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Living apart: Equal access to money makes a big difference

This article first appeared in the St. Louis Beacon, Oct. 8, 2009 - A coalition of St. Louis fair housing advocates says it will serve as a watchdog to ensure that local financial institutions comply with fair lending laws and do their part in investing in low-income and minority communities.

Earlier this week, the group -- called the St. Louis Equal Housing and Community Reinvestment Alliance -- highlighted what it sees as an example of what still needs to be combatted. The Alliance announced that it had filed a public comment letter with the St. Louis Federal Reserve alleging that Clayton-based Midwest BankCentre doesn't provide equal access in African-American communities.

The bank did not approve a home loan to a black borrower in five years -- from 2004 to 2008 -- according to the alliance, which cited data collected under the Home Mortgage Disclosure Act. By contrast, the bank approved 355 loans to white borrowers in three years, from 2006 to 2008.

In addition, the Metropolitan St. Louis Equal Housing Opportunity Council (EHOC), an alliance member, said it conducted a test of the bank and found that black and white borrowers appeared to be treated differently because of their race.

"The testers used racially identifiable names and addresses and identified properties they were interested in purchasing that were located in areas heavily populated by people of that same race. The white tester was slightly less qualified in credit scores and readiness to purchase a home," said Mira Tanna, assistant director of EHOC.

Both borrowers received confirmation from the bank's customer service division notifying them that their inquiries had been received. The white borrower was contacted six times by a senior loan mortgage officer, but the black borrower received no further contact, Tanna said.

Midwest BankCentre has denied the charges.

"It has been and continues to be our policy to comply fully with the Community Reinvestment Act, the Equal Credit Opportunity Act and the Fair Housing Act. We do not tolerate discrimination on the basis of race, color or national origin," said MBC Chairman Ronald T. Barnes in a statement.

Alliance is Looking at Other Banks

Tanna said the alliance is also looking at the lending records of other St. Louis banks, but took action against Midwest BankCentre because the lender is undergoing its regular performance review with federal regulators to determine if it is in compliance with fair lending laws.

"This was more egregious -- for five years not to approve a single mortgage application for an African American -- and also the way they drew their assessment area. It was just one thing after the other that looked like it was not an accident," Tanna said. "With all of these issues together we're very concerned about their adherence to fair lending laws and to the Community Reinvestment Act passed in 1977 to prevent red-lining practices."

The bank received a "satisfactory" rating in its last review, in 2007. A negative rating of the bank could trigger more evaluations, including action by the U.S. Department of Justice, along with delays in expansions of services or mergers.

Tanna said the coalition, which organized last summer, includes the St. Louis office of ACORN; Adequate Housing for Missourians; the Citizens Coalition to Fight Eminent Domain Abuse; Justine Petersen; Metro St. Louis Coalition for Inclusion and Equity (M-SLICE); the Metropolitan St. Louis Equal Housing Opportunity Council and the Wellston Community Support Association.

"We had seen that, across the country, there is a real difference in bank performance when it comes to community reinvestment issues in places where there have been an active community reinvestment coalition. The banks have been much more willing to invest in these areas and to engage with community organizations," Tanna said.

Tanna said the coalition wants to partner with local banks and help them identify needs in the community so they can meet their obligations under the Community Reinvestment Act.

"While this media attention on one bank may seem harsh, and the public comments that we've written may seem harsh, it's warranted by their record," she said. "But I hope other banks realize that we are serious about looking into the record of all banks in this metropolitan area, and we will work with banks who want to meet their obligations."

Red-lining May Lead to Predators

When lending institutions deny equal access to minority and low-income borrowers -- a practice traditionally known as red-lining -- a door is opened for the type of predatory lenders that targeted low-income and minority borrowers for high-cost and subprime mortgages, Tanna said. That type of predatory lending is referred to as "reverse red-lining."

"In areas where there was a vacuum of brick-and-mortar banks that were providing good loans at good interest rates, the predatory lenders just really swooped in," she said.

