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Report Highlights Racial Disparities In Local Lending

[Brian Bull / ideastream]
A row of Cleveland-area homes in winter

Communities of color face more difficulty getting loans from banks regardless of income level, according to a new report from the Western Reserve Land Conservancy. The report found mixed results from three banks aiming to improve lending practices in underserved communities.

Fifth Third, KeyBank and Huntington each entered into Community Benefits Agreements to improve lending practices about three years ago. The report found that, while each bank did make improvements in certain categories, African American applicants for home purchase or improvement loans were less likely to be approved than white applicants.

“Researchers have found this for quite some time, and it is still troubling,” said Frank Ford, senior policy advisor for the conservancy.

The report doesn’t show intentional or explicit prejudice, Ford said, but does examine both the income level and race of applicants.

“The African American applicants were still denied more often than whites, and in fact, were even denied more often than moderate income and middle-income whites,” Ford said.

The report also found a lower number of loans at or below $50,000. Those loans are less common for a few reasons, Ford said, including the low commissions they generate. But another aspect is federal regulation.

“Federal regulators started to penalize banks for making high-cost, subprime loans, often with higher interest rates,” Ford said. “What nobody anticipated was, that those high-cost loans could also include the $50,000 loan, on which the fees – when factored into a small-dollar loan – make it look like a high-cost loan.”

The tendency to avoid those small-dollar loans hurt neighborhoods that were impacted by the initial lending practices that led to the housing crash, Ford said.

“Those loans led to high rates of foreclosure, which led to property abandonment and blight. So communities that did get a lot of those loans, now find that their median housing prices are $50,000 or less,” Ford said.

That includes Cleveland’s East Side, Ford said, which has a “significant unmet need” for lending.

Overall, the report found Huntington Bank has improved its lending to underserved communities, both for home purchases and improvements. KeyBank’s home purchase lending is lower than its competitors but has been on an upward trajectory even as its home improvement lending declines, the report said.

Fifth Third’s purchase lending has declined countywide, including in underserved areas, but its improvement lending has tripled, according to the report. Its volume of lending remains below Huntington and KeyBank.

Banks will need a creative solution to counter the issues found in the report, Ford said. That could include reviewing African American applicants who were denied loans to ensure the decision was justified, or waiving the fees on small-dollar loans to avoid federal penalties.