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Cities and banking: to reinvest or disinvest?

In the final Presidential debate, candidate Ross Perot charged that a banking financial crisis comparable to the S&L crisis awaits the American people. He indicated it had been deliberately covered up in the campaign. Starting last week, The Weekly began running a three-part series about the state of the nation's banking institutions and how federal changes could help or hurt the nation's cities and towns.

This week's article looks at how banks reinvest or do not reinvest in their own cities and towns: what the record is.. Last week the focus was on the current problems facing banks and how those problems might affect cities. Next week, the third and final part will focus on changes President-elect Clinton and others have proposed to create nationwide networks of community development banks.

President-elect Clinton and the new 103rd Congress will consider major changes in the nation's banking laws next year. Those changes will affect banks in every city and town in the nation. They will affect how those banks make loans in their own communities.

This is the second in a three-part series about the state of the nation's banking communities and their relationship to the nation's cities and towns. This part will focus on how banks reinvest or do not reinvest in their own municipalities: what the record is.

What local banks do with deposits can be critical to a city or town's economy and opportunity for growth. Financial institutions in the United States hold trillions of dollars worth of deposits and assets. How they choose to invest those deposits and assets affects a host city, the city's economic foundations, and the city's future. Financial institution practices are fundamental to healthy downtowns and neighborhoods.

At the Congressional-City Conference in 1989, NLC Past President Henry Cisneros, the former mayor of San Antonio, asked then newly appointed HUD Secretary Jack Kemp what the new Bush administration intended to do about growing evidence of financial institution disinvestment or "redlining" in cities and towns. Cisneros gave Kemp a copy of that week's Nation's Cities Weekly featuring an article based upon the findings of a Pulitzer prize-winning series in the Atlanta Journal-Constitution about redlining or race discrimination in lending by financial institutions.

That series demonstrated a discriminatory pattern and practice of lending by banks in the Atlanta metropolitan area. It demonstrated that individuals and businesses in minority neighborhoods were far more likely to be turned down for a loan than an individual or business in a non-minority area.

Recent data released by the Federal Reserve indicates continued, pervasive redlining by financial institutions in cities. Yet nearly 90 percent of U.S. financial institutions received outstanding or satisfactory Community Reinvestment Ratings from the federal government over the last two years.

Some experts claim that today as little as four cents of every dollar in deposits in a local bank are reinvested in the form of loans to local businesses, homeowners, and consumers in poorer or minority cities and neighborhoods. Ninety-six cents of every dollar are vacuumed up out of the city or town are exported and reinvested somewhere else.

It is only in recent years that changes in federal banking laws have begun to provide better information about banks' lending records in cities and towns and to encourage greater efforts at community reinvestment. Up until just a few years ago, the federal government collected information about bank and financial mortgage lending practices, but did not analyze or make the information public. But because of NLC-supported changes in federal banking laws enacted as part of the S&L bailout, the Federal Reserve now releases substantial mortgage lending information which can help city leaders determine the impact of lending practices in their communities.

The federal government does not collect or make available to cities and towns information about lending patterns or practices to small businesses by race, sex, or income of the neighborhood.

Changes in the American banking system have increased concerns about the relationship of banks to cities. As more and more local or community banks have failed to been taken over by large, out-of-state banks, traditional lending practices have changed. The effects can be especially serious for rural towns or cities with significant racial minorities.

U.S. Settles First Redlining Suit

In September, the U.S. Justice Department settled the first ever "pattern and practice" racial discrimination suit against an Atlanta financial institution. The settlement is expected to become a model for a nationwide probe into redlining by banks and thrifts in cities and towns.

The Justice suit arose out of the series referred to by Cisneros to Secretary Kemp. The suit claimed that the federally insured lender in Atlanta rejected black applicants at a rate three times that of whites, defined its lending area to exclude large portions of the metropolitan area's black community, made more than 95 percent of its loans in predominately white neighborhoods, and made loans significantly based upon race.

Over the last several months the Justice Department has met with the various federal banking regulatory agencies to share its new approach and to coordinate joint investigations. The new collaboration should create a sharp disincentive to redlining practices in cities.

Systematic Discrimination in


Last month the Boston Federal Reserve issued a ground-breaking study demonstrating systematic racial discrimination in mortgage lending, even after taking into account an applicant's credit history. The study, focused on 131 financial institutions in the Boston metropolitan area, found that even when two mortgage applicants are identical in every economic respect - including credit history - a minority applicant is 60 percent more likely to be rejected than a white.

The study found that the systematic discrimination did not vary by income of the applicant nor by size of the financial institution. The Boston Fed found the results so convincing and consistent with data collected from other cities and towns that studies in other cities or towns were unnecessary.

The study put to rest arguments by many bankers that federal reports on discriminatory lending were not credible because they did not take into account applicants' credit histories. It is also likely to undercut arguments that CRA requirements ought only to apply to larger financial institutions.

Just weeks after the Boston Fed study, the Federal Reserve Board issued its annual, nationwide home lending report. That report, which covered every federally insured bank and thrift in every city and town across the country, showed no improvement from 1990 in the pattern of discrimination in lending.

The City Connection

The Federal Reserve data allows city leaders to see a picture of bank home mortgage lending in their neighborhoods and to participate in change.

For instance, last summer, as federal regulators looked on, community leaders in Syracuse, N.Y., carefully observed color coded census maps recording the mortgage lending patterns of the city's largest bank. White meant no loans; yellow meant one or two.

The center of the map was a sea of white, covering 23 census tracts in the heart of the city. The bank was the only one in the city which had refused to offer affordable mortgages through the city-sponsored Syracuse Housing Partnership. Yet the bank, which was seeking to take over a smaller bank with the best lending record in the city, received approval for the takeover from the State of New York.

The bank, however, needed approval under CRA from federal regulators.

But the stark evidence from the map was too much. Federal regulators held up their approval until a remarkable, 26-point agreement was worked out between the bank and community leaders.

Community Change and


As a new Clinton administration looks at the persistent pattern of bias and seeks to find new ways to both encourage banks to reinvest in their own communities and to enforce federal laws prohibiting discrimination, federal changes will provide an opportunity to redraw census maps in cities and towns. How those maps are redrawn and the relationship between cities and banks change will be key to the future.
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Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Title Annotation:part 2
Author:Shafroth, Frank
Publication:Nation's Cities Weekly
Date:Nov 16, 1992
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