The New Redlining
It's different from the old, but minorities are still getting shortchanged
April 17, 1995
By Penny Loeb, Warren Cohen and Constance Johnson
Above the blighted neighborhood of North Philadelphia in Germantown,
George and LaVerne Butts purchased an abandoned house seven years ago. It
was something of a beachhead. Banks weren't making loans in the North
Philadelphia area, but the Buttses persuaded them to try. They had the law
on their side. The law was called the Community Reinvestment Act. Passed in
1977, the CRA requires banks to meet the credit needs of their entire
communities -- rich or poor, white or black. The law permits citizens to
protest a bank's community lending record and win agreements for more loans.
That's what the Buttses did. And thanks to their efforts, some 200 abandoned
houses nearby are home now to families. Children play in the yards. The
mortgages get paid on time.
But the 18-year-old act has also generated plenty of controversy.
Republicans have introduced bills in the House and Senate that would exempt
nearly 88 percent of the nation's banks from the CRA. Supported by banking
groups, GOP leaders say the private sector is doing everything it can to
make mortgage money available to lower- income Americans. The Clinton
administration says more needs to be done. It is pushing for stronger CRA
regulations. In the meantime, the Justice Department is taking the lead on
fair lending. Two weeks ago, Justice joined a discrimination case against
American Family Mutual Insurance Co. in Milwaukee. The insurer quickly
agreed to settle. It will invest $14.5 million in the inner city. Says Deval
Patrick, assistant attorney general for civil rights: "Our cases illustrate
that there is a far greater chance that minorities will face outright denial
of financing -- or denial of financing at competitive rates -- than will
white applicants with virtually identical qualifications."
Few people dispute that federal fair-lending laws have had a positive
impact on bank lending to the poor. But critics contend the lenders could be
doing a lot more. They concede that blatant discrimination -- in which
financial institutions literally drew a red line around entire neighborhoods
deemed off-limits for loans and homeowner's insurance -- is rare today. But
formal redlining, they argue, has given way to other practices that
effectively impede lending to poor neighborhoods. Compounding the problem,
banks have been closing branch offices, pulling up a crucial financial
anchor of many communities.
In a six-month investigation, U.S. News examined banking, lending and
home-insurance coverage in poor and minority communities. The inquiry was
based on an unprecedented study of nine sets of banking and insurance
industry data, including more than 24 million mortgage records (methodology,
Page 58). More than 200 interviews were conducted in 12 cities. These are
the principal findings of the inquiry:
The number of poor and minority homeowners who cannot obtain full-
coverage property insurance is nearly 50 percent greater than that for
residents of mostly white, middle-class areas. Poor Americans also pay more
than twice, on average, what residents of middle-class neighborhoods pay for
property insurance. In high-minority, low- income areas, residents pay an
average of $7.21 per $1,000 of homeowner's insurance. Residents of
low-minority, middle-income neighborhoods, by contrast, pay an average of
$3.53 per $1,000. Insurance carriers' loss costs are demonstrably higher for
urban areas -- accounting for more stringent underwriting rules and higher
premiums. Even so, a study done last year by the National Association of
Insurance Commissioners reviewed three decades of insurance industry
performance in urban areas and concluded: "Insurance redlining is widespread
and has adversely affected residents of poor and minority neighborhoods." On
current conditions, the study was less definitive. Higher prices and lack of
insurance availability in poor, urban neighborhoods, it found, "may be
driven, at least in part, by incorrect assumptions about the risk
characteristics" of those neighborhoods.
Despite federal laws that encourage banks to lend to the communities they
serve, banks are fleeing poor neighborhoods in ever greater numbers. An
examination of Federal Deposit Insurance Corp. data for 12 major cities
representing 31 percent of the nation's urban population found that in the
past two decades, the number of bank branches in white neighborhoods had
tripled compared with the number of bank branches in mostly minority areas.
Nationally, according to the U.S. News study, there are an average of 38
bank branches per 100,000 residents in white areas but only 22 branches in
minority neighborhoods. Two decades ago, the numbers were roughly equal.
They have become unbalanced in recent years as banks have closed branches in
Federal laws make it a crime to discriminate against mortgage applicants
seeking to buy homes in mostly minority areas. But the U.S. News survey
found that middle-income black applicants from mostly minority areas were
more than twice as likely to be rejected for mortgage loans as middle-income
whites living in mostly white areas. For blacks, the rejection rate was 37
percent; for whites, it was just 18 percent. Overall, residents of
middle-income white neighborhoods received 61 percent more mortgage loans
than residents of middle-income minority areas did.
