Chicago City Council targets mortgage credit gaps

Can the City of Chicago urge the big banks to revise their grim lending to black and Latino neighborhoods? Some Chicago city councilors are hoping to try a cautious ordinance this week based on greater transparency to encourage banks to lend fairer loans in all neighborhoods.

Pending full approval by the city council on Tuesday, the so-called Equitable Lending Ordinance would place new data transparency requirements for city banks’ financial institutions, known as municipal custodians. It would also require annual equity hearings to ensure progress is made in closing the credit gap.

Mortgage loans are an important way that money flows into communities. A lack of credit robs neighborhoods of much-needed investment and locks residents away from home ownership and the opportunity to build wealth. The wealth gap between white and black households is greater than in the 1960s.

“Access to an affordable home mortgage is essential to realizing the dream of owning, but that dream has been out of reach for millions of families of color for generations,” said Anthony Simpkins, president and CEO of Neighborhood Housing Services of Chicago. as he testified before the Council Finance Committee on Monday.

“In Chicago, only 30% of African American families and 40% of Latino families own their homes, compared to more than half of white families,” Simpkins said, adding that this was a national problem. Across the country, Simpkins said, mortgage loan applicants are denied black applicants at a rate three times higher than that of white applicants.

The NHS helped draft the ordinance, which was passed unanimously by the committee on Monday, a year after a joint investigation by the WBEZ and City Bureau uncovered the banks’ gaping race-based lending disparities. The analysis, which focused on seven years of real estate lending over the past few years, found that big banks like Chase, Bank of America, and Fifth Third Bank invest 25, 30, or even 40 times more in Chicago’s white neighborhoods than in black or Latin American ones Municipalities.

That investigation was what triggered this ordinance, Ald. Harry Osterman, 48th Ward, told WBEZ. Working with local housing companies like the NHS and the Woodstock Institute, a loan watchman, Osterman said he wanted to find a way the city could hold banks accountable for their lending practices.

“It is long time we changed that,” he said.

“To see that churches on the West Side and the South Side – that residents who wake up in Chicago can’t get loans like the people in mine [North Side] Neighborhood – it really pissed me off, ”said Osterman, who also chairs the council’s Housing and Real Estate Committee.

Osterman was the only city councilor to vote “no” to approve this year’s municipal deposits, and was snubbed by bank executives earlier this year when he held a hearing at which city councilors with excellent jobs and credit ratings heard testimonials from Chicagoans with excellent jobs and credit ratings – including city treasurer Melissa Conyears-Ervin – who couldn’t get a loan in the black parts of town.

Conyears-Ervin has set up a working group in her office to look into this issue and is looking for a way to expand the pool of financial institutions that apply to hold city funds, including community banks and credit unions.

“We just want to keep working to help smaller institutions come to us and say we want to be a community custodian,” said Conyears-Ervin. “Because if we can do that and can invest in these institutions, we can put more money into the communities and that’s what we want to do.”

Keep the credit question open

Because municipalities are forbidden from enacting laws that would effectively “regulate” banks, the regulation does not explicitly require lenders to change their behavior or to invest in neighborhoods they have previously neglected.

Instead, it instructs the city to publish each bank’s annual loan records, neighborhood by neighborhood, on their data portal, which displays information such as loan amounts, down payments, interest rates and fees for each loan granted, and loan refusal rates.

All of this data is already reported to the federal government by banks under the Home Mortgage Disclosure Act and is publicly available, but it can be difficult to access and compare Chicago neighborhoods and over time.

The proposed regulation would also require the city council to hold an annual hearing on banks’ lending files before approving or renewing their designation as municipal custodians.

A recent report from the Inspector General found that while banks are currently submitting tons of information about their loan records to the city as part of the municipal custodian application process, an uncoordinated and lax naming process means that even lenders who charge robbery rates can still be approved to work with the city.

“The public hearing component of this issue is absolutely critical,” said Sarah Brune, public policy director for Chicago Neighborhood Housing Services.

“We have to keep the topic open, consistently bring it into public dialogue … and help people understand how much it really affects people’s daily lives and their ability to build generational wealth,” said Brune.

In addition to providing credit information, banks would have to provide an annual racial breakdown of their employees, which is already required by many companies doing business with the city in order to meet minority recruitment requirements.

Horacio Mendez, President and CEO of the Woodstock Institute, says this data point is particularly important given the current national focus on diversity and inclusion.

“People want to go into a branch and see people they either know or feel they can trust the person they are talking to,” said Mendez.

Part of a nationwide trend

Other cities have implemented so-called “Responsible Banking” regulations – local regulations that aim to hold financial institutions accountable when granting loans. Cleveland was one of the first to enact law in the early 1990s.

After the financial collapse of 2008 and the housing crisis that followed, several major cities passed laws that put pressure on banks to invest more in low-income neighborhoods.

But the courts have sided with the banks when they find that local regulations are getting caught in what could be termed “regulation”. For this reason, the Chicago Ordinance is limited in its requirements for banks and only affects municipal depositaries.

“Most banks are regulated at the federal level,” said Brune. “So we really have a regulation here that increases transparency in matters of mortgage loans and in the process of the city deciding who to do business with.”

The New York Bankers Association filed a lawsuit against the city in 2013 when its city council passed law creating a board of directors charged with collecting credit information from banks that maintain accounts for the city. Banks that fail to disclose information about their home and small business loans, or fail to lend in low-income neighborhoods, could lose their municipal custodian status. But a federal judge ruled that the city was trying to regulate these banks by “publicly shaming” them for complying with regulations.

“It just doesn’t fly,” said Mendez. “Banks already have regulators.”

Mendez said his organization worked with housing companies and Osterman to recreate the ordinances passed in other cities that don’t force banks to give Chicago more than they already have to submit to federal regulators.

“So we wanted to make sure that when we asked for something new, it seemed reasonable,” he added point that makes Chicago unique.

Banks are skeptical

No banks were present at the Finance Committee hearing on the regulation. Randy Hultgren of the Illinois Bankers Association predicts the regulation will backfire.

“This regulation creates further hurdles in an already daunting application process that could further deter small community and minority-owned banks from applying to and working with the city,” Hultgren said in an email.

He said Illinois bankers want to improve access to mortgages in Chicago, “especially among black and Latinx Chicagoers who continue to face inequalities.”

He said, however, that this will require more than changes on the part of banks, and pointed to greater investment in the community, reforms to mortgage regulations and the property appraisal system, and job and educational opportunities for “future homeowners.”

Claudia Morell is a Metro reporter for WBEZ and Linda Lutton reports on Chicago neighborhoods. Follow them @claudiamorell and @lindalutton.

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