Are low-income communities getting their fair share under the Community Reinvestment Act?

When Joanna Ganning started looking at community development lending in and around Cleveland, Ohio, something seemed off. As she layered loan data over a census map of Cuyahoga County, she found that bank loans made through the Community Reinvestment Act favored higher income areas over lower income areas. 

The Community Reinvestment Act, which turns 40 this year, was passed to spur lending in communities that are often underserved by lending institutions, namely low- and moderate-income communities. So Ganning, an assistant professor at Cleveland State University wondered why higher income areas were getting more of the loans. Were banks avoiding the county districts that seemed higher risk?

“Here are places that need investment,” she said. “The private market wouldn’t necessarily invest.”

The CRA is regulated by four federal agencies, to which banks have to report the lending, investments and services they offer by census tract. The banks then receive a rating, which can determine whether they can merge or expand. If a regulatory agency finds that a lending institution is not serving low and moderate income neighborhoods, it can delay or deny a request to merge or open new branches, according to the National Community Reinvestment Coalition, an association of community-based organizations.

“Every bank you’ve ever heard of” is beholden to the CRA requirements, Ganning says. The 2015 CRA lending data she analyzed on Cuyahoga County’s 447 Census tracts shows a clear correlation between a tract’s median income and the amount of loan capital it received through the CRA.

The 20 tracts where median family income exceeded 120 percent of the regional median income each received more than $20 million in CRA loans. Collectively, these 20 largely suburban tracts accounted for 37 percent of total CRA lending in Cuyahoga County. Every other tract received less than $5 million each. The six tracts at the very lowest end of the median family income scale each received less than $700,000 in CRA lending.

Ganning says “it smells wrong,” though explains she didn’t have loan-application information to determine specific reasons for the disparities.

Cuyahoga County isn’t an anomaly. Between 2012 and 2014, low-income census tracts in the U.S. received 4.9 percent of total CRA lending capital, compared to upper income area’s 38.3 percent share.

This is in spite of the fact that 9.3 percent of U.S. businesses are based in low-income tracts, compared to 25.6 percent in upper-income tracts, according to a new report by the Woodstock Institute. , which examines how CRA trends have played out nationally, and in-depth in Chicago and Los Angeles-San Diego since 2001. (Chicago and Los Angeles-San Diego have similar CRA lending trends to Cuyahoga County and the country. Data from those two cities also reveals that census tracts with large minority populations receive fewer CRA loans and dollars than tracts with larger white populations.)

“Businesses in lower-income census tracts, businesses in higher minority or higher Hispanic percentage census tracts are likely to have less access to big bank, CRA-reported bank loans than businesses in more affluent or more white neighborhoods,” the report’s author Spencer Cowan told Next City.

Darrell Hubbard, executive of Urban Partnership Bank, a Community Development Finance Institution—financial institutions that are mandated to serve low- and middle-income communities—argues that part of the problem is the time-intensity for large banks to implement small-scale lending. “When you’re trying to generate $500 million in loans… you really don’t have time to do a $500,000 deal.”

Indeed, the majority of CRA lending happens in a small number of big-ticket loans. Of the $208 billion in CRA lending in 2014, a third was issued through loans of $100,000 or less. Yet, the overwhelming majority loans—5.1 million of 5.4 million total—were $100,000 or less, which implies that time intensity isn’t really the problem.

“The probability of a business receiving a CRA-reported loan under $100,000 increases as the income level of the census tract increases, nationally and in both the Chicago and Los Angeles and San Diego regions,” the Woodstock report states. “The average loan amount does not.”

The data that Dr. Ganning was looking at in Cuyahoga County could reflect the same trend. What the data doesn’t reveal, however, is how many loan applications are submitted versus how many are approved. That would offer a clearer picture of CRA-lending patterns.

Fortunately, there is more than one way to skin a cat. Other incentive-based programs, like New Markets Tax Credits, are helping channel private capital into high-need areas. (See: New Markets Tax Credits: A Community Investment Tool Both Parties Can Love) For some banks, a small portion of New Markets Tax Credits overlap with their CRA lending requirements. Also, over 1,000 of Community Development Finance Institutions, like Urban Partnership, have been established across the U.S. with the explicit mission of investing at least 60 percent of lending volume and services in high-need American communities.

There may be short-comings with the CRA, as Dr. Ganning’s and the Woodstock Institute’s analyses suggest. Nevertheless, the NCRC contends, since the Act was launched, it has given communities access to trillions of dollars of private capital that may not have been available otherwise.

Photo credit: Clark Young

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