas, regardless of income level. As a result, individuals from underserved communities were denied the same wealth-generating opportunities. While many of those policies and practices are now illegal, homeownership still feels unattainable for some consumers.
Increasing the homeownership rate — particularly among diverse communities — is a marker of progress for our country. Closing the gap is paramount to uplifting individuals and households from underserved communities. We have a responsibility as a mortgage and financial services industry to drive meaningful change and create a more equitable path to homeownership.
Driving homeownership change requires resolve and education
While there are programs designed to create a path to homeownership for low- and moderate-income families, some of these programs haven’t gone far enough. For example, some families may be able to access down-payment assistance through non-profits and lenders, however, those families frequently need more financial assistance to maintain and remain in their homes over the course of many years. Without the additional help, some families may lose their homes.
Quite frankly, providing access to financial resources is only part of the homeownership equation.
Based on a recent Experian survey comparing the experiences of Black, Hispanic and white consumers, one barrier for Black and Hispanic consumers aspiring to become homeowners is not knowing where to start. In addition, 58% of Black and Hispanic consumers who were denied a mortgage do not know what they need to do to get approved in the future.
There’s a tremendous opportunity for mortgage lenders, non-profits and other financial services participants to redefine our financial inclusion efforts. In addition to addressing financial hurdles, we need to tackle some of the other barriers to closing the homeownership gap, including financial education. This could mean examining the types of questions individuals have about certain products or services, or meeting with community leaders to better understand the challenges that underserved communities are facing.
Individuals and households from underserved communities welcome the opportunity to learn about basic financial concepts, including how to navigate the housing market. Listening to the challenges they encounter, and imparting knowledge is how the mortgage industry can help them prepare to become homeowners.
For example, HomeFree-USA’s “Fast Track to Homeownership” program gets renters ready for mortgage approval and homeownership. Its intermediary network oversees 53 affiliated community and faith-based housing counseling agencies across the nation.
Financial educational resources, such as tips for building and maintaining good credit, that is customized to each community, coupled with classes that provide individuals with financial knowledge and access to tools, can help them to boost their credit score and grow the overall homeownership rate. Even something as fundamental as understanding the various tax refunds for homeowners who are eligible can make a huge impact on new homebuyers.
Inclusion cannot happen in a vacuum. Closing the homeownership gap among diverse populations requires a long-term vision and commitment from stakeholders across the financial services community. Providing access to financial assistance and the knowledge to navigate the housing market better prepares consumers to become first-time homeowners, and more importantly, to begin building generational wealth.
Wil Lewis is the global chief diversity, equity, inclusion and talent acquisition officer for Experian. Gwen Garnett is the executive director for HomeFree-USA.
WASHINGTON — The Bank Policy Institute and the American Bankers Association penned a joint letter Tuesday urging federal bank regulators to delay finalizing the most sweeping revisions to the Community Reinvestment Act — an anti-redlining bill — in decades.
The letter, sent by BPI and ABA to the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency suggested regulators should delay any final CRA rule until the agencies’ joint Basel III capital rules are finalized. They posited regulators had not considered how the new capital requirements lower the incentive for banks to engage in CRA activities like low down payment mortgages to low-income families.
“The proposed capital rules would reduce incentives to engage in mortgage lending, which is central to the CRA programs of many banks,” they said. “Many banks offer low down payment mortgages as a means of meeting the credit needs of low- and moderate-income families.”
In addition to asking regulators to pause the CRA rule to accommodate the likely reduction in mortgage lending, the letter also said that a constitutional challenge to the Consumer Financial Protection Bureau’s funding structure should give regulators pause as they move ahead with a final rule. The banking industry has previously expressed opposition to the CRA revamp on the grounds it oversteps congressional authority.
A Texas district court judge last month temporarily barred the CFPB from enforcing its 1071 rule until after the Supreme Court rules on the constitutionality of the CFPB’s funding structure sometime next year.
“The banking agencies should delay finalization of the CRA rules until a final determination is made regarding the status of the rules promulgated under Section 1071, which will affect how the agencies administer certain aspects of the CRA rules,” the banking groups said.
While the necessity for a CRA update is widely acknowledged, the banking industry has expressed louder opposition as new Basel III endgame requirements and post-banking crisis reforms coincide with the new CRA standards.
In a comment letter in August, 2022 the Bank Policy Institute said the agencies’ joint proposed rule exceeded statutory mandate, added needless complexity and broad application and was overly punitive in its application toward banks. Another major trade group, the American Bankers Association, made similar claims in an August comment letter, saying the proposal missed the mark. ABA said they were concerned that significant numbers of banks would need to invest more in their retail lending departments to pass retail lending examinations under the new rule.
The Community Reinvestment Act was passed in 1977 to bar banks from accepting deposits from lower-income communities without making commensurate levels of loans to those communities — a problem for many communities of color in the first years since explicit racial discrimination in lending was outlawed. The law requires banks to make loans to low- and moderate- income borrowers in the institution’s “assessment area,” defined as areas where the bank has its headquarters, branches or deposit-taking ATMs.
Banks are assessed for compliance at least every five years by their primary regulator. Banks are graded in three areas: lending, investment and service, weighted as 50%, 25% and 25% of the examination respectively. Banks are then assigned a rating of “outstanding,” “satisfactory,” “needs to improve” or “noncompliant” based on their performance.
If a bank is deemed to have less than a “satisfactory” rating, then it may not merge with or acquire another banking institution or modify its charter until it achieves compliance. But critics have argued that most banks receive either an outstanding or satisfactory rating, meaning that virtually no banks face the regulatory burdens that the CRA can impose.
Former Comptroller of the Currency Joseph Otting sought to reform the implementation of the CRA during the Trump administration, but community advocates argued that his reforms were too favorable to banks and would yield little additional investment in the communities that need it the most. Bank regulators issued their revised proposal last year. — John Heltman contributed to this report
Townstone Financial filed a response to the Consumer Financial Protection Bureau appealing the dismissal of a redlining suit it brought against the mortgage lender in 2020.
In a brief filed Aug. 14, the Chicago mortgage lender argued the Seventh Circuit Court of Appeals should affirm the U.S. District Court for the Northern District of Illinois decision, which granted the lender a victory and rejected the bureau’s argument that an anti-discrimination law protects prospective borrowers.
At the time, the District Court ruled that government watchdog’s suit was invalid because the Equal Credit Opportunity Act applies only to home loan applicants, not to potential applicants.
Richard Horn, co-managing partner at Garris Horn LLP and legal counsel for Townstone, called the CFPB’s appeal “an uphill battle” for the bureau and its “arguments weak.”
He noted he was not fully surprised the agency appealed the case because of the “level of hubris internally.”
“The [CFPB] may have some blinders to their legal risks because it doesn’t affect any of the staff there internally…everyone is getting paid and no one is getting fired,” he said. “If the CFPB loses, which we firmly believe they will, they could also appeal to the Supreme Court, so this could go on for a while.”
The CFPB declined to comment.
The Federal Trade Commission, however, did provide input in early June. An amicus brief authored by James Doty, an attorney for the FTC, said the “Congress’s aim of equal access to credit would be a nullity if creditors could blatantly broadcast to protected classes that their applications were not welcome.”
“In upending almost fifty years of law, the district court ignored Congress’s plain language directing regulators to further ECOA’s “purpose” and prevent its “evasion,” Doty’s letter reads.
The suit, launched by the government watchdog almost half a decade ago, accused Townstone of engaging in illegal redlining by discouraging prospective Black applicants from applying for home loans.
The bureau’s complaint alleged that from 2014 through 2017, the company’s CEO and president made statements that “discouraged prospective applicants living in African-American neighborhoods in the Chicago MSA from applying to Townstone for mortgage loans.”
Such alleged remarks included the company’s CEO describing the South Side of Chicago between Friday and Monday as “hoodlum weekend” and that the police are “the only ones between that turning into a real war zone and keeping it where it’s kind of at.”
In February, Judge Franklin Valderrama of the Illinois federal court gave Townstone a victory.
