Expanding Rich Poor Gap Fuels the New Redlining
|THE DEVELOPMENT OF a two-tiered system of financial services, driven by the
rising economic inequality in the United States, is ushering in a new era of de
facto redlining, according to a new paper from the Economic Policy Institute,
“Do Subprime Loans Create Subprime Cities? Surging Inequality and the Rise in
Predatory Lending.” (www.sharedprosperity.org/bp197.html)
In the paper, published by EPI as part of its Agenda for Shared Prosperity,
author Gregory D. Squires, a George Washington University sociologist, contends
that increasing economic inequality and diminishing access to conventional
financial services have become inextricably linked.
“Rising inequality of income and wealth in the United States has intensified
the segregation of metropolitan areas by class, with race and ethnic
segregation continuing at high levels,” said Squires. “For residents of these
increasingly segregated low-income and minority communities, the range of
opportunities, including access to financial services, becomes more and more
This void has opened the door to “fringe bankers” – check-cashers, payday
lenders, pawnshops and others – to target working families, low-income and
minority com¬munities concentrated in central cities. When coupled with
predatory subprime mortgage loan practices, this trend is widening the gap
between the wealthy and poor.
As a result, this system of separate and unequal financial services has
emerged, one featuring conventional products distributed by banks and savings
institutions primarily for middle- and upper-income, disproportionately white
suburban markets, and the other featuring subprime, high-priced, often
predatory products offered by fringe bankers.
The report notes that while not all subprime loans are predatory, virtually all
predatory loans are in the subprime market. Subprime lending and fringe bankers
are concentrated in communities with high unem¬ployment rates and declining
housing values, and they serve to reinforce those neighborhood characteristics.
The 1977 Community Reinvestment Act (CRA), which bans the practice of
discrimination by lenders based on where people live, or redlining, is no
longer enough to counter today’s economic trends, Squires concludes.
“While the Community Reinvestment Act has over the years allowed many
households and communities long denied conventional financial services to find
access to credit, it wasn’t drafted with today’s fringe bankers and predatory
loan products in mind,” said Lawrence Mishel, president of Economic Policy
“Often fringe bankers are the only financial services companies available to
low-income and minority communities, but fringe bankers aren’t required to
adhere to CRA standards,” said Squires. “As a result, inequality not only
persists, it is reinforced. Fringe banking tactics are even more insidious and
damaging to low-income and minority communities than refusing credit based on
“To fix inequities in the provision of financial services we must address the
structural sources of inequality,” said Squires. “Public policies and private
practices have shaped the uneven development of metropolitan areas, and
alternative policies and practices can ameliorate those patterns.”
“Reform of predatory lending practices is a necessary first step, but a
comprehensive approach must take into account the connections between the
evolution of financial services and rising inequality, particularly as they
affect mortgage lending,” said Squires. “Thus, indexing the minimum wage to
keep up with the cost of living, living wage laws for government contractors,
strengthening the bargaining power of workers and limiting corporate tax
deductions for executive compensation should be part of the policy solutions.”
Strengthening the CRA’s ban on redlining, which requires mortgage lenders to
understand and be re¬sponsive to the credit needs of their entire service
areas, in¬cluding low- and moderate-income communities, would address today’s
uneven lending structure. Recommendations detailed in the report include:
• Expand the CRA to cover credit unions, independent mortgage bankers,
insurers, and other entities that now account for well over half of all
mortgage loans. Currently the CRA applies only to federally chartered
depositories (e.g., banks and thrifts).
• Provide sanctions for those that en¬gage in predatory practices and credits
for those that pur¬sue equitable lending in their communities.
• Require evaluation of lenders’ CRA performance when they seek approval from
regulators for mergers, acquisitions, or any other sig¬nificant changes in
their business operations to ensure they are providing fair, equitable credit
and combating predatory lending.
Some cities are not waiting for changes in the law. In January 2008, Baltimore
became the first city to sue to recover costs of foreclosure caused by racially
discriminatory lending practices. It sued Wells Fargo Bank for targeting
minority neighborhoods for predatory loans leading to high foreclosure rates –
costing the city millions of dollars in lost tax revenues, added fire and
police costs, court administrative costs, and social programs to maintain
Cleveland followed by suing 21 financial institutions for flooding the local
housing market with subprime loans to people who could never repay, leading to
a foreclosure crisis costing the city millions of dollars to maintain
boarded-up homes and respond to increased arson and other violent crimes.
The Economic Policy Institute is an independent, nonprofit, nonpartisan
research institute that examines the impact of economic trends and policies on
working people in the United States and around the world. EPI’s Agenda for
Shared Prosperity is a set of comprehensive policy proposals promoting a broad
distribution of the benefits of economic growth.
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