Banking on Poor Neighborhoods

By Michelle Chen Aug 18, 2009

Given the banking industry’s growing reputation for bilking, cheating, and otherwise betraying naive borrowers, it’s not surprising that a new bank account can be a tough sell in poor urban communities of color. So how should banks get the “underbanked” to trust them? According to data released by the Pew Charitable Trusts, a relatively high percentage of Manhattanites are happy saving the old-fashioned way—stowing it away in their bedrooms or wiring it back to their home countries. And some folks just don’t have enough spare cash to bother opening an account. For people living paycheck-to-paycheck in the midst of the recession, the reluctance isn’t unreasonable. In fact, it makes perfect sense in light of the fact that the economic crisis was fueled by institutions that capitalized on the most vulnerable borrowers. Add to that the long legacy of redlining, a pattern of racial and economic discrimination that keeps neighborhoods shut out of the mainstream financial system. Yet the Pew data seems to add a new twist to an old dilemma, reports the New York Times:

The trend is no longer attributable to a lack of bank branches, which moved state and city agencies and community groups to increase efforts in recent years to get banks to open in underserved and low-income areas. Now, New Yorkers are walking past banks and credit unions on the way to check cashers, according to Pew: 86 percent of licensed check cashers in Manhattan are situated less than four blocks from a bank or credit union.

The article suggests that many immigrants and poor people are irrationally picking check cashers over deposit slips. But if you take a stroll through a working-class neighborhood in the city, you might find another backstory to this phenomenon. Financial geography—having a local bank or credit union in your neighborhood—is an important access issue for the underbanked. And while there has been some progress on this front, it’s still lagging in many poor communities, according to research from fair-lending advocates). More broadly, in neighborhoods where consumers can’t afford to take big risks, the responsiveness of these institutions, and the regulatory structure, to their needs remains an open question. A generation ago, Congress passed the Community Reinvestment Act in an attempt to remedy disparities in banking access. (Note this is the same law that right wing propagandists have vilified as a cause of the mortgage meltdown.) The CRA established guidelines to encourage banks to set up shop in low-income communities, but the weaknesses in regulatory framework paved the way to disaster: Under the rubric of the Ownership Society, the predatory and subprime lending market swelled, while the CRA’s regulations were eclipsed by the explosion of alternative (i.e. shady) financial institutions not covered by the law. Ford Foundation scholar Mark A. Willis, a former insider with J.P. Morgan Chase, parses the failures, and the unfulfilled promise, of the CRA in the American Prospect:

CRA has created a cadre of bankers who recognize the business potential of lending to low- and moderate-income neighborhoods prudently and profitably. They have learned how to collaborate with community-based organizations, each other, and with government to provide, for example, real-estate loans for affordable housing and community economic development, which were previously avoided due to their complexity and modest size as well as to possible discrimination.

On reform, Willis says the law’s safeguards are no longer enough to deal with inequities in the current financial system:

Today… the regulatory tools of CRA are a poor fit with the machinery of the new world of mega-banks and mortgage finance that evolved since the 1990s, let alone the wreckage of the industry after the crash…. the largest banks have increasingly addressed CRA goals through their mainstream business units, to the detriment of specialized units that historically have been a major source of innovations and partnerships with community-based organizations and with government. Worse perhaps, CRA also doesn’t focus enough on areas where banks could have the most impact in revitalizing and strengthening low- and moderate-income communities.

Potential reforms might include expanding the CRA to non-banks, tightening regulatory oversight, and providing stronger protections against racial bias in lending. Promoting ethical financial development, whether through community credit unions or mainstream banks, is complicated by the swarm of predatory lenders in “credit-starved” communities. Just as they were redlined in the past, communities of color are undermined by greedy lenders who see their desperation as a marketing opportunity. According to an analysis of several neighborhoods in California by the Center for Responsible Lending:

Even after controlling for income and a variety of other factors, payday lenders are 2.4 times more concentrated in African American and Latino communities. On average, controlling for a variety of relevant factors, the nearest payday lender is almost twice as close to the center of an African American or Latino neighborhood as a largely white neighborhood. Payday lenders are nearly eight times as concentrated in neighborhoods with the largest shares of African Americans and Latinos as compared to white neighborhoods, draining nearly $247 million in fees per year from these communities.

So if banks are scratching their heads about why immigrant families aren’t opening college savings accounts, or would rather start a business by borrowing from relatives instead of applying for loans, they should ask themselves a simple question: would you lend your money to the guy who stole from your neighbor? Image: Seattle Times