The case was dismissed with prejudice, which meant the CFPB could not refile the complaint. However, the Bureau still maintained a right to appeal. On April 3, it filed a notice with the Seventh Circuit Court of Appeals stating it would do that. The filing did not go into the specific reasons it elected to challenge Judge Valderrama’s ruling.
Two advocacy groups are pushing for a state version of the federal Community Reinvestment Act to ensure more equitable treatment of people of color by home lenders.
In Maryland, Black and Latino applicants were denied home loans at a rate 1.6 times higher than white applicants, according to data from the National Community Reinvestment Coalition from 2018 to 2020. In the city of Baltimore, Black applicants were rejected 2.1 times more than white applicants.
Only half of the top 10 mortgage lenders in Maryland were required to meet CRA guidelines, according to the coalition and Economic Action Maryland.
The federal CRA focused on the credit needs of low- and moderate-income communities, but it does not require many lenders to reinvest in communities of color. And, according to the Consumer Financial Protection Bureau, 60 to 70% of mortgages originated with institutions not covered by the federal law, including credit unions and home mortgage companies.
This significantly affects a city like Baltimore, where 33% of loans went to African American borrowers despite the city being 62% Black, according to the coalition.
“Credit unions have a significantly higher denial rate for borrowers of color than the financial institutions that are covered by CRA like banks and the non-mortgage lenders,” said Marceline White, executive director of the program.
“In a state like Maryland where we know Prince George’s County is one of the wealthiest majority-Black counties in the country, it’s disturbing to see these kinds of denial rates across the state,” White added.
Advocates say a state-level CRA would complement the federal law by assessing performance in individual counties and addressing underserved communities.
A Maryland CRA would apply to banks and credit unions with about $46 billion in assets and cover mortgage companies that made more than 68,000 loans over three years, according to the National Community Reinvestment Coalition.
“The reason why you want this is because not all banks and credit unions are doing a great job in serving underserved communities,” said Josh Silver, a senior fellow with the coalition. “So you want to encourage the ones that are behind to do better.”
President Jimmy Carter signed the CRA into law in 1977, nine years after Congress passed the Fair Housing Act, which outlawed the discriminatory practice known as redlining. The CRA focused on the credit needs of low- and moderate-income communities, as well as curbing discriminatory bank lending through loans, investments, products and services.
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“The banking industry has changed dramatically since 1977 and emerging technologies as well as the growth of non-bank lenders means there is a need to modernize, expand, and strengthen CRA to meet the needs of our communities and marketplace today,” Economic Action Maryland said in its position paper.
And data shows that “race is a more significant predictor of denial than income or creditworthiness,” the group said.
Lenders subject to the CRA are overseen by the Federal Deposit Insurance Corp., the Federal Reserve Board and the Office of the Comptroller of the Currency. These regulators provide information on the banks they oversee, as well as the banks’ CRA ratings and performance evaluations.
On a federal level, banks pass their exams around 98% of the time even as “bank lending patterns continue to exacerbate existing racial inequalities,” according to Economic Action Maryland.
The advocacy group has called for establishing CRA requirements for mortgage companies and credit unions, expanding grading requirements to include “assessments of lending in distressed or underserved communities or populations,” examining performance by county, and creating stronger enforcement mechanisms.
“The banks that are doing better are required by law to make sure that they are trying to reduce these kind of lending disparities,” White said. “If they want to grow and merge with another organization, having a poor record could affect their ability to do so.”
Maryland would not be the first state to enact a state-level CRA. Connecticut, Massachusetts, New York and Illinois have extended their own regulations to non-banks and credit unions. Massachusetts was the first to do so.
After the enactment of the Massachusetts CRA, the number of both Black and Hispanic credit union applicants rose significantly from 2019 to 2020, according to the Massachusetts government.
With Democratic Gov. Wes Moore’s swearing in this year, there is hope among advocates that Maryland will join the list of states with a state-level CRA in the next year or two.
“We’re working with Economic Action Maryland and the state legislature for introducing a bill, hopefully in the next session,” Silver said of the coalition. “Obviously, we hope the legislature passes it and Governor Moore signs it.”
Moore’s office did not respond to a request for comment.
Americans take today’s selection of mortgages for granted, but financing a home is a much different experience than it was a century ago
By
Matthew Wells
The furniture industry was booming in Greensboro, N.C., 100 years ago. A furniture craftsman making a solid, steady income might have wanted to buy a home and build up some equity. But the homebuying process then looked very little like it does today. To finance that purchase, the furniture maker first would need to scrape together as much as 40 percent for a down payment, even with good credit. He might then head to a local building and loan association (B&L), where he would hope to get a loan that he would be able to pay off in no more than a dozen years.
Today’s mortgage market, by contrast, would offer that furniture maker a wide range of more attractive options. Instead of going to the local B&L, the furniture maker could walk into a bank or connect with a mortgage broker who could be in town or on the other side of the country. No longer would such a large down payment be necessary; 20 percent would suffice, and it could be less with mortgage insurance — even zero dollars down if the furniture maker were also a veteran. Further, the repayment period would be set at either 15 or 30 years, and, depending on what worked best for the furniture maker, the interest rate could be fixed or fluctuate through the duration of the loan.
The modern mortgage in all its variations is the product of a complicated history. Local, state, national, and even international actors all competing for profits have existed alongside an increasingly active federal government that for almost a century has sought to make the benefits of homeownership accessible to more Americans, even through economic collapse and crises. Both despite and because of this history, over 65 percent of Americans — most of whom carry or carried a mortgage previously — now own the home where they live.
The Early Era of Private Financing
Prior to 1930, the government was not involved in the mortgage market, leaving only a few private options for aspiring homeowners looking for financing. While loans between individuals for homes were common, building and loan associations would become the dominant institutional mortgage financiers during this period.
B&Ls commonly used what was known as a “share accumulation” contract. Under this complicated mortgage structure, if a borrower needed a loan for $1,000, he would subscribe to the association for five shares at $200 maturity value each, and he would accumulate those shares by paying weekly or monthly installments into an account held at the association. These payments would pay for the shares along with the interest on the loan, and the B&L would also pay out dividends kept in the share account. The dividends determined the duration of the loan, but in good economic times, a borrower would expect it to take about 12 years to accumulate enough money through the dividends and deposits to repay the entire $1,000 loan all at once; he would then own the property outright.
An import from a rapidly industrializing Great Britain in the 1830s, B&Ls had been operating mainly in the Northeast and Midwest until the 1880s, when, coupled with a lack of competition and rapid urbanization around the country, their presence increased significantly. In 1893, for example, 5,600 B&Ls were in operation in every state and in more than 1,000 counties and 2,000 cities. Some 1.4 million Americans were members of B&Ls and about one in eight nonfarm owner-occupied homes was financed through them. These numbers would peak in 1927, with 11.3 million members (out of a total population of 119 million) belonging to 12,804 associations that held a total of $7.2 billion in assets.
Despite their popularity, B&Ls had a notable drawback: Their borrowers were exposed to significant credit risk. If a B&L’s loan portfolio suffered, dividend accrual could slow, extending the amount of time it would take for members to pay off their loans. In extreme cases, retained dividends could be taken away or the value of outstanding shares could be written down, taking borrowers further away from final repayment.
“Imagine you are in year 11 of what should be a 12-year repayment period and you’ve borrowed $2,000 and you’ve got $1,800 of it in your account,” says Kenneth Snowden, an economist at the University of North Carolina, Greensboro, “but then the B&L goes belly up. That would be a disaster.”
The industry downplayed the issue. While acknowledging that “It is possible in the event of failure under the regular [share accumulation] plan that … the borrower would still be liable for the total amount of his loan,” the authors of a 1925 industry publication still maintained, “It makes very little practical difference because of the small likelihood of failure.”
Aside from the B&Ls, there were few other institutional lending options for individuals looking for mortgage financing. The National Bank Act of 1864 barred commercial banks from writing mortgages, but life insurance companies and mutual savings banks were active lenders. They were, however, heavily regulated and often barred from lending across state lines or beyond certain distances from their location.
