The Washington PostDemocracy Dies in Darkness

The keys to ensuring a new anti-redlining initiative succeeds

History offers some pointers for government regulators

Kristen Clarke, assistant U.S. attorney general for civil rights, speaks at the Justice Department in D.C. on Oct. 22, announcing the launch of an initiative to fight lending discrimination. (Sarah Silbiger/Bloomberg News)
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The Justice Department recently announced an initiative to combat redlining, the refusal of lenders to issue credit to borrowers in communities of color.

Congress baked the practice into New Deal housing policies and later the Servicemen’s Readjustment Act, better known as the GI Bill, after World War II, making it responsible for a massive expansion of homeownership for White Americans in largely segregated suburbs into the 1950s. Meanwhile, Black and integrating neighborhoods suffered from disinvestment and, as Attorney General Merrick Garland recently noted, a substantial and stubborn wealth gap between Black and White families that has persisted. And the whole thing was invisible to most White Americans — epitomizing the racism built into the structures of everyday American life.

Yet the Justice Department effort isn’t the first initiative to tackle redlining. Forty-four years ago, Congress passed the Community Reinvestment Act to curb the practice. But despite this legislation, redlining and its legacies have remained stubbornly durable. And understanding why will be key to ensuring the success of this new initiative.

Discriminatory real estate practices have a long history, but the late 1960s provided a new opening to combat them. Inspired by the direct action of the civil rights movement and empowered by the 1968 Fair Housing Act, which banned racial discrimination in home financing, urbanites began to challenge banks’ lending policies as rooted in racial bias rather than sound business decisions.

In the 1970s, a multiracial coalition of people from redlined neighborhoods demanded that banks meet their credit needs. As part of this push, they hoped to prove that these neighborhoods had, in fact, been redlined. But they quickly learned how hard that was.

Activists charged that banks stopped lending when their neighborhoods integrated, but bankers countered that loan demand was just nonexistent in such places. Seeking documentation, anti-redlining activists persuaded Congress to pass the Home Mortgage Disclosure Act of 1975, legislation that forced banks to make their geographic lending data public for the first time. When banks shared the data the following year, activists’ complaints gained new credibility with influential lawmakers such as Sen. William Proxmire (D-Wis.).

Two years later, Congress approved the Community Reinvestment Act (CRA) so these same activists could do something with the lending data. The law gave ordinary people standing to stop bank mergers or acquisitions if one of the banks in question had redlined. Armed with data, residents of redlined neighborhoods used the CRA to bring banks to the negotiating table, where they demanded actions to repair the damage done by this practice. Impressively, community groups used the CRA to generate an estimated $1.4 trillion in mortgage loans in redlined communities by 2004.

Despite these real victories, the reach and impact of the CRA was significantly constrained both by limitations in the design of the bill itself and by changes in the mortgage business that accelerated just after Congress passed it. First, residents and activists had little leverage over redlining lenders except at those moments when a bank sought to merge or expand. Congress designed the CRA to ameliorate the impact of redlining, but without overly burdening banks. As such, it forced them to make amends for past conduct only when they asked for the privilege of expanding their operations.

Second, legislators limited the law’s scope to the banks and savings and loans that then originated the majority of residential mortgages. But in the late 1970s and 1980s, financial deregulation led to mortgage companies — non-depository institutions that made loans and immediately sold them on the burgeoning secondary mortgage market — taking a growing and eventually majority share of mortgage origination. Crucially, because these mortgage companies were not depository institutions, they were not subject to the CRA and other regulations that applied to banks and savings and loans. This reality left activists with little leverage over the lenders that, by the early 1990s, were the dominant source of residential mortgage credit.

This gap in the coverage of financial regulation created space for the flourishing of what historian Keeanga-Yamahtta Taylor calls “predatory inclusion.” Since the passage of the Fair Housing Act in 1968, some lenders turned from practices of discriminatory exclusion — redlining — to extending credit, but on predatory terms. In the 1990s and early to mid-2000s, predatory inclusion in the form of subprime loans became rampant, saddling many borrowers with debt they couldn’t possibly pay back, damaging their credit histories and resulting in widespread foreclosures in many of the very neighborhoods that had long been redlined.

But there’s reason to hope that this is a new era.

One of the first successes of the Justice Department’s new initiative was a settlement with Trustmark National Bank over what in many ways was “old school” redlining by a depository bank. Trustmark allegedly didn’t open branches in, market to, post loan officers in or lend to borrowers in majority-Black and Hispanic neighborhoods. (Trustmark agreed to the terms of the settlement without admitting fault.) Its penance — pledging more lending in underserved communities, opening a loan office in a Black and Hispanic neighborhood and increasing advertising — is the same set of strategies that federal regulators have used to punish redlining banks under the CRA.

But the action against Trustmark also marked an important shift. It stemmed not from a community challenge during a bid for expansion or merger, but from an examination by the bank’s regulator, the Office of the Comptroller of the Currency. Although community voices who point out discriminatory patterns and practices do yeoman’s work in uncovering such behavior, placing the onus of exposing redlining on them made it a far slower, more difficult process. Further, they don’t have access to the same tools as federal regulators.

So intervention from federal regulators promises to be a game changer. The Justice Department and the Consumer Financial Protection Bureau (CFPB), which have purview over the full range of financial institutions, have promised that they will proactively monitor for redlining practices of non-bank lenders — closing the giant loophole in the anti-redlining enforcement regime — and take action against “modern day” redlining practices including discriminatory algorithms.

In addition to proactively examining lending data for evidence of redlining and doing so for non-banks as well as depository institutions, there are two things that the Justice Department, the CFPB and federal financial regulators can learn from the past half-century as they strive to make the “Combatting Redlining Initiative” successful. First, although removing the burden from redlined communities to challenge and prove discrimination is a positive development, continuing to include them in the process — particularly in crafting remedies — will help regulators understand community credit needs and enable them to devise appropriate remedies.

Listening to redlined communities probably will help accomplish the second key to greater success, as well — ensuring that new loans resulting from anti-redlining efforts are good loans. For newly extended credit to ameliorate the damage from redlining, it needs fair interest rates, payback periods, appraisals and down payments, not a new iteration of predatory inclusion.

Only through such actions can the government begin to address the damage wrought by decades of redlining and begin to close the racial wealth gap that government housing policy fueled and fostered for decades.

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