The Tools We Need to Help Poor Neighborhoods
The Community Reinvestment Act doesn't always get at underlying economic issues. It's time to redesign it.
Near the end of my first year as mayor of Kansas City, I approached Ajamu Webster to help me design a program to stimulate economic development in the city's urban core. I had declared in my inauguration speech that the first tax-increment-financing deal I would sign would be for a project "east of Troost," the largely black and low-income part of the city.
In that first year, I succeeded in getting the city council to adopt an economic-development policy to control and focus the use of incentives. But I did not fulfill my promise of getting a project east of Troost. The standard tools of economic development, developer-driven tax incentives, were not going to work in the areas of the city that most needed help. Developers follow the money, and therefore they focused almost exclusively on the whiter, wealthier parts of town. The policy we adopted could slow the abuses of tax incentives, but as it turned out that was not enough. We needed new tools.
Webster is a professional engineer who owns a small engineering consulting firm located east of Troost. He also is chairman of the Kansas City chapter of the Black United Front. When I told him I wanted him to help lead an effort to develop new tools for economic development in the depressed areas of the city, he said, "Mr. Mayor, you mean the oppressed areas of the city."
He was, of course, completely right. The disinvestment and disintegration of the social and physical fabric of the urban core of Kansas City, as in so many other American cities, wasn't an inevitable natural occurrence. As Kevin Fox Gotham describes in vivid, well documented detail in "Race, Real Estate, and Uneven Development: the Kansas City Experience, 1900-2000," the real-estate industry, the banks and the federal government worked hand in hand during the middle part of the last century to create conditions that kept blacks contained in the urban core while driving whites to the suburbs. In "A City Divided: the Racial Landscape of Kansas City, 1900-1960," Sherry Lamb Schirmer provides maps showing the sites of bombings of the homes of blacks who attempted to move out of the areas to which they had been confined.
Redlining, the principal tool used to carry out this discrimination, was initially created as an instrument of federal policy. As Federal Reserve Chairman Ben Bernanke pointed out in a speech in 2007 marking the 30th anniversary of the Community Reinvestment Act (CRA), the term, which refers to the practice of designating certain lower-income or minority neighborhoods as ineligible for credit, appears to have originated with the Federal Home Loan Bank Board in 1935.
In the 1960s and 1970s Congress passed a series of laws designed to reduce housing discrimination and to repair the damage to communities caused by the earlier practices. The CRA, which was passed in 1977 and has undergone several major revisions since then, aimed not only to reduce redlining but also to encourage banks to provide credit to low- and moderate-income communities in a manner consistent with safe and sound banking practices. The underlying premise of the law, according to Bernanke, is that "the obligation of financial institutions to serve their communities is seen as a quid pro quo for privileges such as the protection afforded by federal deposit insurance and access to the Federal Reserve's discount window."
In practice, it seems that what banks do to comply with the CRA is to provide loans for affordable housing, often through community-development and similar agencies. The problem with this is that it does nothing to improve underlying economic conditions in the affected neighborhoods. In Kansas City, we had brand-new subsidized housing in deteriorating neighborhoods that sometimes sat vacant for more than a year.
Now, after the subprime mortgage mess, banks stand once again accused of actively harming low-income and minority communities. In a speech in Atlanta last November, Bernanke detailed how the damage from the economic crisis has been much worse for low-income and minority Americans, saying that almost all the gains made by these communities in the last 15 years had been wiped out. "Two types of discrimination continue to have particular significance to the mortgage markets," he said. "One is redlining … and the other is pricing discrimination, in which lenders charge minorities higher loan prices than they would to comparable non-minority borrowers."
Here is an opportunity for local-government leaders. Banks are looking for ways to show compliance with the CRA and win back credibility and good standing in their communities. Federal regulators can probably be persuaded to allow more creative uses of the CRA. Targeting the oppressed areas of their cities and towns, mayors ought to look to some combination of place-making (listening to residents of an area and making small-scale improvements that bring immediate benefits), community-based economic development and citizen engagement to develop programs and projects to bring to banks as CRA investors. These projects should be targeted at improving outcome indicators such as per-capita income, residents' ratings of their neighborhoods as places to raise children, and percentage of dwellings in need of major repair.
Members of the public and elected officials working to undo the damage to their communities from housing policies of the past need new tools. The objective of the CRA should be to stimulate market-based, profit-driven economic activity in lower-income neighborhoods--something Bernanke says the CRA has done "at its most successful." A redesigned CRA, recognizing the realities of global banking and focused on outcomes, could be a powerful tool indeed.