But the money to finance the building boom of the second half of the 19th century had to come from somewhere. Unconstrained by geographic boundaries or the law, mortgage companies and trusts sprouted up in the 1870s, filling this need through another innovation from Europe: the mortgage-backed security (MBS). One of the first such firms, the United States Mortgage Company, was founded in 1871. Boasting a New York board of directors that included the likes of J. Pierpont Morgan, the company wrote its own mortgages, and then issued bonds or securities that equaled the value of all the mortgages it held. It made money by charging interest on loans at a greater rate than what it paid out on its bonds. The company was vast: It established local lending boards throughout the country to handle loan origination, pricing, and credit quality, but it also had a European-based board comprised of counts and barons to manage the sale of those bonds on the continent.
Image : Library of Congress, Prints & Photographs Division, FSA/OWI collection [LC-DIG-FSA-8A02884]
A couple moves into a new home in Aberdeen Gardens in Newport News, Va., in 1937. Aberdeen Gardens was built as part of a New Deal housing program during the Great Depression.
New Competition From Depression-Era Reforms
When the Great Depression hit, the mortgage system ground to a halt, as the collapse of home prices and massive unemployment led to widespread foreclosures. This, in turn, led to a decline in homeownership and exposed the weaknesses in the existing mortgage finance system. In response, the Roosevelt administration pursued several strategies to restore the home mortgage market and encourage lending and borrowing. These efforts created a system of uneasy coexistence between a reformed private mortgage market and a new player — the federal government.
The Home Owners’ Loan Corporation (HOLC) was created in 1933 to assist people who could no longer afford to make payments on their homes from foreclosure. To do so, the HOLC took the drastic step of issuing bonds and then using the funds to purchase mortgages of homes, and then refinancing those loans. It could only purchase mortgages on homes under $20,000 in value, but between 1933 and 1936, the HOLC would write and hold approximately 1 million loans, representing around 10 percent of all nonfarm owner-occupied homes in the country. Around 200,000 borrowers would still ultimately end up in foreclosure, but over 800,000 people were able to successfully stay in their homes and repay their HOLC loans. (The HOLC is also widely associated with the practice of redlining, although scholars debate its lasting influence on lending.) At the same time, the HOLC standardized the 15-year fully amortized loan still in use today. In contrast to the complicated share accumulation loans used by the B&Ls, these loans were repaid on a fixed schedule in which monthly payments spread across a set time period went directly toward reducing the principal on the loan as well as the interest.
While the HOLC was responsible for keeping people in their homes, the Federal Housing Administration (FHA) was created as part of the National Housing Act of 1934 to give lenders, who had become risk averse since the Depression hit, the confidence to lend again. It did so through several innovations which, while intended to “prime the pump” in the short term, resulted in lasting reforms to the mortgage market. In particular, all FHA-backed mortgages were long term (that is, 20 to 30 years) fully amortized loans and required as little as a 10 percent down payment. Relative to the loans with short repayment periods, these terms were undoubtedly attractive to would-be borrowers, leading the other private institutional lenders to adopt similar mortgage structures to remain competitive.
During the 1930s, the building and loan associations began to evolve into savings and loan associations (S&L) and were granted federal charters. As a result, these associations had to adhere to certain regulatory requirements, including a mandate to make only fully amortized loans and caps on the amount of interest they could pay on deposits. They were also required to participate in the Federal Savings and Loan Insurance Corporation (FSLIC), which, in theory, meant that their members’ deposits were guaranteed and would no longer be subject to the risk that characterized the pre-Depression era.
The B&Ls and S&Ls vehemently opposed the creation of the FHA, as it both opened competition in the market and created a new bureaucracy that they argued was unnecessary. Their first concern was competition. If the FHA provided insurance to all institutional lenders, the associations believed they would no longer dominate the long-term mortgage loan market, as they had for almost a century. Despite intense lobbying in opposition to the creation of the FHA, the S&Ls lost that battle, and commercial banks, which had been able to make mortgage loans since 1913, ended up making by far the biggest share of FHA-insured loans, accounting for 70 percent of all FHA loans in 1935. The associations also were loath to follow all the regulations and bureaucracy that were required for the FHA to guarantee loans.
“The associations had been underwriting loans successfully for 60 years. FHA created a whole new bureaucracy of how to underwrite loans because they had a manual that was 500 pages long,” notes Snowden. “They don’t want all that red tape. They don’t want someone telling them how many inches apart their studs have to be. They had their own appraisers and underwriting program. So there really were competing networks.”
As a result of these two sources of opposition, only 789 out of almost 7,000 associations were using FHA insurance in 1940.
In 1938, the housing market was still lagging in its recovery relative to other sectors of the economy. To further open the flow of capital to homebuyers, the government chartered the Federal National Mortgage Association, or Fannie Mae. Known as a government sponsored-enterprise, or GSE, Fannie Mae purchased FHA-guaranteed loans from mortgage lenders and kept them in its own portfolio. (Much later, starting in the 1980s, it would sell them as MBS on the secondary market.)
The Postwar Homeownership Boom
In 1940, about 44 percent of Americans owned their home. Two decades later, that number had risen to 62 percent. Daniel Fetter, an economist at Stanford University, argued in a 2014 paper that this increase was driven by rising real incomes, favorable tax treatment of owner-occupied housing, and perhaps most importantly, the widespread adoption of the long-term, fully amortized, low-down-payment mortgage. In fact, he estimated that changes in home financing might explain about 40 percent of the overall increase in homeownership during this period.
One of the primary pathways for the expansion of homeownership during the postwar period was the veterans’ home loan program created under the 1944 Servicemen’s Readjustment Act. While the Veterans Administration (VA) did not make loans, if a veteran defaulted, it would pay up to 50 percent of the loan or up to $2,000. At a time when the average home price was about $8,600, the repayment window was 20 years. Also, interest rates for VA loans could not exceed 4 percent and often did not require a down payment. These loans were widely used: Between 1949 and 1953, they averaged 24 percent of the market and according to Fetter, accounted for roughly 7.4 percent of the overall increase in homeownership between 1940 and 1960. (See chart below.)
Demand for housing continued as baby boomers grew into adults in the 1970s and pursued homeownership just as their parents did. Congress realized, however, that the secondary market where MBS were traded lacked sufficient capital to finance the younger generation’s purchases. In response, Congress chartered a second GSE, the Federal Home Loan Mortgage Corporation, also known as Freddie Mac. Up until this point, Fannie had only been authorized to purchase FHA-backed loans, but with the hope of turning Fannie and Freddie into competitors on the secondary mortgage market, Congress privatized Fannie in 1968. In 1970, they were both also allowed to purchase conventional loans (that is, loans not backed by either the FHA or VA).
A Series of Crises
A decade later, the S&L industry that had existed for half a century would collapse. As interest rates rose in the late 1970s and early 1980s, the S&Ls, also known as “thrifts,” found themselves at a disadvantage, as the government-imposed limits on their interest rates meant depositors could find greater returns elsewhere. With inflation also increasing, the S&Ls’ portfolios, which were filled with fixed-rate mortgages, lost significant value as well. As a result, many S&Ls became insolvent.
Normally, this would have meant shutting the weak S&Ls down. But there was a further problem: In 1983, the cost of paying off what these firms owed depositors was estimated at about $25 billion, but FSLIC, the government entity that ensured those deposits, had only $6 billion in reserves. In the face of this shortfall, regulators decided to allow these insolvent thrifts, known as “zombies,” to remain open rather than figure out how to shut them down and repay what they owed. At the same time, legislators and regulators relaxed capital standards, allowing these firms to pay higher rates to attract funds and engage in ever-riskier projects with the hope that they would pay off in higher returns. Ultimately, when these high-risk ventures failed in the late 1980s, the cost to taxpayers, who had to cover these guaranteed deposits, was about $124 billion. But the S&Ls would not be the only actors in the mortgage industry to need a taxpayer bailout.
