Banks as Heroes

Late last summer, Gloria Stallworth, a resident of Chicago's South Side, was hospitalized with stomach pains. The 54-year-old mother and nutritional supervisor at a local hospital was told by doctors that her pain was due to anxiety, and Stallworth knew exactly what was wrong. She was drowning in bills; specifically, her adjustable-rate mortgage seemed to take more and more money out of her pocket every month.

"It was a nightmare," Stallworth says. "My mortgage was going up but my pay wasn't moving."

With her mortgage, assorted bills, and her daughter's private school tuition, Stallworth considered taking a second job. Until she heard a radio story about ShoreBank, a community-development bank that was offering rescue loans for homeowners drowning in their adjustable-rate mortgages. "My rate was about to adjust again," Stallworth says, so she picked up the phone. With ShoreBank, Stallworth was able to refinance and bring her mortgage down to a manageable 6.25 percent rate.

Stallworth's story has a happy ending. But the stories of millions of other minority homeowners saddled with sub-prime mortgages don't. The sub-prime debacle hit minorities particularly hard -- blacks and Latinos made up almost half of new homeowners between 1995 and 2005. In 2005 more than half of these new homeowners who were black received sub-prime loans, and 46 percent of new Latino homeowners got them as well. The numbers cut across class but not race: even high-income minority borrowers were far more likely to get adjustable-rate mortgages than were whites or Asians.

ShoreBank, a community-development financial institution, or CDFI, didn't start out trying to repair the fallout of sub-prime loans. Launched in 1973 as the South Shore National Bank, ShoreBank was founded to provide loans to Chicago neighborhoods devastated by redlining, racial discrimination, and the fallout of the riots of the late 1960s. It's more than just a business; it's a profitable one: ShoreBank, in fact, has been profitable since its second year. Last year it reported a profit of $2.6 million and, along with its affiliates across the United States, holds over $2.4 billion in assets. ShoreBank has purchased and renovated more than 55,000 units of affordable housing since 1973. According to the National Community Investment Fund, a nonprofit that measures the performance of CDFIs, more than 80 percent of ShoreBank's loan originations and purchases are in low- and moderate-income communities.

CDFIs like ShoreBank give the lie to the idea that adjustable-rate or other high-interest loans are the appropriate way to deal with the risk of lending to minority communities. Aside from the fact that adjustable-rate loans were targeted at minorities regardless of credit history, ShoreBank showed that lower-income borrowers and small businesses, carefully evaluated for credit-worthiness, could pay back conventional loans at the same rate as other borrowers. ShoreBank isn't quite as profitable as other banks -- careful underwriting of smaller loans is more expensive and time consuming. But ShoreBank's avoidance of deceptive adjustable-rate mortgages allowed it to avoid the losses incurred by other banks when the sub-prime crisis occurred.

By 2007, ShoreBank was already warning of the coming debacle in the sub-prime market. ShoreBank founder and Chair Ronald Grzywinski wrote a letter to Federal Reserve Chair Ben Bernanke warning that responsible CDFIs like ShoreBank were unable to compete with predatory lenders and that stronger regulation was necessary. A month earlier, Bernanke had dismissed calls for tougher regulation in a speech on sub-prime lending he gave in Chicago, arguing that "in the long run, markets are better than regulators at allocating credit." Months later, ShoreBank had launched its Rescue Loan Program, serving borrowers with high-priced loans and encouraging them to refinance before it was too late. "It's a very emotional thing where people don't like to admit that they're behind or do something about it," says Brian Berg, a spokesperson for ShoreBank. "Half the people didn't know what kind of mortgage they had signed on for."

Located in the same communities as their lenders, CDFIs like ShoreBank have an incentive to help their neighborhood improve rather than simply collect on residents' loans. ShoreBank in particular highlights its "triple bottom line," which focuses not just on profitability but on raising the value of the homes in the community and making them environmentally sustainable. ShoreBank uses its influence with borrowers to encourage them to weatherize their homes and retrofit them with appliances that use less energy, which also leaves the borrower with more money in the long run. Typically, people recoup their costs in two to four years. "The costs we've found from working with folks are [$2,000] to $5,000," Berg says. "They're reducing utility bills up to 50 percent a month, not to mention the environmental benefits." Despite the general downturn in the market, community-development banks are still appealing investments -- over the past two years, TIAA-CREF has invested more than $49 million in seven community banks across the country, including ShoreBank.

