Oopsy: Outdated U.S. Law Funnels Loans For Poor To Help Gentrify Houses Instead

abandonned townhouses
Looking to buy and refurbish? Housing in a low income census tract of Baltimore, MD.

In order to discourage the banking practice of redlining1, the U.S. 1977 Community Reinvestment Act (CRA) was passed to encourage banks to provide a greater proportion of their loans to low income tracts2 of a community.

Under CRA rules, banks get credit if they offer a certain portion of their mortgage loans to people with lower income. This means test favours someone who has scrimped and saved for years to purchase a house over a middle or wealthier house flipper who has plans to gentrify the house and sell it for a profit.

But . . . banks also get credit for offering loans to people who live in a low-income tract. Struggling low income purchaser or wealthy gentrifying house-flipper? The law does not require the banks to discriminate based on the income of a resident living in the tract.

The result? In some areas, loans are being made to wealthier people. That defeats a purpose of the CRA. Read more about the limitations of the law and its consequences for the Washington D.C area in The Agenda: How A 40-Year-Old Federal Law Is Speeding Gentrification 

 

Footnotes

  1. Try: Redlining: What Was It? And We Should Be Asking ‘What Is It?’ Because It’s Still With Us, And It’s Bad
  2. Low income tracts are defined by census data. They are those where the median family income that does not exceed 80 percent of a suitable specified area (e.g. a given state, or a metropolitan area)

LEAVE A REPLY

Please enter your comment!
Please enter your name here

This site uses Akismet to reduce spam. Learn how your comment data is processed.