By the turn of the century, both Fannie and Freddie had converted to shareholder-owned, for-profit corporations, but regulations put in place by the Federal Housing Finance Agency authorized them to purchase from lenders only so-called conforming mortgages, that is, ones that satisfied certain standards with respect to the borrower’s debt-to-income ratio, the amount of the loan, and the size of the down payment. During the 1980s and 1990s, their status as GSEs fueled the perception that the government — the taxpayers — would bail them out if they ever ran into financial trouble.
Developments in the mortgage marketplace soon set the stage for exactly that trouble. The secondary mortgage market in the early 2000s saw increasing growth in private-label securities — meaning they were not issued by one of the GSEs. These securities were backed by mortgages that did not necessarily have to adhere to the same standards as those purchased by the GSEs.
Freddie and Fannie, as profit-seeking corporations, were then under pressure to increase returns for their shareholders, and while they were restricted in the securitizations that they could issue, they were not prevented from adding these riskier private-label MBS to their own investment portfolios.
At the same time, a series of technological innovations lowered the costs to the GSEs, as well as many of the lenders and secondary market participants, of assessing and pricing risk. Beginning back in 1992, Freddie had begun accessing computerized credit scores, but more extensive systems in subsequent years captured additional data on the borrowers and properties and fed that data into statistical models to produce underwriting recommendations. By early 2006, more than 90 percent of lenders were participating in an automated underwriting system, typically either Fannie’s Desktop Underwriter or Freddie’s Loan Prospector (now known as Loan Product Advisor).
Borys Grochulski of the Richmond Fed observes that these systems made a difference, as they allowed lenders to be creative in constructing mortgages for would-be homeowners who would otherwise be unable to qualify. “Many potential mortgage borrowers who didn’t have the right credit quality and were out of the mortgage market now could be brought on by these financial-information processing innovations,” he says.
Indeed, speaking in May 2007, before the full extent of the impending mortgage crisis — and Great Recession — was apparent, then-Fed Chair Ben Bernanke noted that the expansion of what was known as the subprime mortgage market was spurred mostly by these technological innovations. Subprime is just one of several categories of loan quality and risk; lenders used data to separate borrowers into risk categories, with riskier loans charged higher rates.
But Marc Gott, a former director of Fannie’s Loan Servicing Department said in a 2008 New York Times interview, “We didn’t really know what we were buying. This system was designed for plain vanilla loans, and we were trying to push chocolate sundaes through the gears.”
Nonetheless, some investors still wanted to diversify their portfolios with MBS with higher yields. And the government’s implicit backing of the GSEs gave market participants the confidence to continue securitizing, buying, and selling mortgages until the bubble finally popped in 2008. (The incentive for such risk taking in response to the expectation of insurance coverage or a bailout is known as “moral hazard.”)
According to research by the Treasury Department, 8 million homes were foreclosed, 8.8 million workers lost their jobs, and $7.4 trillion in stock market wealth and $19.2 trillion in household wealth was wiped away during the Great Recession that followed the mortgage crisis. As it became clear that the GSEs had purchased loans they knew were risky, they were placed under government conservatorship that is still in place, and they ultimately cost taxpayers $190 billion. In addition, to inject liquidity into the struggling mortgage market, the Fed began purchasing the GSEs’ MBS in late 2008 and would ultimately purchase over $1 trillion in those bonds up through late 2014.
The 2008 housing crisis and the Great Recession have made it harder for some aspiring homeowners to purchase a home, as no-money-down mortgages are no longer available for most borrowers, and banks are also less willing to lend to those with less-than-ideal credit. Also, traditional commercial banks, which also suffered tremendous losses, have stepped back from their involvement in mortgage origination and servicing. Filling the gap has been increased competition among smaller mortgage companies, many of whom, according to Grochulski, sell their mortgages to the GSEs, who still package them and sell them off to the private markets.
While the market seems to be functioning well now under this structure, stresses have been a persistent presence throughout its history. And while these crises have been painful and disruptive, they have fueled innovations that have given a wide range of Americans the chance to enjoy the benefits — and burdens — of homeownership.
READINGS
Brewer, H. Peers. “Eastern Money and Western Mortgages in the 1870s.” Business History Review, Autumn 1976, vol. 50, no. 3, pp. 356-380.
Fetter, Daniel K. “The Twentieth-Century Increase in U.S. Home Ownership: Facts and Hypotheses.” In Eugene N. White, Kenneth Snowden, and Price Fishback (eds.), Housing and Mortgage Markets in Historical Perspective. Chicago: University of Chicago Press, July 2014, pp. 329-350.
McDonald, Oonagh. Fannie Mae and Freddie Mac: Turning the American Dream into a Nightmare. New York, N.Y.: Bloomsbury Publishing, 2012.
Price, David A., and John R. Walter. “It’s a Wonderful Loan: A Short History of Building and Loan Associations,” Economic Brief No. 19-01, January 2019.
Romero, Jessie. “The House Is in the Mail.” Econ Focus, Federal Reserve Bank of Richmond, Second/Third Quarter 2019.
Rose, Jonathan D., and Kenneth A. Snowden. “The New Deal and the Origins of the Modern American Real Estate Contract.” Explorations in Economic History, October 2013, vol. 50, no. 4, pp. 548-566.
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HSBC Bank USA on Tuesday disclosed that it is facing an investigation from the U.S. Department of Housing and Urban Development (HUD) for alleged redlining practices.
The federal investigation is based on a complaint filed by the non-profit organization National Community Reinvestment Coalition (NCRC).
According to filings with the Securities and Exchange Commission (SEC), HUD is investigating whether “HSBC Bank USA violated the U.S. Fair Lending Act by engaging in discriminatory lending practices in majority Black and Hispanic neighborhoods in six U.S. metropolitan areas from 2018 through 2021.”
The NCRC complaint includes six metropolitan areas: New York (NY), Seattle (WA), Orange County (CA), Los Angles (CA), Oakland (CA) and the Bay Area (CA).
A spokesperson for HUD said the agency “Does not comment on investigations or potential complaints.” HSBC did not reply to a request for comments.
A representative for NCRC said in a statement that when “NCRC or our members find evidence of redlining or any other form of lending discrimination, we take prompt action.”
“We are always concerned by data that suggests unfair treatment of disenfranchised communities and individuals, and always glad to help ensure the appropriate authorities have an opportunity to review the facts and pursue any remedies they deem appropriate.”
Per the mortgage tech platform Modex, HSBC originated about $2 billion in mortgages in the last 12 months. Purchases and conventional loans were more than 77% of the total. California and New York are the main markets for the bank.
That was the second time HSBC was questioned about its mortgage lending practices by federal agencies.
In 2016, the bank ended up paying a $601 million settlement to a series of federal agencies and nearly every state over charges that it engaged in mortgage origination, servicing and foreclosure abuses.
In a separate but related settlement, HSBC paid $131 million to the Federal Reserve. According to the Fed, the penalty considers the circumstances of HSBC’s “unsafe and unsound practices and foreclosure activities.”
U.S. regulators are active in investigating redlining cases.
In June, the U.S. Department of Justice (DOJ) announced a $3 million redlining settlement with ESSA Bank & Trust. It followed a $31 million settlement with City National Bank in January. In 2022, settlements were made with Trident Mortgage Co., Warren Buffet’s Berkshire Hathaway subsidiary; and Lakeland Bank.
HSBC’s U.S. division is under federal investigation for potentially engaging in discrimination against minority borrowers in six metropolitan areas.
The U.S. Department of Housing and Urban Development is reviewing the bank’s lending practices in majority Black and Hispanic neighborhoods within the six regions, HSBC disclosed in a regulatory filing Tuesday.
The geographic areas where HSBC is facing scrutiny include New York, Seattle and four parts of California — Los Angeles, San Francisco, Oakland and Orange County — according to the National Community Reinvestment Coalition, which filed a complaint that prompted the HUD investigation.
After the NCRC filed the complaint, HUD has been investigating whether HSBC violated federal law by engaging in discriminatory lending practices between 2018 and 2021, the bank’s filing states.
