We need remedies that purposefully correct injustice in community development

From the beginning of our country’s history, Black communities have been disinvested in — often intentionally. For much of the 20th century redlining and other exclusionary policies forbade lending in Black communities, segregating our cities. While laws such as the Fair Housing Act and the Community Reinvestment Act penalized and curtailed these practices, their legacy remains. The systemic devaluation of Black assets has led banks to still forego lending in many of our communities.

And while some Black spaces may be targets for investment, that money is rarely disbursed in an equitable manner. Longtime residents are often deemed unworthy of credit and are left out of the influx of development. They may not be able to keep pace with taxes and other costs that accompany rising values and thus find themselves forced out, victims of gentrification. They are then robbed of the opportunity to build generational wealth.

We are amid a new era of thought around inclusive development. While our cities were purposely built segregated, and our first attempts at fixing this problem resulted in gentrification, over time, it has become apparent that inclusion matters in community development. Just as our cities were purposefully segregated, we need remedies that purposefully correct this injustice and spread wealth-building opportunities today.

One of those remedies is in mission-driven financial institutions devoted to spreading economic access to disadvantaged communities. Black-owned banks, other minority depository institutions (MDIs), and community development financial institutions (CDFIs) have historically served as the mechanism for inclusion. They intentionally serve people the traditional banking sector leaves out. MDIs and CDFIs are among the main tools to fight this country’s racial wealth gap. While they are under-resourced, they nevertheless do impressive work extending credit and opportunity to those who would otherwise be without. Moreover, their deposits and earnings are reinvested in the communities they serve.

To amplify the work of these institutions, a new study examines the mortgage lending of minority depository institutions. The Kresge Foundation supported the National Bankers Association (NBA) with a grant to conduct research. The NBA was started 97 years ago as the Negro Bankers Association and now serves as the trade association for MDIs across ethnic backgrounds. The NBA partnered with Bank Black USA, a grassroots organization dedicated to an inclusive economy, and the Hip Hop Caucus. This national nonprofit uses the power of cultural expression to empower communities that are first and worst impacted by injustice.

The study (which I co-authored), The Social Impact of MDI Mortgage Lending, used Home Mortgage Disclosure Act (HMDA) data to analyze lending and spoke with bank officials to understand the full picture of MDIs serving the neighborhood development needs of communities of color through mortgage lending.

The data showed that:

• MDIs originate a higher share of mortgages to borrowers and communities of color than traditional non-MDI banks.
• MDIs originate more of their mortgages to low- to moderate-income individuals and communities than non-MDI banks.
• MDIs have a lower overall denial rate than their counterparts.

This research not only analyzed HMDA data, but we also spoke with the MDI loan officers, the individuals working to get more credit into communities. They spoke of the creative financial products they employ and the challenges that come with community development finance. They shared that the majority of mortgage lending goes through the secondary market —  loans that are sold to government-sponsored enterprises like Fannie Mae and Freddie Mac.

The banks gain liquidity and transfer risk by selling these loans, allowing them to put out even more capital. However, to be sold, they must meet certain standards for value and risk. Because of these standards, mortgage lending can be restrictive. Our interviewees told us portfolio lending is where they can make the most impact. Portfolio loans stay on the books of a bank and are not resold. Therefore, they can utilize expansive underwriting criteria and look past things such as appraisal values and credit scores, which have discriminatory pasts.

These findings make clear we need to amplify the ability of these banks to make loans. The report details strategies that increase MDI mortgage lending capacity, such as creating a new secondary market for selling portfolio loans. That way, MDIs and CDFIs can move loans off their balance sheet and get more money into the community. Another recommendation is creating loan loss reserves and guarantees for MDI mortgage lending. This mitigates the risk they take, spreading it to philanthropic partners and allowing MDIs to do more of what they do best.

There is a market failure in traditional banking, and Black and Brown communities are underserved. Whether from the government, large banks or philanthropy, these communities need investment. However, capital alone is not enough. We also need to bolster our mechanisms of distribution. MDIs are poised to do just that. They are the front line of inclusive lending. The future of our communities depends on intentional, inclusive financial practices. Strengthening MDIs and CDFIs will rectify past injustices and lay the groundwork for a more equitable and prosperous society.