In 1993, a few months after being sworn in as comptroller of the currency, I joined Representative Paul Kanjorski on a tour of his central Pennsylvania congressional district. The area around Scranton, perhaps best known today as home to the fictional Dunder Mifflin Paper Company from The Office, was broadly akin to York, Pennsylvania, where I’d grown up two generations earlier, roughly 150 miles away. Both areas, rural landscapes dotted with pockets of industry, had been fairly prosperous in the postwar era of my youth. Now deteriorating, both seemed to be on the cusp of being forgotten amid the nation’s transition to the “new” information-based economy.
Kanjorski, a warm-hearted, old-style liberal sitting on the House Financial Services Committee, had invited me up to see the state of the housing market firsthand—and specifically the way federal laws affected the opportunities Black families and people of modest means had to purchase homes. A quarter century earlier, when President Lyndon B. Johnson signed the Fair Housing Act of 1968 (FHA), many liberals had hoped that Washington was well on its way to eliminating prejudice from the housing marketplace altogether, ensuring, in the phrase popularized by President John F. Kennedy, that “a rising tide lifts all boats.” Johnson himself believed that future generations would view the FHA as a breakthrough of equal importance to the Civil Rights Act of 1964 and the Voting Rights Act of 1965. But by the late 1970s, progressives were forced to admit that the new law had not had the impact Johnson envisioned. Through a practice known as redlining, banks were skirting the spirit of Johnson’s law simply by refusing to lend to lower-income, typically Black, neighborhoods altogether.
[Read: The racist housing policy that made your neighborhood]
Redlining was nearly ubiquitous. The three largest banks serving Hartford, Connecticut, for example, had made more than 1,300 loans in the city’s largely white suburbs—but only 85 in the city itself. In Chicago, the four largest savings and loan associations and the two largest commercial banks extended only 22 percent of their mortgage loans inside the city, the rest being directed to the much whiter suburbs. As Gale Cincotta, a well-respected community advocate working in Chicago told a Senate panel, “It’s easier to get a loan in Albania than on the West Side of Chicago.” So, in 1977, Congress passed, and President Jimmy Carter signed, the Community Reinvestment Act (CRA), which required financial institutions to serve customers everywhere the institutions had a physical presence, not just in neighborhoods where they thought they could derive the most profit.
After Carter’s defeat in 1980, the Reagan and Bush administrations effectively nullified the law, and regulators refused in most cases to hold banks to the high standard laid out in the underlying legislation. Rather than forcing lenders to serve minority communities in earnest, Washington simply compelled lending officers to document why, in each case, they had chosen not to lend to lower-income applicants. The paltry impact was predictable. In 1960, 64 percent of white people owned their homes, compared with 38 percent of Black people—a racial gap of 27 percent. Thirty years later, in 1990, the gap still stood at 25 percent.
Shortly after he was elected president in 1992, Bill Clinton nominated me to become comptroller of the currency, running the federal agency that regulates the nation’s largest banks. During my confirmation hearing, I promised senators that I would do everything in my power to end discrimination in the banking system, eliminating it “root and branch.” Beyond investigating clear violations of the FHA and referring cases to the Department of Justice for prosecution—something that had almost never been done before—that meant making the CRA more effective.
Kanjorski had invited me up to Scranton to get a better sense of the blowback we would face if we began pressuring loan officers to accept applications that, left to their own devices, they would have been more likely to reject. Stopping into a local branch, we were ushered into a conference room with a table piled high with thick manila folders. Each folder, the branch manager explained, contained the reams of paperwork bankers were required to fill out when they rejected an application, for insufficient savings, bad credit, or whatever other reason.
Walking out, Kanjorski argued that as skeptical as liberals might be of the banking community’s failure to serve minority communities, the paperwork problem was real. The CRA had been written to help underserved communities get loans—but banks had largely absolved themselves of having to extend credit to applicants by wrapping themselves in red tape. The system represented the worst of both worlds: reams of useless paperwork and nothing positive to show for it. So, after returning from Scranton, I took up the president’s directive to begin what became the first-ever comprehensive overhaul of the nation’s anti-redlining laws.