According to the Pew Research Center, blacks and Hispanics remain far more likely than whites to borrow in the subprime market where loans are higher-priced. In 2007, 33.5 percent of home-purchase loans to blacks and 27.6 percent of such loans to Hispanics were higher-priced loans, compared with 10.5 percent of home-purchase loans to whites. (In 2008, higher-priced loans were made to 17 percent of black borrowers, 15 percent of Hispanic borrowers and 7 percent of white borrowers, according to data collected under the Home Mortgage Disclosure Act.)

Tanna said it is important to assess the status of fair lending in the wake of the subprime mortgage collapse that has left African-American communities bearing a disproportionate share of foreclosures.

"Why wasn't credit available on an equitable basis to a lot of people in those neighborhoods? Why did people choose not to go to a bank but to go to a subprime lender instead? We need to make sure that banks are getting the word out that they've got these good loan products available and that they serve all the communities," she said.

Midwest Bankcentre Denies Allegations

Midwest BankCentre, which was founded as Lemay Bank and Trust Co. in 1906, has $1 billion in deposits and seven full-service locations in St. Louis, Jefferson County and St. Charles County. The bank also has four partial-service locations in Garden Villa nursing homes.

"We appreciate the alliance's concerns, but we strongly disagree with the assertions made about our performance under the Community Reinvestment Act and our bank's lending practices," said Barnes in the bank's press statement.

In its public comment letter, the alliance charges that Midwest BankCentre doesn't provide equal access to services in African-American communities because all of its full-service branches are in areas with less than 2.5 percent of African American households. The exception is a partial-service branch located in a retirement center that is not open to the general public and doesn't issue credit.

Tanna said the bank's assessment area appears to exclude areas of high concentration of minorities, leaving out large parts of St. Louis city and some parts of north St. Louis County.

Tanna's agency regularly conducts lending tests to determine if borrowers are treated differently because they are of different races. EHOC is a nonprofit agency founded in 1992 that grew out of a task force on racial polarization established by Confluence St. Louis (now Focus St. Louis).

The test borrowers visited Midwest BankCentre in late 2008 and early 2009 -- a period of credit retraction in the financial markets.

"Credit was not as available because of the financial collapse, but credit should be made equally available regardless of race," she said. "We're really not so much looking at whether the black borrower was denied the opportunity, but how they were treated. This test showed a definite difference in treatment."

In its statement responding to the alliance's charges, Midwest BankCentre said that beginning in 2005 it had changed the manner in which it processes and reports the mortgage loans it originates. Since 2004, loans originated by the bank to minorities have continued to increase, not decrease, the statement said.

The bank said that because the alliance has expressed its concerns about the bank's performance and lending practices to the Federal Reserve Bank of St. Louis it will address those concerns and assertions directly with the Federal Reserve.

A Further Complication: Secondary Mortgage Market

Ensuring fair lending for all borrowers has been further complicated by the fact that so many lenders now sell their loans on the secondary mortgage market, says Colin Gordon, chairman of the history department at the University of Iowa. Gordon has done extensive research on housing in St. Louis; his book "Mapping Decline: St. Louis and the Fate of the American City" was published in 2008 by the University of Pennsylvania Press.

Gordon describes red-lining as a "moving target" that evolved after the fair lending laws of 1970s ended classic forms of lending discrimination. Disinvestment in low-income and minority neighborhoods was replaced by predatory lenders who bought and flipped properties - a churning form of investment, Gordon said.

"As avenues for discrimination closed, other ones opened up; and I think red-lining moved from -- not the acceptance or denial of mortgage applications -- but to their terms," he said.

He believes banks should be evaluated not only on the basis of how many loans they originate in a community but also on whether they service them on a community-related basis.

"When they sell them on the market immediately, you haven't really gained anything," he said. "You haven't removed the incentive for those banks, under the mantle of community reinvestment, to just engage in subprime lending. For them, it becomes just a quantity of loans that matter and not their quality."

Gordon said the spirit of the Community Reinvestment Act -- community banks investing in local property -- was vitiated by the larger deregulation of the mortgage industry, which allowed originating banks to immediately sell the mortgages.