Since its creation, ShoreBank has become a model for CDFIs across the country. While devoting more than 80 percent of its loans to low- and moderate-income communities, its loan losses in 2008 were less than 1 percent of its outstanding loans. And while many of the most prominent CDFIs began prior to 1994, the Community Development and Regulatory Improvement Act, signed by Bill Clinton, established the Community Development Financial Institutions Fund, which provides capital for and helps train CDFIs. Over 800 CDFIs are now licensed by the CDFI Fund.

By 2000, ShoreBank had established itself as a reliable institution where less affluent Chicago residents could go to get home loans. But as sub-prime lending grew, predatory lenders began poaching customers from CDFIs like ShoreBank, with disastrous results. ShoreBank watched as significant portions of Chicago neighborhoods were lost to blight and foreclosure. In the city of Chicago, the foreclosure rate increased 34 percent from the first quarter of 2008 -- after a substantial number of homes had already been lost.

"The investment we've made is being stripped away," says Michelle Collins, senior vice president of mortgage lending at ShoreBank. "Home values are plummeting; people are losing their homes."

In the aftermath of the sub-prime crisis, ShoreBank found itself in the unexpected business of trying to repair neighborhoods devastated by foreclosure, by offering loans to borrowers like Gloria Stallworth. Since the program started, ShoreBank says it has kept over 200 Chicago families in their homes by making more than $32 million in rescue loans.

***

Shorebank isn't the only CDFI trying to clean up the mess left behind by unscrupulous lenders. Founded in 1980, Self-Help Credit Union of North Carolina has spent years advocating for better lending practices and regulation. In 1998, after a local borrower came to Self-Help Credit Union looking to refinance an adjustable-rate mortgage, the credit union was shocked at the amount the borrower was being charged in fees.

"We couldn't believe it was legal," says David Beck of Self-Help. The group began looking into the previous lender and realized it had expanded all over Self-Help's home base in North Carolina. "If this is the type of lending these guys do, they are dwarfing all of our efforts to do good," Beck says. Working with a coalition of groups including the NAACP and the AARP, they managed to persuade North Carolina to enact stronger regulations against predatory lending, in the form of a state law that limited the amount of fees lenders can charge on refinancing or home-equity loans. This law is now threatened by a provision in the proposed Mortgage Reform and Anti-Predatory Lending Act, which passed the U.S. House in May. That bill would preempt state regulations.

Seven years ago, Self-Help established the Center for Responsible Lending to help push for better regulation. Since the sub-prime crisis, Self-Help has undertaken a number of initiatives to stem the tide of foreclosures. It received money from North Carolina's Neighborhood Stabilization Grant program to help finance home loans and redevelopments in some of the hardest-hit areas in the state. The credit union has also instituted "high-touch loss mitigation" practices -- meaning that it is in frequent communication with its borrowers -- in order to keep borrowers from falling behind on their payments. "One of the problems" that exacerbated the sub-prime crisis, Beck says, "was that lenders were using conventional loss-mitigation techniques in a non-conventional market."

Not every community-lending institution is capable of meeting all the needs of residents in communities of color. While ShoreBank offers fixed-rate loans for businesses and homes, its focus is on building appreciable wealth, so it doesn't offer car loans, for example. The problem is that while the value of a car depreciates over time, it can often be essential to getting or keeping a job.

"It depends on how you see asset-building. A car is not a product that increases in value, but it's definitely a necessary product to get to asset building," says Jose Garcia, an associate director for research and policy at the New York?based think tank De¯mos. "You don't have a reliable public transportation system in most cities."

Other community-lending institutions, like Self-Help, do offer such loans. But a far more significant obstacle is the lack of regulation to curtail predatory lending. "The free-marketers will say just let the market be free," says David Beck. "But the flip side of a free market is perfect or near-perfect information. And the fact is in any loan transaction, the borrower is almost always at a disadvantage to the lender or the broker. And in situations with vulnerable populations, it's an extreme information disadvantage."

Community-lending institutions are admirable, but by themselves they are no panacea. Even if sub-prime mortgage loans are gone forever, predatory lenders have a menu of options to choose from: payday loans, car loans, single-premium credit insurance, even usurious credit-card rates. Unless Congress enacts very strong pro-consumer regulation, when the market rebounds predatory lenders are likely to start circling once more. And the need is not just rules to prevent predatory practices but also regulations to require conventional lenders to reach out to residents of low- and moderate- income communities. Only when people of color and other communities of modest means have the full range of financial services at reasonable rates will they have access to the capital they need to realize their economic potential.

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