The next two years were difficult. But after several rounds of tough negotiations between activists, bankers, and other regulators, we created a new regime. Rather than forcing lending officers to prepare piles of documentation to justify their decisions, we established procedures and examinations that would more comprehensively measure whether any bank was, in earnest, lending, serving, and investing across its whole “service area.” If a bank failed to meet this mandate, it would not receive regulatory approval to undertake a wide variety of corporate activities, including mergers, acquisitions, and branch openings and closings. In other words, banks that failed to meet their CRA obligations could be forced to abandon key parts of their business strategy.
Our plan worked. From 1993 to 1998, lenders cumulatively made more than $1.2 trillion in CRA commitments, 125 times more than the $8.8 billion made from 1977 to 1991. And that pointed to an important model for regulatory success. Washington could use the various tools already at its disposal, when properly calibrated, to combat pernicious forms of prejudice in the banking system.
Unfortunately, efforts to make loans more widely available did not solve the broader challenge. For one thing, the government’s leverage during the 1990s was predicated on bankers wanting to engage in the sorts of corporate transactions that regulators had the power to deny. When the decade-long stampede toward consolidation later slowed, banks had less incentive to comply. More important, in part because of a prevailing deregulatory impulse in Washington, unregulated companies and investors situated outside the banking system expanded their lending much more rapidly than banks themselves. And while at first this appeared to be a promising development, it turned out for the worst.
[Read: A house you can buy, but never own]
A number of these “shadow banks”—companies such as Countrywide, New Century, Ameriquest, and Northern Rock, which performed many banking services without a bank charter—were explicitly oriented toward serving lower-income communities, including minority communities. But, as soon became clear, they were much more interested in garnering profits than providing good service, and they embraced brazenly poor standards for controlling how loans would be made and administered. The shadow banks frequently offered loans to low-income borrowers that obscured exploding interest rates or hidden terms. Suddenly, the very communities that had been abused for years by the financial world’s refusal to lend were awash in loans that many residents could not afford to repay. When the bubble burst near the end of President George W. Bush’s second term, the ensuing wave of foreclosures wiped out millions of middle- and lower-income homeowners, triggering the Great Recession.
For those of us who had spent years trying to use finance to fight inequality, the Great Recession was excruciating. Even today, some critics argue that a large number of the loans that went bad during the early 2000s were made to unworthy borrowers by lenders seeking to comply with the Clinton-era regulatory regime. But studies by the Federal Reserve found that a mere 6 percent of the defaulting loans had even been CRA-eligible. Instead, the housing bubble that emerged through the Bush years illustrated the dangers of allowing the market to get ahead of any regulatory regime. For decades, activists had spotlighted how bankers had excluded minority communities from building the generational wealth that comes from owning a home. Now the communities that had been iced out of the mortgage market were being victimized for finally having gotten in.
The impact was particularly acute in the communities the CRA had been established to serve. In some places, the functional Black unemployment rate—the inability to obtain full-time employment or earn more than a poverty wage—rose to roughly 70 percent. Many good banks—institutions such as Chicago’s ShoreBank, which had served minority communities with integrity when their competitors were engaged in redlining—were forced out of business. Perhaps most distressing for those who had fought to extend the power of credit to lower-income Americans was the spectacle of a housing crisis that pierced any sense that the momentum of the 1990s would continue to drive progress. It turned out that a rising tide did not lift all boats for very long; some were left stranded when the tide went out. And so even after decades of activism, the communities most harmed by prejudice were, by many standards, no better off.
The situation improved gradually through the Obama-era recovery and beyond—until the coronavirus pandemic hit. Today, a new cadre of financial regulators, many being appointed by President Joe Biden, face a fresh opportunity to transform the financial world’s role in the fight against prejudice and inequality. Three decades ago, our aim was to rip racism out of the banking sector “root and branch.” But now we know it’s not just overt discrimination that we have to combat. As the Great Recession demonstrated, the world of lending can actually exacerbate problems if it is not regulated both to prohibit what is effectively sanctioned loan sharking and to ensure that every financial institution (and not just banks) have affirmative obligations to serve lower-income Americans the right way. To that end, any new regulatory regime needs to incorporate the lessons of the past.