The bottom line. Bankers and insurance executives say they work hard to
do more business in poor and minority neighborhoods, and many do,
particularly through community development banks. But higher crime rates and
tumbling property values make lending in poor areas difficult. "Banks want
to make loans," says the American Bankers Association's James McLaughlin.
"It's how they make their money. ... The bottom line is that they're in the
business of making loans." Leo Jordan, a vice president with State Farm
Insurance Co., agrees. "There really isn't evidence of intentional
discrimination by insurers against urban residents," he says. "What you have
are neutral underwriting rules that have a disproportionate impact upon
minority, urban residents."
Obtaining full-coverage insurance for a home is nearly as important as
finding the financing to buy one. In Toledo, Ohio, Deborah Quinn- Lucy, a
black high school teacher, owns a handsome frame house in a neighborhood of
mostly well-maintained homes. The neighborhood is in central Toledo. Most of
the residents are black. In the past four years, Quinn-Lucy has had her
homeowner's insurance canceled twice. The reasons have differed each time.
One insurer claimed that her house is located in front of an alley, creating
a security problem. Another canceled over a broken window that actually was
The crime rate in Quinn-Lucy's neighborhood is significantly higher than
that in nearby Maumee. In 1993, the city of Toledo reported 64 property
crimes for every 1,000 residents. In Maumee, the rate was 40.5 crimes per
1,000. The numbers mirror the national averages almost exactly: In central
cities of 1 million people or more, the national average is 65 burglaries
per 1,000 households, compared with 45 per 1,000 households in suburban
Loss costs. The numbers are instructive on two levels. First, while the
crime rate in inner cities is higher than in the suburbs, it is not twice as
high, as is the average insurance premium paid by inner- city residents.
Second, insurance carriers clearly have greater loss costs on policies sold
in inner cities, but except for the most blighted inner cities, crime stats
don't appear to justify decisions to exclude entire neighborhoods from
insurance coverage. State Farm Insurance Co. is currently under
investigation for its sales practices in Quinn-Lucy's neighborhood in Toledo
and in several other Ohio cities. State Farm says it has broken no laws and
is cooperating with the inquiry.
Insurers say they do not discriminate against residents of poor and
minority neighborhoods. Rather, they say, their decisions on where and what
kinds of insurance to sell are dictated by business reasons. One key factor
is property values. In many inner-city neighborhoods, the value of housing
stock of all kinds has fallen in recent years. That makes it difficult or
impossible to offer "replacement value" coverage -- policies that pay to
rebuild a structure and replace its furnishings at today's costs.
Still, a growing number of policy cancellations have attracted the
attention of federal regulators. Although it has no statutory authority to
police insurance carriers, the federal government can take action if there
is the suspicion of civil rights violations. That is the authority the
Department of Housing and Urban Development cited in opening its
investigation of State Farm's sale practices in Ohio. HUD is also examining
Allstate's sales of homeowner's policies in Illinois and those of Nationwide
Insurance Enterprise in Louisville, Atlanta, Milwaukee and Chicago. A
spokesperson for Allstate says the company is in compliance with the law and
is cooperating with the government inquiries. Nationwide has informed HUD
that it has no authority to investigate the company. A spokesperson says the
company's sales policies comply with all applicable laws.
Wide gap. In its study of the insurance industry's performance in urban
areas, the National Association of Insurance Commissioners collected data on
the cost and type of policies sold in 33 metropolitan areas in 20 states.
The study is considered the most comprehensive ever done on the subject.
After statistically ruling out other factors, the NAIC study found that only
57.6 percent of the houses in high-minority, low-income areas were insured
at all, compared with 81.5 percent in white, high-income areas.
In a controversial settlement with Maryland-based Chevy Chase Federal
Savings Bank last year, the Justice Department cited evidence of
discriminatory lending practices. Chevy Chase had a policy of opening
branches only in mostly white neighborhoods, where it intended to sell
mortgages, Justice said. In its settlement, Chevy Chase admitted no
wrongdoing but agreed to open three new branches in mostly black
neighborhoods and make $7 million available in nonconventional mortgage
Chevy Chase was unusual. In other cities, despite fair-lending laws like
the CRA, which is supposed to penalize banks for failing to serve people in
all parts of their service areas, banks regularly ignore or underserve
inner-city neighborhoods. The Dime Savings Bank of New York, for example,
said it serves New York, except the Bronx, suburban Long Island, affluent
Westchester County and areas upstate including Albany and Buffalo. "The
Dime's communities consist of neighborhoods that are home to people of
diverse ethnic and socioeconomic backgrounds," the bank's brochure stated.
