Banking: Programs sought by activists spark surges in lending. But levels typically fall by the third year, a study finds. By E. SCOTT RECKARD, TIMES STAFF WRITER Bank pledges to provide more home loans in minority and lower-income areas are followed by a surge in lending, but the financial flood typically dries up after two years, according to a new study by a USC economist. The study by Raphael Bostic, a former Federal Reserve Board senior advisor who heads a USC real-estate economic forecast, is to be released today. It contains mixed news for backers of these lending deals, which community groups often negotiate when banks are seeking regulatory approval for mergers--a process once compared to "extortion" by Sen. Phil Gramm (R-Texas), then head of the Senate Banking Committee. Data for the 23 years studied by Bostic showed that mortgage lending jumped an average of 14% in targeted areas after the agreements took effect. But the fact that lending fell back to its original levels by the third year suggests the agreements may typically help only the "cream of the crop"--the top tier of potential borrowers in low- and moderate-income areas, said Josh Silver, vice president of the National Community Reinvestment Coalition, whose organization represents community groups across the country. But even if the banks' Community Reinvestment Act programs sometimes fizzle out, Silver said the new study reaffirms his belief that there's a need for the programs and that they work. He cited studies by the Treasury Department and the Federal Reserve Board showing CRA lending is generally profitable for banks and brings new capital to distressed neighborhoods. Bank commitments to increase lending in lower-income areas are the offspring of federal fair-housing and equal-credit laws and of the Community Reinvestment Act of 1977, which requires regulators to scrutinize banks and thrifts to ensure they are serving poorer neighborhoods. The release of CRA data and the possible denial or delay of mergers over CRA issues have been important in spurring banks to pledge billions of dollars that, Bostic said, serve as "insurance" against the cost of violating fair-lending laws. Sophisticated community groups have used money wrung from banks under CRA agreements to increase home purchases and small-business start-ups among low-income groups, striking more than 300 lending agreements nationwide with pledges totaling more than $1.5 trillion. In fact, large commitments to community lending have become an expected part of pre-merger maneuvering for banks, with the conflicts centering on the size and form of the agreements. As part of its current bid to acquire California Federal Bank parent Golden State Bancorp, Citigroup Inc. pledged last month to commit $120 billion in new loans and investments over 10 years to minority and lower-income customers in California and Nevada. But community groups protested that Citigroup, as the nation's largest financial institution, should provide more money and better details on how it would be spent. The Fed has asked Citigroup to respond to a long list of questions raised by New York's Inner City Press and other community groups about practices at its sub-prime lending businesses, which make higher-interest loans to borrowers with spotty credit. In his study, Bostic used a database combining information from the Fed and community groups to examine lending patterns in various census tracts after the agreements took effect. "My [initial] thought was that it was basically grandstanding on the part of the banks, and that the community groups would be too small to enforce these things," he said. The fact that lending increased significantly, he said, "was a good surprise." Among the benefits of the CRA agreements, he said, was that the banks developed new loan products tailored for low-income borrowers, such as mortgages with extremely low down payments. The study didn't determine why mortgage lending dropped off after two years, a question Bostic hopes to address in future research. He said early findings indicate that some community groups fail to monitor lender programs and that some banks regard CRA "insurance" as needed only for short periods, such as during the course of a merger. James Ballentine, director of the Center for Community Development at the American Bankers Assn., said Bostic's research shows that many potential borrowers in lower-income areas are "credit-worthy at the outset." Banks have benefited from making more loans and taking in more deposits in these areas, Ballentine said, but banks have found that many more residents of these neighborhoods need considerable financial coaching, credit repair and debt reduction before they're ready to take on home loans. The success of programs such as low down-payment loans has made it tougher for some banks to meet their lending goals in competitive markets such as California. Seeing that these loans can be profitable, other banks rush in with similar products to siphon business away, Ballentine said. CRA agreements are more prevalent and more complex in states such as Illinois, New Jersey and New York, which have big urban populations and well-established community groups. No agreements have occurred in some rural states such as Kansas, Bostic said. In California, groups such as the Greenlining Coalition and the California Reinvestment Committee worked out some of the biggest CRA commitments amid major mergers involving institutions such as Wells Fargo & Co. and Washington Mutual Inc. Lending information collected under the federal Home Mortgage Disclosure Act consistently has showed that minorities are turned down for loans more often than whites. The latest data, released last week, showed 36% of black applicants for conventional mortgages were rejected in 2001, compared with 35% of Native American applicants, 23% of Latino applicants and 16% of white applicants. Maud Hurd, president of the Assn. of Community Organizations for Reform Now, said it was "outrageous that ... African Americans are still being turned down for home purchase loans twice as often as whites." She said blacks, "who are starting from behind in the climb to homeownership, are being pushed still further back." Bostic and others, however, cautioned that no conclusions can be drawn about the extent to which racial bias may have been a factor in the higher rejection rates, because the Home Mortgage Disclosure Act requires lenders to disclose information about race, gender and income, but not such crucial variables as the debt burdens and credit histories of loan applicants. "An individual's credit status is highly significant when you measure whether somebody gets a loan or not," Ballentine said. He suggested that banks and community groups need "to do better outreach" to educate potential borrowers. Bostic's study didn't address many facets of CRA agreements, such as small business loans, commitments to community development, minority hiring and adding minority representatives to boards. Data about those areas is far harder to come by than information about individual home loans at the census-tract level, he said.
August 5, 2002