Apr 27, 2020
Like so many of the horrors we’ve faced under the Trump Administration, yet another relic of 20th Century segregation is once again rearing its ugly head: Redlining. Trump officials have proposed a change in an obscure but important banking law that could undermine decades of progress incentivizing re-investment in low-income neighborhoods — particularly communities of color that suffered from historic efforts to undermine their economies under legal segregation and property appropriation.
In response to the Trump Administration moves, which target a rule change in implementing the Community Reinvestment Act (CRA), California Attorney General Xavier Becerra and 21 other state Attorneys General submitted a comment letter that offers a powerful reminder that structural racism persists in U.S. housing policy, and there is an active element of Trumpism that seeks to reinforce it.
Here are the key takeaways:
- The CRA, as originally intended, is a vital source of credit and finance for affordable housing in working poor and communities of color, which have historically been shut out of mortgage lending and capital investment.
- The Trump Administration’s Proposed Rule would dangerously undermine equitable lending practices under the CRA, and weaken enforcement.
- The apparent goal is a “back to the future” environment where bankers and other sources of capital favor white-owned businesses and communities, while low-income neighborhoods and entrepreneurs of color face additional hurdles to securing needed investment.
A Dark History of Disinvestment
First, some background. It’s important to remember that today’s housing crisis has deep roots in federal mortgage policy, disinvestment, and the effective destruction of wealth within black communities. Low-income neighborhoods and communities of color were not only denied federally-backed home loans by the 1930s redlining maps drawn by the Home Owners Loan Corporation (HOLC); savings that these residents deposited into banks were also largely not reinvested in their local communities.
A Senate Banking Committee study in the 1970s found that just 10 percent of money that Washington, D.C. residents deposited was reinvested locally. The CRA requires federal regulators to review banking practices and enforce a “continuing and affirmative obligation” to increase investment and access to credit in communities historically disadvantaged by redlining.
But four decades after the passage of the CRA in 1977, the legacy of classist and racist economic policies persists. 74% of redlined neighborhoods that were denied mortgage insurance are still low- and moderate-income (LMI). Banks still deny home loans to African American and Latinx customers at disproportionately higher rates than white borrowers.
Against this backdrop, it may be difficult to see why the CRA is so valuable. But its incremental impacts have been transformative. From 2010 to 2016, the CRA grew the number of small business loans in LMI neighborhoods by 38%; during its lifespan, it is credited with enabling roughly 15-35% of home loans for Latinos in LMI neighborhoods.
This effect is especially pronounced in California, where CRA-responsive banks lent $27 billion in LMI communities, according to a 2016 survey by the California Reinvestment Coalition. Furthermore, 85% of the equity for investments in the Low Income Housing Tax Credit—a key source of funding for over 3 million low-income housing units—has come from banks operating under the CRA.
The Trump Administration’s Proposed Rule would greatly undermine all of these outcomes by changing the rules for banks to qualify under the CRA, and make enforcement toothless. The effect would be to functionally eliminate requirements that banks actually target their reinvestment funds in LMI communities.
Incentives for Disinvestment and Discrimination
Becerra and his allies are clear that such a change would enable banks to comply with the law “regardless of whether these investments actually meet local credit needs (e.g., of LMI small businesses and individuals), which can involve more challenging or labor-intensive efforts on the part of banks.”
Other proposed changes would likely dry up credit for many “‘mom and pop’ businesses and entrepreneurs” and eliminate incentives for banks to maintain local branches in LMI neighborhoods — a catastrophic blow in many low-income neighborhoods, which suffer from “banking deserts” that disadvantage unbanked residents.
So much for metrics. How about implementation? That, too, would be a disaster.
Of major concern, banks could get CRA credit for making loans that would displace LMI residents with disruptive developments such as sports stadiums that take advantage of Opportunity Zone tax incentives. The changes would also lighten the punishment for banks that engage in illegal discriminatory lending, by reducing their impact on a bank’s potential downgrading.
Finally, the changes would direct investment away from LMI communities by weakening the requirements for physical bank branches in those communities. As Becerra notes, “banks should not get credit for activities such as social services and individual bank employees’ volunteerism that, while laudable, are only tangentially (at best) related to the core purposes.”
California YIMBY is proud to stand behind Attorney General Becerra in calling for this Proposed Rule to be rejected.