Leaders in the banking industry acknowledge decades of discrimination by banks and inattention to persistent problems have helped fuel the country’s racial wealth gap.
As the protests following George Floyd’s death at the hands of a Minneapolis police officer brought attention to racial inequalities, many in the banking industry stepped forward with support for Black Lives Matter and commitments to address racism and issues of diversity and equity.
But the banking industry itself has a long history of contributing to ongoing racial inequities with its lending policies and practices – oftentimes legal, though sometimes not. The resulting racial disparities continue to affect Black people and their access to capital, credit scores, debt-to-income ratios, ability to build family wealth, education and business opportunities.
“If you cannot get access through traditional markets, you cannot participate in a meaningful way in building, creating and sustaining a viable ecosystem,” said former state Sen. Dianne Wilkerson, who played a key role in addressing Boston’s second-mortgage scandal in the 1990s as the Boston NAACP’s general counsel. “Without that viable ecosystem and an economic base, the community will always be at the bottom with economic disparity and a victim of gentrification.”
Today, due to the legacies of slavery, discrimination in federally-backed mortgage programs after World War II, redlining and other factors, white families are three times more likely to transfer wealth between generations as Black families are, as Boston Consulting Group noted in its June report, “Financial Institutions Can Help Break the Cycle of Racial Inequality.” Black households also lack access to credit at nearly twice the rate of white households, BCG reported, and Black-owned businesses get turned down for bank financing twice as often as white businesses.
Lending Disparities Persist
Lenders enforced racial inequalities through redlining, refusing to lend to Black people or in predominantly Black neighborhoods. The 1960s and 1970s saw the Civil Rights Act, the Fair Housing Act and the Community Reinvestment Act start to dismantle the discrimination.
But three studies in 1989 by the Federal Reserve Bank of Boston, the Boston Redevelopment Authority and the Greater Roxbury Neighborhood Authority brought to light ongoing practices in Boston’s banking industry that led to racial disparities in lending.
The reports touched a nerve with the community, said retired UMass Boston economics professor Jim Campen.
Boston’s four large banks at the time – Bank of Boston, Shawmut, Fleet and BayBank – agreed to take part in a program to address racial disparities in mortgage lending. Several community organizations were formed as a result of the program, including the Massachusetts Housing Investment Corp. and the Massachusetts Community and Banking Council, which both still exist.
Campen worked with the MCBC to study mortgage lending patterns in Boston. He continued writing these reports annually until his 25th and final one in 2018.
Over those 25 years, Campen continued to see racial disparities in lending. While conscious and unconscious biases at banks had some role, persistent inequalities in lending decisions were tied to Black households having less wealth, income and education, along with living in neighborhoods with higher crime rates, Campen said.
“They were the result of our country’s whole history and our city’s and region’s whole history of institutionalized racism and slavery,” Campen said. “It was one dimension of a much bigger problem.”
Targets of Predatory Lending
Predatory lenders have also targeted local Black communities more than once in Massachusetts’ recent history.
One of the most notable examples was known as the second-mortgage scandal of the 1990s. Wilkerson said banks were providing financing to lenders offering older Black residents, many of whom had mostly paid off their first loans, second mortgages, saying they could be used for repairs.
The lenders would then foreclose on the home. Wilkerson said more than 8,300 residents were affected by the scandal.
The next decade, some subprime lenders also targeted Black borrowers.
“It went from a time when Blacks had a hard time getting loans to a time when horrible loans were pushed on Blacks,” Campen said. “There were strong marketing campaigns to get them to take on debt, which they were in many cases unable to repay, that had a variety of exploitative provisions in it.”
The industry has made progress since 1990 in addressing racial disparities, said Jon Skarin, an executive vice president with the Massachusetts Bankers Association. But he added that more work needs to be done. The banking trade group has had several initiatives over the years to encourage the industry to do more outreach in Black communities.
“It’s something that banks continue to work on,” Skarin said. “I don’t think we’re at the point where we have solved this.”
Banks have been able to increase lending to people of color by participating in mortgage programs designed for low- and moderate-income households through MassHousing and the Massachusetts Housing Partnership, Skarin said. But the rising costs for housing during the last 20 years in Greater Boston, along with the lack of accumulated wealth that has affected many Black households, have created challenges for lenders and prospective homebuyers.
While the Dodd-Frank Act tightened underwriting rules to prevent banks from engaging in predatory lending, people of color often access credit through non-bank lenders with higher interest rates, further reducing opportunities to accumulate wealth.
Diane McLauglin
Skarin said many banks in recent weeks have been reevaluating lending practices and looking for ways to improve their ability to make loans in communities of color. He expects over the next six to eight months to see initiatives start to emerge.
Wilkerson said she is watching to see whether banks follow through on the support they have been showing to the Black Lives Matter movement in recent weeks.
“I’m taking everyone at their word that they want to do what they’re saying they want to do,” Wilkerson said. “The question is whether they’re going to be willing to do the things necessary to accomplish this, which means breaking down historic barriers on race in ways that we haven’t done before.”