First, as the Biden administration and various independent regulatory agencies begin to think more comprehensively about how to extend fair and equitable loans, they need to embrace clear and transparent metrics. The CRA, as it was initially understood in 1977, simply mandated that lenders make a good-faith effort to serve the communities in which they operated. In the 1980s and early 1990s, though, it became evident that paperwork is no substitute for real lending. By setting clear metrics, we can avoid the danger of forcing financial institutions to create another housing bubble, without letting lenders off the hook. No financier should be able to claim sympathy for merely having tried to lend to their whole community. Today, too many financial institutions have been given license to collect trillions of dollars in profit with no affirmative obligations other than to serve the most privileged members of society.
Second, tomorrow’s regulations must extend further than federally regulated banks, applying to every business that provides financial services. When President Carter signed the CRA, banks were by far the largest part of the financial community and, as a rule, functionally prohibited from doing business beyond the places where they had physical branches. Today, a wider range of financial institutions has come to serve a much broader marketplace of prospective borrowers, and many have no real geographic footprint to be measured against. The CRA, as currently written, requires deposit-taking community banks based in York, Pennsylvania, to lend equitably to every neighborhood in and around York. But Rocket, presently the largest mortgage lender in the United States, is not subject to the CRA’s mandates because it is a “nonbank.” Perhaps more important, it has no real physical presence, yet lends across the country. So the metrics that are used to measure compliance need to change.
[Read: The unfulfilled promise of fair housing]
Third, the next generation of regulations must have real teeth. The Clinton administration’s success in combatting financial inequality during the 1990s was driven largely by the fact that unsatisfactory CRA ratings prevented banks from engaging in what promised to be profitable mergers and acquisitions. Whatever standards regulators craft for tomorrow’s financial institutions, those benchmarks need to be enforced with sanctions executives take seriously. When a financial executive meets with President Biden’s new comptroller or any other federal regulator, he or she must come away with a clear understanding of that firm’s regulatory responsibilities—and what the penalty will be if they fall short.
Fourth, government at all levels should begin investing more heavily in the resilient (but often overlooked) category of lenders who balance the drive for profitability with a more wholesome mission to serve marginalized neighborhoods, lest those communities be compelled to depend on the sorts of unscrupulous lenders that were responsible for the housing bubble. More than a generation ago, Washington began seeding what are officially titled community development financial institutions, or CDFIs, which serve places and borrowers that banks typically ignore. Sunrise Banks in Minnesota, for example, and Southern Bank, headquartered in Arkansas, should be the lenders of first resort for borrowers who might otherwise depend on check cashers or loan sharks. Washington recently increased investment in CDFIs through a welcome provision championed by Senator Mark Warner in the COVID-19 relief bill signed in December. That should be just a down payment.
Finally, when a borrower runs into trouble, as so many did a decade ago, regulators need to better discern who is truly culpable, and then specify where Old Testament justice might be unfair or counterproductive. When the housing bubble burst, many lenders foreclosed on helpless borrowers for fear that regulators would sanction them for showing what’s called “forbearance,” and well-intentioned institutions such as ShoreBank were forced to close, to the detriment of the lower-income communities they had long served. Untrammeled greed in one part of the financial system—in this case, among the shadow banks—should not be permitted to pull the rug out from under middle- and lower-income Americans who have largely made prudent financial decisions. Regulators should make room for lenders to work out distressed loans without helpless borrowers taking so much of a hit, and those with oversight responsibilities should be prohibited from slaughtering the sheep along with the wolves.
Finance need not be a barrier to progress—it should be part of a broader effort to breathe new life into the American dream. These lessons of history, taken together, can help form the foundation for a regulatory regime that serves the goals articulated as far back as the FHA. In the absence of sufficient jobs, quality education, and a robust safety net equipped to connect those seeking opportunity with ways to harness it, better lending practices can go only so far. But that’s no excuse to let the prejudices that haunt certain corners of the financial world persist. Lending will never be a panacea. But these reforms would be indispensable pieces of any larger, more comprehensive path toward real equality.