"We delineate our CRA communities by incorporating neighborhoods, including
low- and moderate-income areas, located around our branch offices."
But the bank's map of its service area omitted the entire area of Harlem
north of 117th Street -- despite the fact that the area is part of New York.
Last year, Dime agreed to include the rest of Harlem in maps of its service
area. After a challenge by a Bronx community group threatened to scuttle
Dime's application to merge with the Anchor Savings Bank, it added the
Bronx. A spokesperson says Dime made the decision earlier but hadn't
The loss of bank branches creates a Catch-22 situation. Banks typically
lend in their service areas, most often defined as areas around their
branches. Fewer branches means fewer loans. In the 12 cities analyzed by
U.S. News, the number of banks per 100,000 residents in minority and white
areas was roughly equal in 1970. By 1993, the most recent year for which
records are available, there were three times as many banks per 100,000
residents of white areas as there were for every 100,000 residents of
Baltimore was one of the cities most affected by bank flight from poor
areas. In 1970, the number of banks serving the city's white and minority
neighborhoods was nearly even. By 1993, minority areas had just 1 bank
branch for every 5 located in white neighborhoods. For Mary Harden, the
nearest bank now is a 20-minute bus ride away. Like a lot of her neighbors,
Harden goes to a commercial check casher now -- paying a fee of several
dollars each time.
The stories differ, but not much. Not too long ago, Chandra Ward wanted
to buy a house. At $15,000, the place was a steal, well within her budget. A
single black woman with a steady job working for Federal Express, Ward saw
her mortgage loan application rejected almost immediately -- the little
bungalow was in a mostly black neighborhood in central Memphis. When Ward
tried to buy a second house, her loan application for $71,500 sailed right
through. The second house was in a racially mixed area.
The U.S. News analysis found that differences in mortgage-lending rates
between whites and minorities could not be accounted for fully by income
levels. In white areas where household incomes were at least as much as the
area median, as determined by HUD, there were an average of 45 mortgage
loans per 1,000 houses. In minority areas at the same income level, there
were just 28 loans per 1,000 houses.
Assessing such disparities is tricky. Many residents of poor and minority
neighborhoods don't believe they can qualify for mortgage loans and so don't
apply. An inability to secure full-coverage homeowner's insurance further
complicates the picture, as does the secondary market for conventional
mortgages. Many big lenders sell the home loans they make to buyers like the
Federal National Mortgage Association. Secondary-market buyers have strict
criteria: Buyers must either have made a down payment on the home of at
least 20 percent of the purchase price or they must buy private mortgage
insurance, which guarantees repayment of the loan if the homeowner defaults.
Many poor people cannot come up with a 20 percent down payment. Many cannot
qualify for or afford private mortgage insurance.
The disparities in mortgage lending by neighborhood are important. The
CRA was passed as a key element of the 1977 Housing and Urban Development
Act, whose stated purpose was to outlaw "redlining" -- defined as a refusal
by a financial institution to make mortgage loans to certain neighborhoods
because of their racial composition, income level of the residents or age of
the housing stock. The U.S. News findings for middle-income black and white
mortgage applicants are best understood not by the race of the applicant but
by the racial composition of the neighborhoods in which loan applicants
sought to purchase homes. Jonathan Fiechter, acting director of the U.S.
Office of Thrift Supervision, one of four federal agencies responsible for
enforcing fair-lending laws, calls the trend dismaying. "I don't think we
have the blatant discrimination we had in the 1950s and 1960s," Fiechter
says. "I think it tends to be more unintentional, which may be just as
egregious in some sense."
That's why the stakes in the current fight over the CRA are so high, its
supporters say -- arguing that the act is a linchpin in the federal
antidiscrimination enforcement machine, a "trigger" that can bring other
antibias laws to bear.
Everyone seems to have a gripe about the law. Critics call CRA rules
burdensome; others say the law has been ineffective in promoting far greater
levels of lending to minorities.
Both, in a way, are right. The American Bankers Association's McLaughlin
says banks spend $12 billion annually trying to comply with the CRA -- and
most of that goes for paperwork -- an expensive and time-consuming burden.
"There are some real small banks in this country that only have seven, eight
employees that have to have 15 or 16 different written policies. ... It
doesn't make a lot of sense."
Challenges generate loans. The law has done some good. Under the CRA,
challenges to banks have resulted in pledges of more than $30 billion in
loans to minority neighborhoods nationwide. In Illinois, Harris Bank,
Northern Trust Bank and First National Bank of Chicago promised to lend $153
million over five years to poor neighborhoods. An evaluation found that the
program had generated $117.5 million in new loans by the start of the fifth
year -- and almost no direct loan losses.
