Giving Compass’ Take:
• Aspen Institute’s recent study on the benefits and limits of Black banks suggests a two-pronged approach is necessary to increase capital to Black banks.
• This two-pronged approach involves supporting Black banking and bolstering community development financial institutions (CDFIs). How can donors help fortify these efforts?
• Read how Black-owned banks are helping minority groups keep their money out of an extractive banking system.
Black banks support Black communities, lending mostly to Black homebuyers and maintaining community lending even in tough economic times. Recent interest in supporting these institutions is a welcome and positive step.
But their small sizes and declining numbers mean that today, they cannot tackle the problem of capital access in predominantly Black neighborhoods by themselves. To bring greater capital to communities of color, our recent study on the benefits and limits of Black banks suggests a two-pronged approach: increase capital to Black banks, and adopt policies that support community development financial institutions (CDFIs) more broadly.
Most Black banks are headquartered in and support predominately Black neighborhoods.
The median share of mortgage originations to Black borrowers for owner-occupied homes is substantially higher among Black banks than among other lenders. The typical Black bank originated between 75 and 100 percent of its one-to-four-family purchase loans for Black borrowers between 2004 and 2018, averaging 1,260 purchase loans a year.
In contrast, the overall share of purchase loans to Black borrowers from other types of lenders never exceeded 10 percent over this same period.
Black banks practice relationship banking. They go beyond assessing a potential borrower’s financial status to account for the borrower’s personal needs and preferences developed over the length of their relationship. In so doing, Black banks are often able to creatively meet a diverse array of consumer credit needs within their community, producing greater access to credit to a wider group of borrowers through specialized underwriting practices that consider risk characteristics.
Black banks provide countercyclical mortgage lending during weak economic periods.
Amidst the Great Recession, mortgage credit availability tightened dramatically. During that recession and the initial stages of recovery when credit standards remained tight, Black banks increased their service to Black borrowers who were shut out of traditional channels.
Between 2007 and 2013, purchase mortgage originations by Black banks increased 57 percent. In contrast, purchase mortgages to Black borrowers overall dropped 69 percent over the same period.
Read the full article about supporting Black banks and CDFIs by Michael Neal at Urban Institute.
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