Alan Pyke, an NCRC spokesperson, said in an email that his organization, which advocates for community groups nationwide on financial and investment issues, filed the complaint earlier this year.
“Lending redlining is a violation of the Fair Housing Act,” Pyke said. The NCRC based its complaint on data suggesting “unfair treatment of disenfranchised communities and individuals,” he said.
The nonprofit group is focused on working with government agencies to “pursue any remedies they deem appropriate,” Pyke said.
A spokesperson for HSBC USA declined to comment. HUD did not respond to a request for comment.
HSBC’s U.S. arm has previously faced scrutiny in connection with fair-lending laws.
In 2016, the London-based bank agreed to a $601 million settlement with 49 U.S. states and numerous federal agencies — including HUD, the Department of Justice, the Consumer Financial Protection Bureau and the Federal Reserve — over allegations related to discriminatory mortgage lending and foreclosure practices.
In 2021, Attorney General Merrick Garland launched an interagency initiative to combat redlining.
Earlier this year, City National Bank, a unit of Royal Bank of Canada, agreed to pay a $31 million fine in the largest redlining settlement in U.S. history. The Department of Justice alleged that City National discouraged Black and Hispanic customers from applying for home loans.
In March, Park National Bank agreed to a $9 million settlement over redlining allegations in Columbus, Ohio. And last month, the DOJ announced that ESSA Bank & Trust will pay over $3 million to resolve similar allegations in the Philadelphia metro market.
In 2022, HSBC sold 10 California branch locations, along with loans and deposits associated with its West Coast consumer banking business, to Cathay General Bancorp.
The sale was part of HSBC’s broader pullback in U.S. retail banking, which also included the sale of 80 branches, mostly in the New York metropolitan area, to Citizens Financial Group.
The Jefferson Avenue commercial district in Buffalo, New York, is anchored by a supermarket.
There are dozens of other businesses and services along the 12-block corridor — a couple of bank branches, a library, a coffee shop, gas stations, a small plaza with a dollar store and a primary care clinic and a business incubator for entrepreneurs of color.
But Tops Friendly Markets, the only grocery store on Buffalo’s vast East Side, is the center of activity. More than just a place to buy food, pick up medications and use an ATM, the store is a communal gathering space in a predominantly Black neighborhood that, for generations, has been segregated, isolated and disenfranchised from the wealthier — and whiter — parts of the city.
Which explains how it came to be the site of a mass shooting on a spring day in May of last year. On that Saturday, a gunman, who lived 200 miles away in another part of the state, drove to Jefferson Avenue and went into Tops, and in just a few minutes killed 10 people, injured three and inflicted mass trauma across the community.
It is a scenario that has sadly, and repeatedly, played out in other parts of the country that have experienced mass shootings. But this one came with a twist: The gunman’s intention was to kill as many Black people as possible.
To achieve that, he specifically targeted a ZIP code with one of the highest percentages of Black residents in New York state. All 10 who died that day were Black.
“The mere fact that someone can research, ‘Where will the greatest number of Black people be … on a Saturday morning,’ that’s not by chance,” said Franchelle Parker, a community organizer and executive director of Open Buffalo, a nonprofit focused on racial, economic and ecological justice. “That’s not a mistake. It’s a community that’s been deeply segregated for decades.”
The day of the shooting, Parker, who grew up in nearby Niagara Falls, was driving to Tops, where she planned to buy a donut and an unsweetened iced tea before heading into the Open Buffalo office, which is located a block away from Tops. The mother of two had intended to complete the mundane task of cleaning up her desk — “old coffee cups and stuff” — after a busy week.
She saw the news on Twitter and didn’t know if she should keep driving to Jefferson Avenue or turn around and go back home. She eventually picked the latter.
When she showed up the next day, there were thousands of people grieving in the streets. “The only way that I could explain my feeling, it was almost like watching an old war movie when a bomb had gone off and someone’s in, like, shell shock. That’s how it felt,” said Parker, vividly recounting the community’s collective trauma in a meeting room tucked inside of Open Buffalo’s second-story office on Jefferson Avenue.
Almost immediately following the May 14, 2022, massacre, which was the second-deadliest mass shooting in the United States last year, conversations locally and nationally turned to the harsh realities of the East Side and how long-standing factors that affect the daily life of residents — racism, poverty and inequity — made the community an ideal target for a white supremacist.
Now, more than a year after the tragedy, there is growing concern that not enough is being done fast enough to begin to dismantle those factors. And amid those conversations, there are mounting calls for the banking industry — whose historical policies and practices helped cement the racial segregation and disinvestment that ultimately shaped the East Side — to leverage its collective power and influence to band together in an effort to create systemic change.
The ideas about how banks should support the East Side and better embed themselves in the neighborhood vary by people and organizations. But the basic argument is the same: Banks, in their role as financiers and because of the industry’s history of lending discrimination, are obligated to bring forth economic prosperity in disinvested communities like the East Side.
I know banks are often looked upon sort of like a panacea, but I don’t particularly see it that way. I think others have a role to play in all of this.
Chiwuike Owunwanne, corporate responsibility officer at KeyBank
“Banks have been very good at providing charitable contributions to the Black community. They get an ‘A’ for that,” said The Rev. George Nicholas, an East Side pastor who is also CEO of the Buffalo Center for Health Equity, a four-year-old enterprise focused on racial, geographic and economic health disparities. “But doing the things that banks can do in terms of being a catalyst for revitalization and investment in this community, they have not done that.”
To be sure, banks’ ability to reverse the course of the community isn’t guaranteed — and there is no formula to determine how much accountability they should hold to fix deeply entrenched problems like racism. Several Buffalo-area bankers said that while the Tops shooting heightened the urgency to help the East Side, the industry itself cannot be the sole driver of change.
“There are a lot of institutions … that can certainly play a part in reversing the challenges that we see today,” said Chiwuike “Chi-Chi” Owunwanne, a corporate responsibility officer at KeyBank, the second-largest bank by deposits in Buffalo. “I know banks are often looked upon sort of like a panacea, but I don’t particularly see it that way. I think others have a role to play in all of this.”
A long history of segregation
How the East Side — and the Tops store on Jefferson Avenue — became the destination for a racially motivated mass murderer is a story about racism, segregation and disinvestment.
Even as it bears the nickname “the city of good neighbors,” Buffalo has long been one of the most racially segregated cities in the United States. Of the 114,965 residents who live on the East Side, 59% are Black, according to data from the 2021 U.S. Census American Community Survey. The percentage is even higher in the 14208 ZIP code, where the Tops store is located. In that ZIP code, among 11,029 total residents, nearly 76% are Black, the census data shows.
The city’s path toward racial segregation started in the early 20th century when a small number of job-seeking Black Americans migrated north to Buffalo, a former steel and auto manufacturing hub at the far northwestern end of New York state. Initially, they moved into the same neighborhoods as many of the city’s poorer immigrants and lived just east of what is today the city’s downtown district. As the number of Blacks arriving in Buffalo swelled in the 1940s, they were increasingly confronted with various housing challenges, including racist zoning laws and restrictive deed covenants that kept them from buying homes in more affluent white areas.
Black Buffalonians also faced housing discrimination in the form of redlining, the practice of restricting the flow of capital into minority communities. In 1933, as the Great Depression roiled the economy, a temporary federal agency known as the Home Owners’ Loan Corporation used government bonds to buy out and refinance mortgages of properties that were facing or already in foreclosure. The point was to try to stabilize the nation’s real estate market.
As part of its program, HOLC created maps of American cities, including Buffalo, that used a color coding scheme — green, blue, yellow and red — to convey the perceived riskiness of making loans in certain neighborhoods. Green was considered minimally risky; other areas that were largely populated by immigrant, Black or Latino residents were labeled red and thus determined to be “hazardous.”