But other evidence supports the argument that the CRA is a weak tool at
best. Prior to 1992, the four bank regulatory agencies responsible for
enforcement of fair-lending laws referred potential violators to the
Department of Justice just one time; no enforcement action resulted. In the
past two years, there have been 16 bank referrals to the Justice Department
for racial and ethnic discrimination. Two lawsuits were filed as a result of
those referrals. The Justice Department sent 11 of the complaints back to
the agencies that originated them, citing insufficient evidence of
violations or recommending administrative enforcement. Three referrals are
under investigation. One big reason for the complaints about the CRA is the
approach the law takes toward enforcement. Many who supported passage of the
law initially said that banks ought to be made to serve all areas of the
communities in which they did business. In exchange for government services
like federal deposit insurance, the theory went, banks should have to meet
certain minimal lending standards. Lawmakers wanted performance. What they
didn't want was an overly rigid regulatory tool. What they got was a law
that barely quantified lending activity at all.
Ratings. Federal bank regulators are supposed to evaluate lending records
every other year. Banks are rated on 12 factors. Only three have anything to
do with where loans are actually made and whether banks locate branches in
poor neighborhoods. Three other rating factors relate only to paperwork.
Banks are thus assessed, for example, on the quality of brochures they
publish about their lending philosophy. Eugene Ludwig, comptroller of the
currency, concedes the point: "What the law asks us to evaluate is, 'Are you
meeting with the community? Are you advertising to the community?'"
Even defenders of the CRA call the rating system inadequate. Banks can be
given one of four grades. In 1994, fewer than 1 percent of all banks -- the
exact figure is 0.3 percent, just 17 banks out of 5,592 examined -- received
the lowest CRA grade, a term regulators call substantial noncompliance. Of
the 100 banks that ranked lowest in a separate U.S. News review of mortgage
loans to minorities, not a single bank received the noncompliant grade.
Seeking favor. The U.S. News review also found extraordinary variation in
the kind of information banks provide to regulators. One bank asked the FDIC
for a favorable CRA rating because some of its employees participated in a
community window-washing project; the FDIC approved the request. Another
bank asked the Federal Reserve for a high CRA rating, in part because it
established a $60,000 line of credit for local businesses to purchase Girl
Scout cookies. The Fed commended the bank for the effort.
William Proxmire, the former chairman of the Senate Banking Committee who
authored the CRA, envisioned regulators stepping in to block mergers and
acquisitions because of poor CRA ratings. In fact, federal regulators have
blocked almost no applications for mergers and acquisitions because of poor
CRA grades. Since 1977, according to banking consultant Kenneth Thomas,
regulators have denied just 20 of more than 77,000 applications for adding
branches or merging with other banks.
Community groups say this is a critical time for the nation's inner
cities. With interest rates higher than they were a year ago, borrowing is
more expensive for most Americans. In the nation's poorest neighborhoods,
the problems and difficulties are worse.
While the 104th Congress decides what to do now about the Community
Reinvestment Act, banks and their Washington supporters are anxious to make
their case. They are likely to get a sympathetic hearing. In the 1993-94
election cycle, banks and mortgage companies made nearly $12 million in
campaign contributions. One of every five dollars went to key members of the
This report is based on banking, insurance, demographic
and campaign finance records from the Federal Deposit Insurance Corp., the
Federal Financial Institutions Examination Council, the National Association
of Insurance Commissioners, the U.S. Dept. of Housing and Urban Development,
the Census Bureau, the Federal Election Commission, Inside Mortgage Finance
and Sheshunoff Information Services. All conventional loans to purchase
one-family to four-family houses in 1992 and 1993 were analyzed. Federally
insured loans and refinancing loans were excluded. Loan data were combined
with 1990 census data to determine loan locations. Median incomes for each
metropolitan area were used to determine low- and moderate-income
neighborhoods and applicants. Census data were added to data on location of
bank branches to determine the racial composition of neighborhoods. Because
of criticism of denial rates as an inaccurate measure, U.S. News also
examined lending patterns by race and income of neighborhood and by income
of applicant. Lenders were rated in cities with more than 10 percent
minority populations where they made at least 25 loans. Banks with fewer
than 50 total applications were excluded. Banks and mortgage companies were
rated on loans in minority and low- and moderate-income areas, loans to
African-Americans and Hispanics and denial rates for the two races. Banks
were also rated on the number of branches in minority areas. With Joseph P.
Shapiro; Kukula Glastris; Pamela Sherrid; Andrea Wright. Copyright 1995,
U.S. News & World Report. All rights reserved.