A Provision Hidden in the Banking Bill Could Hurt Black Homeowners

The country's racial wealth gap might widen if banks don't have to disclose as much about their mortgage-lending practices.

Many colorful suburban houses seen from above
Andrew Merry / Getty

Imagine two families in Mobile, Alabama, trying to buy a home. The households are similar in many ways. They have roughly the same income and employment history. They are seeking to buy similar three-bedroom ranches in comparable, quiet neighborhoods. They both want a loan from the same local bank, and both want to put down a similar, standard down payment. The only difference is that one family is white and the other is black. Today—50 years after the passage of the Fair Housing Act, 40 years after the passage of the Community Reinvestment Act, and a decade after the subprime-loan crisis—that black family would be 5.6 times more likely to be denied a conventional mortgage than that white family, a damning report released last month by the Center for Investigative Reporting found.

Redlining and other forms of discriminatory lending practices remain a defining feature of the American housing market, and they have profound consequences in terms of wealth-building, equality, and equity. Yet a technical and mostly overlooked provision of a big piece of financial-regulatory legislation working its way through Congress might make such practices harder to identify, and thus harder for federal regulators to stamp out.

This week, Congress is considering a sweeping and complicated piece of law aimed at helping community and local banks. Its exact provisions are still uncertain, but the law will likely let smaller banks make certain risky investments; exempt certain institutions from a rule that restricts their lending, depending on what they hold in deposits; reduce the number of institutions labeled as systemically important; and put more responsibility on the Federal Reserve and other regulators to intervene in the event of a crisis. The Economic Growth, Regulatory Relief, and Consumer Protection Act is a rare bipartisan effort; given its support in both houses and both parties, its passage is all but certain.

Off of Capitol Hill, the bill’s reception has been mixed. Conservatives largely love it, moderates largely support it, progressives largely hate it, and many left-of-center types argue it is less of a regulatory gutting than they expected from a Republican-dominated Congress. “It’s difficult to categorize this as a pile of horrendous ideas, or as a motherhood-and-apple-pie, just-helping small-community-banks [effort],” said Aaron Klein of the Brookings Institution, who helped author the Dodd-Frank banking legislation of 2010.

Much of the criticism of the bill has focused on the way it might end up reducing the regulatory burden on big banks, not just small ones. Some of the country’s largest, most risk-hungry, and most powerful financial institutions have been on a quiet campaign to loosen regulations, such as one determining how much leverage “custodial banks,” ones that safeguard assets for rich clients and institutional investors, are allowed to have. “In general, I’m against exempting anything from the simple leverage ratio,” Klein told me. “Once you start exempting one bank, where does the logic end?” He expressed concern that exempting institutions from the rule would increase the chance banks would game the regulatory system, and increase systemic risk. Moreover, the bill largely fails to address the most prevalent consumer-protection issues of recent years, namely the widespread fraud at Wells Fargo and the data breaches at Equifax.

Then there are the provisions regarding redlining and discrimination in lending—ones largely overlooked, but potentially important. The legislation in process includes a number of technical changes that stand to put borrowers of color, mobile-home owners, and rural residents at risk. Chief among these is a change letting banks that make fewer than 500 mortgage loans a year report less data to the government on who they lend to and at what rates—data meant to help show whether financial institutions are discriminating against families of color. According to data from the Consumer Financial Protection Bureau, the legislation might exempt four out of every five banks and credit unions.

Supporters of the provision have argued that the vast majority of mortgage loans would still be covered by these reporting requirements, which stem from the 1975 Home Mortgage Disclosure Act (HMDA) and were expanded by Dodd-Frank, and also argued that the intention is to make things easier for small banks without the resources to handle the data reporting. An amendment made to the bill this week also required small banks that have gotten low scores on examinations performed by the government to provide the full scope of HMDA data.

But fair-lending groups, civil-rights organizations, and Democratic politicians have pointed out that many financial institutions would still be able to discriminate and hide their discrimination—and the government, journalists, and housing activists would have fewer tools to detect troublesome patterns. That might make it harder for regulators to identify discriminatory lending practices that might precipitate another crisis going forward, or simply make the country’s yawning racial wealth gap worse. “The only way to enforce fair-lending laws is to have an accurate picture of what the market looks like,” Scott Astrada, the director of federal advocacy for the Center for Responsible Lending, a policy-research group, told me.

A yet broader concern is that this particular provision is coming at a time when the federal government is scaling back other protections for communities of color. The Trump administration, for instance, has hollowed out the Consumer Financial Protection Bureau, and the Department of Housing and Urban Development is removing its mandates for inclusion and consumer protection from its mission statement. “One could imagine a world in which the Trump Department of Justice said, ‘Don’t report so much data. That’s a headache. We’re going to step up enforcement because we take the civil rights of people of color seriously, more seriously that we have in the past,’” said Mike Konczal of the Roosevelt Institute, a left-of-center think tank. But, instead, he pointed to clear signs that the Trump administration has pulled back on a wide range of regulatory investigations.

What is at risk? More than a decade after the housing crisis, discriminatory lending—meaning both that black families are more likely to be denied mortgages than white families, and are more likely to be offered high-cost financial products than white families—remains pervasive. This both disadvantages black families in terms of intergenerational wealth building, by pushing them out of the housing market, and raises costs on them, sapping their month-to-month income by forcing them into higher-interest-rate loans. At risk is fairness, then—but also wealth inequality, and the integrity of the mortgage market itself.