“The goal was to free up mortgage capital by going to cities and giving banks a way to unload mortgages, so they could turn around and make more mortgage loans,” said Jason Richardson, senior director of research at the National Community Reinvestment Coalition, an association of more than 750 community-based organizations that advocates for fair lending. “It was kind of a radical concept and it has evolved over the decades into our modern mortgage finance system.”
The Federal Housing Administration, which was established as a permanent agency in 1934, used similar methods to map urban areas and labeled neighborhoods from “A” to “D,” with “A” considered to be the most financially stable and “D” considered the least. Neighborhoods that were largely Black, even relatively stable ones, were put in the “D” category.
The result was that banks, which wanted to be able to sell mortgage loans to the FHA, were largely dissuaded from making loans in “risky” areas. And Buffalo’s East Side, where the majority of Blacks were settling, was deemed risky. Unable to get loans, Blacks couldn’t buy homes, start businesses or build equity. At the same time, large industrial factories on the East Side were closing or moving away, limiting job opportunities and contributing to rising poverty levels.
“Today what we’re left with is the residue of this process where we’ve enshrined … a pattern of economic segregation that favors neighborhoods that had fewer Black people in them and generally ignores neighborhoods that had African Americans living in them,” Richardson said.
Case in point: Research by the National Community Reinvestment Coalition shows that three-quarters of neighborhoods that were once redlined are low- to moderate-income neighborhoods today, and two-thirds of them are majority minority communities.
Adding to the division between Blacks and whites in Buffalo was the construction of a highway called the Kensington Expressway. Built during the 1960s, the below-grade, limited-access highway proved to be a speedy way for suburban workers to get to their downtown jobs. But its construction cut off the already-segregated East Side even more from other parts of the city, displacing residents, devaluing houses and destroying neighborhoods and small businesses.
As a result of those factors and more, many Black residents have become “trapped” on the East Side, according to Dr. Henry Louis Taylor Jr., a professor of urban and regional planning at the University at Buffalo. In 1987, Taylor founded the UB Center for Urban Studies, a research, neighborhood planning and community development institute that works on eliminating inequality in cities and metropolitan regions. In September 2021, eight months before the Tops shooting, the Center for Urban Studies published a report that compared the state of Black Buffalo in 1990 to present-day conditions. The conclusion: Nothing had changed for Blacks over 31 years.
As of 2019, the Black unemployment rate was 11%, the average household income was $42,000 and about 35% of Blacks had incomes that fell below the poverty line, the report said. It also noted that just 32% of Blacks own their homes and that most Blacks in the area live on the East Side.
“Those figures remain virtually unchanged while the actual, physical conditions that existed inside of the community worsened,” Taylor told American Banker in an interview in his sun-filled office at the center, located on the University at Buffalo’s city campus. “When we looked upstream to see what was causing it, it was clear: It was systemic, structural racism.”
Banks’ moral obligations
As the East Side struggled over the decades with rampant poverty, dilapidated housing, vacant lots and disintegrating infrastructure, banks kept a physical presence in the community, albeit a shrinking one. In mid-2000, there were at least 20 bank branches scattered across the East Side, but by mid-2022, the number had fallen to around 14, according to the Federal Deposit Insurance Corp.’s deposit market share data. The 14 include four new branches that have opened since early 2019 — Northwest Bank, KeyBank, Evans Bank and BankOnBuffalo.
The first two branches, operated by Northwest in Columbus, Ohio, and KeyBank, the banking subsidiary of KeyCorp in Cleveland, were requirements of community benefits agreements negotiated between each bank and the National Community Reinvestment Coalition. In both cases, Northwest and KeyBank agreed to open an office in an underserved community.
Evans Bank opened its first East Side branch in the fall of 2021. The office is located in the basement of an $84 million affordable senior housing building that was financed by Evans, a $2.1 billion-asset community bank headquartered south of Buffalo in Angola, New York.
Banks have been very good at providing charitable contributions to the Black community. They get an ‘A’ for that. But doing the things that banks can do in terms of being a catalyst for revitalization and investment in this community, they have not done that.
The Rev. George Nicholas, an East Side pastor who is also CEO of the Buffalo Center for Health Equity
On the community and economic development front, banks have had varying levels of participation. Buffalo-based M&T Bank, which holds a whopping 64% of all deposits in the Buffalo market and is one of the largest private employers in the region, has made consistent investments in the East Side by supporting Westminster Community Charter School, a kindergarten through eighth-grade school, and the Buffalo Promise Neighborhood, a nonprofit organization focused on improving access to education in the city’s 14215 ZIP code.
Currently, Buffalo Promise Neighborhood operates four schools. In addition to Westminster, it runs Highgate Heights Elementary, also K-8, as well as two academies that serve children ages six weeks through pre-kindergarten. Twelve M&T employees are dedicated to the program, according to the Buffalo Promise Neighborhood website. The bank has invested $31.5 million into the program since its 2010 launch, a spokesperson said.
Other banks are making contributions in other ways. In addition to the Jefferson Avenue branch and as part of its community benefits plan, Northwest Bank, a $14.2 billion-asset bank, supports a financial education center through a partnership with Belmont Housing Resources of Western New York. Meanwhile, the $198 billion-asset KeyBank gave $30 million for bridge and construction financing for Northland Workforce Training Center, a $100 million redevelopment project at a former manufacturing complex on the East Side that was partially funded by the state.
BankOnBuffalo’s East Side branch is located inside the center, which offers KeyBank training in advanced manufacturing and clean energy technology careers. A subsidiary of $5.6 billion-asset CNB Financial in Clearfield, Pennsylvania, BankOnBuffalo’s office opened a month after the shooting. The timing was coincidental, but important, said Michael Noah, president of BankOnBuffalo.
“I think it just cemented the point that this is a place we need to be, to be able to be part of these communities and this community specifically, and be able to build this community up,” Noah said.
In terms of public-private collaboration, some banks have been involved in a deeper way. In 2019, New York state, which had already been pouring $1 billion into Buffalo to help revitalize the economy, announced a $65 million economic development fund for the East Side. The initiative is focused on stabilizing neighborhoods, increasing homeownership, redeveloping commercial corridors including Jefferson Avenue, improving historical assets, expanding workforce training and development and supporting small businesses and entrepreneurship.
In conjunction with the funding, a public-private partnership called East Side Avenues was created to provide capital and organizational support to the projects happening along four East Side commercial corridors. Six banks — Charlotte, North Carolina-based Bank of America, the second-largest bank in the nation with $2.5 trillion of assets; M&T, which has $203 billion of assets; KeyBank; Warsaw, New York-based Five Star Bank, which has about $6 billion of assets; Northwest and Evans — are among the 14 private and philanthropic organizations that pledged a combined $8.4 million to pay for five years’ worth of operational support, governance and finance, fundraising and technical assistance to support the nonprofits doing the work.
Laura Quebral, director of the University at Buffalo Regional Institute, which is managing East Side Avenues, said the banks were the first corporations to step up to the request for help, and since then have provided loans and other products and education to keep the program moving.
Their participation “is a signal to the community that banks cared and were invested and were willing to collaborate around something,” Quebral said. “Being at the table was so meaningful.”
Richard Hamister is Northwest’s New York regional president and former co-chair of East Side Avenues. Hamister, who is based in Buffalo, said banks are a “community asset” that have a responsibility to lift up all communities, including those where conditions have arisen that allow it to be a target of racism like the East Side.
“We operate under federal charters, so we have an obligation to the community to not only provide products and services they need but also support when you go through a tragedy like that,” Hamister said. “We also have a moral obligation to try to help when things are broken … and to do what we can. We can’t fix everything, but we’ve got to fix our piece and try to help where we can.”
In the wake of a tragedy
After the massacre, there was a flurry of activity within banks and other organizations, local and out-of-town, to respond to the immediate needs of East Side residents. With the community’s only supermarket closed indefinitely, much of the response centered around food collection and distribution. Three of M&T’s five East Side branches, including the Jefferson Avenue branch across the street from Tops, became food distribution sites for weeks after the shooting. On two consecutive Fridays, Northwest provided around 200 free lunches to the community, using a neighborhood caterer who is also the bank’s customer. And BankOnBuffalo collected employee donations that amounted to more than 20 boxes of toiletries and other items that were distributed to a nonprofit.
