Improve Lending Disparities With Policies Focused on Banks, Not Fintechs

COMMENTARY

Democratic California State Sen. Monique Limón recently introduced the California Community Reinvestment Act, SB 1176, a bill that aims to increase lending to communities of color and low- to moderate-income communities. This is a laudable goal, as for years discrimination in lending has punished communities of color, especially Black communities. 

SB 1176 proposes grading lending institutions, including nonbank online lenders, on a one to five scale. But recent studies have shown that the technology boom and the emergence of online, nonbank lending has led to progress in eliminating disparity in mortgage lending. The fear from a consumer perspective is that the regulators are unable to properly regulate lenders in a way that actually grows credit accessibility and fairness, especially when it comes to online lending. 

Proponents point out that SB 1176 goes beyond the existing federal government’s Community Reinvestment Act. That law, “encourages certain insured depository institutions to help meet the credit needs of the communities in which they are chartered, including low- and moderate-income (LMI) neighborhoods.” The problem with the CRA is that it hasn’t worked as advertised. Studies show more, not less, discrimination toward minority borrowers and bank customers. There are fewer bank branches in low-income communities, and discrimination in real estate appraisals and small business lending persists.

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Recent analysis provides another reminder of banks’ poor record. In 2020 Wells Fargo, which is headquartered in San Francisco, California, rejected almost half of mortgage refinance applications submitted by Black homeowners while approving nearly three quarters of those sent in by white consumers. 

SB 1176 purportedly exceeds the federal CRA by including nonbank lenders in its regulations in addition to the banking institutions already under regulation. We are not sure this is the proper place to review the performance of these institutions. Banks have such a problematic history and have proven themselves unable and/or unwilling to change, while online lenders have been more inclusive and have provided credit in a less discriminatory manner. It would make more sense to review these lenders in a different paradigm. 

The Greenlining Institute, based in Oakland, California, recently noted this performance gap. Their newly released report finds that fintechs are more likely to make home loans to low-income borrowers than traditional banks. These improved rates are encouraging as well as necessary if communities of color are to close the gap in access to home loans. 

The Greenlining Institute’s finding complements our own research. We found that the artificial intelligence and algorithmic approaches used by nonbank lenders have the potential to cut down on the racial discrimination that characterizes lending from traditional banks. Artificial intelligence has made progress in reducing bias in the housing finance system, and it should be embraced and further developed to advance this improvement.

The data show how much banks lag behind nonbank lenders in serving lower-income consumers. Only 38.2% of bank loans go to borrowers from low- and middle-income neighborhoods, according to analysis from the Urban Institute. That falls significantly short of the 45.4% of nonbank loans that go to the same group of borrowers. 

SB 1176 is well-intentioned, but it fails to account for the varied approaches and success that exist between traditional bank lenders and fintechs. 

Policies should be well-tailored with the objective of improving traditional bank lending rates so that they can reach the level obtained by fintechs. Applying the same rules and regulations to the two types of lenders will be ineffective in realizing this progress. 

Homeownership is an important wealth-building tool that remains difficult to achieve in minority communities, but which legislation focused on improving traditional bank lending could help improve.

Kevin B. Kimble, Esq. is the founder and CEO of the Financial Services Innovation Coalition. He is a founding member of the coalition’s Housing Task Force, which seeks to eliminate bias in the housing marketplace.