Why Banks Do Not Lend in Low- and Medium-Income Neighborhoods

//Why Banks Do Not Lend in Low- and Medium-Income Neighborhoods

Why Banks Do Not Lend in Low- and Medium-Income Neighborhoods

Explaining to policymakers and others why banks are unable and unwilling to pick up the slack in states where onerous lending laws make it impossible for traditional installment lenders to offer credit, has become an essential part of NILA’s work.

In places like Illinois, the expectation that banks could and would play a role in providing small-dollar credit, once it became impossible for traditional installment lenders to operate, was certainly a factor in the development of that state’s disastrous law.

Banks Cannot and Will Not Make Small Dollar Loans

We have explained elsewhere the economics behind the inability of banks to make small dollar loans [FAQs Q27]. Nevertheless, some banks have made public declarations that they would offer payday-style loans, the drawback being that these would only be available to existing customers.

They would be of no benefit, therefore, to the unbanked borrowers served by traditional installment lenders. On top of this, banks continue to withdraw from low and medium income (LMI) neighborhoods, with 4000 branch closures last year.

Community Reinvestment Act

This runs contrary to the obligations that banks have under the Community Reinvestment Act (CRA) to serve LMI neighborhoods. Despite this, most banks receiving passing grades and tax benefits from CRA compliance. How is this possible?

A recent news investigation by station WFAA in Dallas, Texas (see video below), may help explain this. The story focuses on the big banks and the incongruity between bank ownership of housing in under-resourced neighborhoods and the extent of their lending operations in those neighborhoods.

The example given in the story, is of bank investment of $50 million in apartments in LMI neighborhoods, balanced by only two mortgage loans made in those same neighborhoods. This clearly indicates the business priorities of the banks and further supports the case that big banks will never be comfortable or willing providing credit to a non-prime demographic. Nevertheless, by investing in LMI neighborhoods in this way, they satisfy CRA.

So, the prospect for bank-lending in LMI neighborhoods continues to diminish, even as new laws, like the one in Illinois, remove existing options that borrowers rely on. We posted recently about the statements bank CEOs have made on 36 percent APR caps. They said that their banks would not be making any small subprime loans because it was not economically feasible to do so at a 36 percent APR.

It never was.

Banks never have.

It would be foolish to expect them to start now.


2021-08-02T15:04:42+00:00 August 2nd, 2021|Categories: News|Tags: , , , , , , , |Comments Off on Why Banks Do Not Lend in Low- and Medium-Income Neighborhoods