At the same time, M&T, KeyBank and other banks began financial donations to organizations that could support the immediate needs of the community. KeyBank provided a van that delivered food and took people to nearby grocery stores. Providence, Rhode Island-based Citizens Financial Group, whose ATM inside Tops was inaccessible during the store’s temporary closure, installed a fee-free ATM near a community center located about a half-mile north of Tops, and later put a permanent ATM inside the center that remains there today. And M&T rolled out a short-term loan program to provide capital to East Side small-business owners.
One of the funds that benefited from banks’ support was the Buffalo Together Community Response Fund, which has raised $6.2 million to address the long-term needs of the East Side.
Bank of America and Evans Bank each donated $100,000 to the fund, whose list of major sponsors includes four other banks — JPMorgan Chase, Citigroup, M&T and KeyBank. Thomas Beauford Jr., a former banker who is co-chair of the response fund, said banks, by and large, directed their resources into organizations where the dollars would have an immediate impact.
“Banks said, ‘Hey, you know … it doesn’t make sense for us to try to build something right now. … We will fund you in the work you’re doing,'” said Beauford, who has been president and CEO of the Buffalo Urban League since the fall of 2020. “I would say banks showed up in a big way.”
Fourteen months later, banks say they are committed to playing a positive role on the East Side. For the second year, KeyBank is sponsoring a farmers’ market on the East Side, an attempt to help fill the food desert in the community. Last fall, BankOnBuffalo launched a mobile “bank on wheels” truck that’s stationed on the East Side every Wednesday. The 34-foot-long truck, which is staffed by two people and includes an ATM and a printer to make debit cards, was in the works before the shooting, and will eventually make four stops per week around the Buffalo area.
Evans has partnered with the city of Buffalo to construct seven market-rate single family homes on vacant lots on the East Side. The relationship with the city is an example of how banks can pair up with other entities to create something meaningful and lasting, more than they might be able to do on their own, said Evans President and CEO David Nasca.
The bank has “picked areas” where it can use its resources to make a difference, Nasca said.
“I don’t think the root causes can be ameliorated” by banks alone, he said. “We can’t just grant money. It has to be within our construct of a financial institution that invests and supports the public-private partnership. … All the oars [need to be] pulling together or this doesn’t work.”
‘Little or no engagement with minorities’
All of these efforts are, of course, welcomed by the community, but there is still criticism that banks haven’t done enough to make up for their past contributions to segregating the city. And perhaps more importantly, some of that criticism centers on banks failing to do their most basic function in society — provide credit.
In 2021, the New York State Department of Financial Services issued a report about redlining in Buffalo. The regulator looked at banks and nonbank lenders and found that loans made to minorities in the Buffalo metro area made up 9.74% of total loans in Buffalo. Overall, Black residents comprise about 33% of Buffalo’s total population of more than 276,000, census data shows.
The department said its investigation showed the lower percentage was not due to “excessive denials of loan applications based on race or ethnicity,” but rather that “these companies had little or no engagement with minorities and generally made scant effort to do so.”
“The unsurprising result of this has been that few minority customers or individuals seeking homes in majority-minority neighborhoods have made loan applications … in the first instance.”
Furthermore, accusations of redlining persist today, even though the practice of discriminating in housing based on race was outlawed by the Fair Housing Act of 1968.
In 2014, Evans was accused of redlining by the New York State Attorney General, which said the community bank was specifically avoiding making mortgage loans on the East Side. The bank, which at the time had $874 million of assets, agreed to pay $825,000 to settle the case, but Nasca maintains that the charges were unfounded. He points to the fact that the bank never had a fair lending or fair housing violation, no specific incidents were ever claimed and that the bank’s Community Reinvestment Act exam never found evidence of discriminatory or illegal credit practices.
The bank has a greater presence on the East Side today, but that’s because it has grown in size, not because it is trying to make up for previous accusations of redlining, he said.
“Ten years ago, our involvement [on the East Side] certainly wasn’t what you’re seeing today,” Nasca said. “We were looking to participate more, but we were participating within our means and our reach. As we have grown, we have built more resources to be able to do more.”
Shortly after accusations were made against Evans, Five Star Bank, the banking arm of Financial Institutions in Warsaw, New York, was also accused of redlining by the state Attorney General. Five Star, which has been growing its presence in the Buffalo market for several years, wound up settling the charges for $900,000 and agreeing to open two branches in the city of Rochester.
KeyBank is currently being accused of redlining by the National Community Reinvestment Coalition. In a 2022 report, the group said that KeyBank is engaging in systemic redlining by making very few home purchase loans in certain neighborhoods where the majority of residents are Black. Buffalo is one of several cities where the bank’s mortgage lending “effectively wall[ed] out Black neighborhoods,” especially parts of the East Side, the report said.
KeyBank denied the allegations. In March, the coalition asked regulators to investigate the bank’s mortgage lending practices.
Beyond providing more credit, some community members believe that banks should be playing a larger role in addressing other needs on the East Side. And the list of needs runs the gamut from more grocery stores to safe, affordable housing to infrastructure improvements such as street and sidewalk repairs.
Alexander Wright is founder of the African Heritage Food Co-op, an initiative launched in 2016 to address the dearth of grocery store options on the East Side, where he grew up. Wright said that while banks’ philanthropic efforts are important, banks in general “need to be in a place of remediation” to fix underlying issues that the industry, as a whole, helped create. (After publication of this story, Wright left his job as CEO of the African Heritage Food Co-Op.)
Aside from charitable donations, banks should be finding more ways to work directly with East Side business owners and entrepreneurs, helping them with capital-building support along the way, Wright said. One place to start would be technical assistance by way of bank volunteers.
“Banks are always looking to volunteer. ‘Hey, want to come out and paint a fence? Want to come out and do a garden?'” Wright said. “No. Come out here and help Keshia with bookkeeping. Come out here and do QuickBooks classes for folks. Bring out tax experts. Because these are things that befuddle a lot of small businesses. Who is your marketing person? Bring that person out here. Because those are the things that are going to build the business to self-sufficiency.
“Anything short of the capacity-building … that will allow folks to rise to the occasion and be self-sufficient I think is almost a waste,” Wright added. “We don’t need them to lead the plan. What we need them to do is be in the community and [be] hearing the plan and supporting it.”
Parker, of Open Buffalo, has similar thoughts about the role that banks should play. One day, soon after the massacre, an ATM appeared down the street from Tops, next to the library that sits across the street from Parker’s office. Soon after the ATM was installed, Parker began fielding questions from area residents who were skeptical of the machine and wanted to know if it was legitimate. But Parker didn’t have any information to share with them. “There was no outreach. There was no community engagement. So I’m like, ‘Let me investigate,'” she said. “I think that’s a symptom of how investment is done in Black communities, even though it may be well-intentioned.”
As it turns out, the temporary ATM belonged to JPMorgan Chase. The megabank has had a commercial banking presence in Buffalo for years, but it didn’t operate a retail branch in the region until last year. Today it has four branches in operation and plans to open another two by the end of the year, a spokesperson said.
After the Tops shooting, the governor’s office reached out to Chase asking if the bank could help in some way, the spokesperson said in response to the skepticism. The spokesperson said that while the Chase retail brand is new to the Buffalo region, the company has been active in the market for decades by way of commercial banking, private banking, credit card lending, home lending and other businesses.
In addition to the ATM, the bank provided funding to local organizations including FeedMore Western New York, which distributes food throughout the region.
“We are committed to continuing our support for Buffalo and helping the community increase access to opportunities that build wealth and economic empowerment,” the spokesperson said in an email.
In the year since the massacre, there has been some progress by banks in terms of their interest in listening to the East Side community and learning about its needs, said Nicholas. But he hasn’t felt an air of urgency from the banking community to tackle the issues right now.