"Even if you have a small community bank trying to get people into homes, the fact that six hours after writing the mortgage they sell it on some sort of derivatives market means that their incentives are completely upside down because they have no obligation to service those loans. They make all their money on the front end," he said.

Gordon believes the Community Reinvestment Act, passed in 1977, has been unfairly blamed as the cause of the current housing market collapse by critics who say it opened the market to people who couldn't afford their homes.

"If it were government programs opening up the market and erasing red lines that had created this problem, we would have had the problem in the decades after it passed," Gordon said. "But we didn't get a subprime lending problem until 25 years after the CRA."

He said subprime lending grew after 2004 when CRA reporting requirements, particularly for small banks, were reduced and that in many cases, lenders who were responsible for selling subprime mortgages aren't required to report their activities.

And, he adds, fair lending can be hard to quantify.

"It can be very hard to sort through the data on lending," he added. "You may have what looks like an open institution that's lending at a high acceptance rate in particular neighborhoods and populations. That may be an open institution or it may be a predatory institution. Until 2004, the federal government didn't track interest rates on the mortgages it was tracking. It was difficult to know if these were responsible banks investing in communities or ones that were just looking to make a buck."

By the numbers

The denial rate for black and Hispanic borrowers was more than double that of white borrowers in 2008, says Fed report.

Tightened credit in the aftermath of the housing market collapse affects everyone, but minority borrowers faced greater challenges to get home loans in 2008 -- particularly when refinancing -- according to a report issued last week by the U.S. Federal Reserve.

The annual report on U.S. home lending is based on data from 8,388 lenders with offices in metropolitan areas and assets of $37 million (as of December 2007).

The Home Mortgage Disclosure Act of 1975 requires public disclosure of home lending information for three reasons:

  • to determine whether financial institutions are adequately serving the housing finance needs in the communities they serve;
  • to monitor fair lending laws
  • to assist in decisions about how and where community development funds are spent.

Some Key Numbers

The report reflects the worsening recession.

Applications for home loans of all types -  14.2 million, down 34 percent from 2007 and nearly 50 percent from 2006. The number of reporting institutions fell 3 percent, partially driven by the decline in independent mortgage companies

Denial rate for conventional home loans   nationally

  • 36 percent of the time for blacks
  • 31 percent for Hispanics
  • 13.6 percent for whites

Denial rate for conventional mortgages in the St. Louis metropolitan statistical area

  • 37 percent for African Americans
  • 24 percent for Hispanics
  • 12 percent for whites

Denial rate nationally on applications to refinance conventional mortgages not backed by the government 

  • 61 percent for African Americans
  • 51 percent for Hispanic whites
  • 32 percent denial rate for nonHispanic whites

(The Fed noted that the growing gap might reflect that a larger proportion of minority borrowers had subprime loans - and their houses had suffered greater declines in values.)
Denial rate for conventional refinancing in the St. Louis area

  • 45 percent for African Americans
  • 36 percent for Hispanics
  • 22 percent for whites

High-priced loans (those with rates at least 3 percentage points above the rate for prime loans) accounted for nearly 12 percent of the national market, down from 29 percent in 2006. These loans made to 17 percent of black borrowers and 15 percent of Hispanic borrowers, as compared to 7 percent of white borrowers. 

Mary Delach Leonard is a veteran journalist who joined the St. Louis Beacon staff in April 2008 after a 17-year career at the St. Louis Post-Dispatch, where she was a reporter and an editor in the features section. Her work has been cited for awards by the Missouri Associated Press Managing Editors, the Missouri Press Association and the Illinois Press Association. In 2010, the Bar Association of Metropolitan St. Louis honored her with a Spirit of Justice Award in recognition of her work on the housing crisis. Leonard began her newspaper career at the Belleville News-Democrat after earning a degree in mass communications from Southern Illinois University-Edwardsville, where she now serves as an adjunct faculty member. She is partial to pomeranians and Cardinals.