“I do experience banks being a little more open to figuring out what their role is, but it’s slow. It’s slow,” said Nicholas. The senior pastor of the Lincoln Memorial United Methodist Church, located about a mile north from Tops, Nicholas is part of a 13-member local advisory committee for the New York arm of Local Initiatives Support Coalition, or LISC. The group is focused on mobilizing resources, including banks, to address affordable housing in Western New York, specifically in the inner city, as well as training minority developers and connecting them to potential investors, Nicholas said.
Of the 13 members, seven are from banks — one each from M&T, Bank of America, BankOnBuffalo, Evans and KeyBank, and two members from Citizens Financial Group. One of the priorities of LISC NY is health equity, and the fact that banks are becoming more engaged in looking at health disparities is promising, Nicholas said. Still, they have more work to do, he said.
“I need them to think more on how to strengthen and build the economy on the East Side and provide leadership around that, not only to provide charitable things, but using sound business and banking and community development principles to say, ‘OK, if we’re going to invest in this community, these are the types of things that need to happen in this community,’ and then encourage their partners and other people they work with … to come fully in on the East Side.”
Some bankers agree with the community activists.
“Putting a branch in is great. Having a bank on wheels is great,” said Noah of BankOnBuffalo. “But if you’re not embedded in the community, listening to the community and trying to improve it, you’re not creating that wealth and creating a better lifestyle for everyone.”
What could make a substantial difference in terms of banks’ impact on the community is a combination of collaboration and leadership, said Taylor. He supports the idea of banks leading the charge on the creation of a comprehensive redevelopment and reinvestment plan for the East Side, and then investing accordingly and collaboratively through their charitable foundations.
“All of them have these foundations,” Taylor said. “You can either spend that money in a strategic and intentional way designed to develop a community for the existing population, or you can spend that money alone in piecemeal, siloed, sectorial fashion that will look good on an annual report, but won’t generate transformational and generational changes inside a community.”
Banks might be incentivized to work together because it could mean two things for them, according to Taylor: First, they’d have an opportunity to spend money in a way that would have maximum impact on the East Side, and second, if done right, the city and the banks could become a model of the way to create high levels of diversity, equity and inclusion in an urban area.
“If you prove how to do that, all that does is open up other markets of consumption all over the country because people want to figure out how to do that same thing,” Taylor said.
Some of that is already happening, at least on a bank-by-bank case, said KeyBank’s Owunwanne. Through the KeyBank Foundation, the company is able to leverage different relationships that connect nonprofits to other entities and corporations that can provide help.
“I see this as an opportunity for us to make not just incremental changes, but monumental changes … as part of a larger group,” Owunwanne said “Again, I say that not to absolve the bank of any responsibility, but just as a larger group.”
Downstairs from Parker’s office, Golden Cup Coffee, a roastery and cafe run by a husband and wife team, and some other Jefferson Avenue businesses are trying to build up a business association for existing and potential Jefferson-area businesses. Parker imagined what the group could accomplish if one of the banks could provide someone on a part-time basis to facilitate conversations, provide administrative support and coordinate marketing efforts.
“In the grand scheme of things, when we’re talking about a multimillion dollar [bank], a part-time employee specifically dedicated to relationship-building and building out coalitions, it sounds like a small thing,” Parker said. “But that’s transformational.”
City National Bank has agreed to pay $31 million to settle a U.S. Justice Department lawsuit alleging racial bias in its home mortgage lending in Los Angeles County.
The government’s complaint, filed Thursday in Los Angeles, accused the bank of violating federal housing and banking discrimination laws by avoiding loans to buyers of homes in neighborhoods that are majority Black or Latino.
City National Bank is the largest bank headquartered in L.A., but just one of the 11 branches it has opened in the county over the last 20 years is in a predominantly Black or Latino neighborhood. The county’s population of nearly 10 million is 49% Latino and 9% Black.
From 2017 to 2020, City National Bank maintained just three of its 37 branches in majority Black and Latino neighborhoods, the complaint said.
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The bank relied on “relationship managers” to generate home loan applications from existing customers, who were predominantly white, the government alleged, and it failed to act on internal reports showing it risked running afoul of fair lending laws.
Other banks serving L.A. County received more than six times as many loan applications in Black and Latino areas, the government found.
City National Bank denied breaking discrimination laws, but said it agreed to settle the case to avoid prolonged litigation.
Under the proposed settlement, which was filed simultaneously with the complaint and requires court approval, the bank would provide $29.5 million in home loan subsidies to borrowers in Black and Latino areas, including interest-rate cuts and down-payment assistance.
Assistant Atty. Gen. Kristen Clarke and U.S. Atty. Martin Estrada announced the agreement at Second Baptist Church Los Angeles in Historic South Central, one of the city’s oldest Black churches. Nobody from the bank participated in the event.
“Through this agreement, we’re sending a strong message to the financial industry that we will not stand for unlawful barriers when it comes to residential mortgage lending,” Clarke said. “We will not stand for unlawful modern-day redlining.”
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City National Bank released a statement saying it supports the Justice Department’s efforts to ensure equal access to loans regardless of race.
“At City National, we are committed to ensuring that all consumers have an equal opportunity to apply for and obtain credit,” it said.
Founded in Beverly Hills in 1953, City National Bank has deep ties to the entertainment industry. It was acquired in 2015 by the Royal Bank of Canada.
As part of the settlement agreement, City National Bank has agreed to spend $500,000 on advertising targeting residents of Black and Latino neighborhoods and $500,000 on a consumer financial education program to enhance their access to credit.
The bank also said it planned to open a new branch in a majority Black or Latino neighborhood and ensure that at least four loan officers are dedicated to serving those areas.
Atty. Gen. Merrick Garland launched a program in 2021 to step up enforcement of housing discrimination laws. It has yielded $75 million in relief to borrowers in Houston, Memphis, Philadelphia, Newark and Los Angeles.
At an event marking the 55th anniversary of the passage of the Fair Housing Act (FHA) during the National Fair Housing Alliance 2023 National Conference, Federal Reserve Vice Chair for Supervision Michael Barr delivered remarks urging for the evolution of both the FHA and the Equal Credit Opportunity Act (ECOA) to reflect realities and dangers posed by emerging technologies in the mortgage space.
“As our financial system evolves, it is critical that we adapt our application of the Fair Housing Act and ECOA to deal with technological change and other developments,” Barr said in his speech.
There are potentially positive implications that come with such technological advances, including providing “a window” into the creditworthiness of a person who may not have a “standard credit history,” he said. New artificial intelligence technologies, including machine learning, could also make use of such data “at scale and at low cost to expand credit to people who otherwise can’t access it,” Barr added.
However, there is also the potential for these technologies to exacerbate existing issues related to lending equality, Barr explained.
“While these technologies have enormous potential, they also carry risks of violating fair lending laws and perpetuating the very disparities that they have the potential to address,” he said. “Use of machine learning or other artificial intelligence may perpetuate or even amplify bias or inaccuracies inherent in the data used to train the system or make incorrect predictions if that data set is incomplete or nonrepresentative. There are also risks that the data points used could be correlated with a protected class and lack a sufficient nexus to creditworthiness.”
Barr called “digital redlining in marketing” — defined as “the use of criteria to exclude majority-minority communities or minority applications” — one such risk that could come with the advent of these technologies in lending, something that has already been the “subject of several settlements,” he said.
Additionally, if lenders select their target audiences based on the characteristics commonly associated with a protected class, then a form of “digital redlining” becomes more possible.
“New technologies can also result in ‘reverse redlining,’ or steering in the advertisement of more expensive or otherwise inferior products to minority communities,” he said. “These risks are amplified when a model is opaque and lacks a sufficient degree of explainability—the degree to which the bank can understand how data, variables, and other features inform the credit decisions.”
The banking and lending ecosystems themselves are still navigating these emerging technologies, he said. As a result, the Fed is aiming to ensure that its oversight of such practices “keeps pace” with the implementation,
“Through our supervisory process, we evaluate whether firms have proper risk management and controls, including with respect to those new technologies,” he said.