The Fed’s Bad Credit Report

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Roberto Hiciano had to go to loan sharks for capital to start his video production company in Washington Heights several years ago because he couldn’t get a conventional loan. “Loan sharking in Washington Heights is a booming business, and they charge up to 5 percent interest per week,” says Mark Levine, president of the Neighborhood Trust Federal Credit Union, which serves this uptown Manhattan neighborhood.

Credit card companies and banks turned Hiciano down again last year when he needed $4,000 for an editing machine, but by this time Levine’s nonprofit credit union was up and running. Now, Hiciano is building his credit rating as he makes payments to Neighborhood Trust–and he hasn’t missed one yet.

Small businesses are the unsung driving force of New York City’s economy. According to City Comptroller Alan Hevesi’s office, small firms–those with fewer than 500 employees–have added more than four times as many jobs citywide as larger companies since 1993. In Brooklyn, which suffered from an 11.1 percent unemployment rate in 1997, small firms have added nearly 12,000 jobs over the last four years, while large firms lost 4,500 positions.

Getting a start-up or expansion loan can be critical for a company’s survival, and community financiers such as Levine work hard to provide capital in otherwise disinvested neighborhoods. Without adequate data, it hasn’t been easy for them to gauge if New York’s traditional banks redline businesses in poor neighborhoods, however.

In October, the job of tracking loans in the inner city was supposed to get a little easier, as small business lending data became available for the first time in accordance with recent revisions of the federal Community Reinvestment Act (CRA). But neighborhood activists aren’t jumping out of their chairs to get hold of the new database. Word got out that the contents weren’t particularly useful or illuminating.


Anyone familiar with affordable housing knows about the two federal laws that revolutionized finance in low- and moderate-income neighborhoods: the Community Reinvestment Act and the Home Mortgage Disclosure Act. CRA requires banks to serve all communities where they receive deposits; HMDA makes detailed information on an individual banks’ mortgage loans available to the public. Together, the laws help community groups monitor housing lending patterns. When government regulators review a bank’s CRA ratings, activists can provide well-informed critiques of its records–and challenge a merger or expansion. As a result, banks have been prompted to make billions of dollars in housing loans in low- and moderate-income communities.

Congress added small business lending to the list of banks’ CRA responsibilities when it revised the act in 1995, but lenders managed to block legislators from creating rigorous new reporting requirements. “While we won on many points, we lost most of the fight on small business lending,” acknowledges John Taylor, the president and CEO of the National Community Reinvestment Coalition (NCRC) in Washington, D. C.

For individual banks, the new database lists the total number of loans–and the total amount loaned–in each county of the United States. But it breaks down the data by census tracts only after combining information from all the banks, so it’s impossible to determine whether a specific bank is ignoring potential borrowers in a specific neighborhood. So while it is possible to see how many loans were made by all lenders in Washington Heights, for example, it’s impossible to know how well any specific bank is servicing that community.

“Grassroots, effective CRA activism is about particular neighborhoods. That’s what makes it real for people,” says Matthew Lee, executive director of Inner City Press/Community on the Move, a Bronx-based group that helps prepare challenges to banks under CRA. “This takes much of the juice out of it.”

Users are also limited as to which banks they can keep an eye on: The law only requires the largest one-fifth of all lenders nationwide to report. And while HMDA data include the total number of mortgage applications, this database does not, an impediment to community groups that want to see not only how many loans were granted, but how many were denied.

HMDA also reports the loan applicant’s race. But banks aren’t allowed to note the owner’s race on small business loan applications. The rule was originally intended to protect borrowers against racial bias, but it makes it nearly impossible to hold banks accountable for business redlining. “A lot of people would like to see that change,” admits Mark Schultz, a senior financial analyst for the Federal Reserve Board, which collects and publishes the CRA data.


Advocates say more detailed data would make it easier to illustrate how banks’ standard operating procedures tend to limit business lending in non-white neighborhoods.

“We tell banks, if you have blinders on when you look in our community’s direction, you’re not going to accomplish much. Ninety percent of the businesses in this community have trouble with credit,” says Herman Valazquez, the executive director of BRISC, the small business assistance arm of the Upper Manhattan Empowerment Zone Development Corp.

Valazquez acknowledges that a significant number of businesses seeking credit in Harlem aren’t a good risk for a bank loan because of inadequate bookkeeping and other problems. But he and others are not asking banks to make loans that will go into default. They just want recognition that the credit history of someone fighting to start a business in a poor neighborhood might not portray them in the best light on a computer credit scoring system.

“Anyone who says CRA is about throwing good money at bad loans hasn’t read the statutes. It’s loaning within the bounds of sound banking practices,” says Sarah Ludwig, executive director of the Neighborhood Economic Development Advocacy Project. “[But] there definitely needs to be more access to small business loans, there’s no question of that.”

Access to capital doesn’t have to be through the bank itself. Typically, microloans like Hiciano’s aren’t handled by a bank because the administrative costs are too high–nonetheless banks are a key part of the process. For example, Levine’s credit union is supported by more than $2 million in bank deposits.

But the new CRA data doesn’t include any information about bank participation in microloan funds. Nor does it count business loans secured with personal home mortgages.

On the other hand, much of what is included serves to muddy any analysis. For example, loans of less than $1 million are counted as small business loans–a huge category–and companies’ lines of credit are also counted, whether or not the firms actually borrow money. Furthermore, while the database does note how many loans went to businesses with less than $1 million in gross annual revenues, it is impossible to know whether or not the owner is a local resident. “There’s no information on the business owner, so you don’t know if a loan is going to a Boston Market franchise or a local grocery store,” says Josh Silver, NCRC’s vice president of research.


Still, NCRC and groups around the country have started to explore what can be accomplished with this database. “It has its limitations, but community groups can develop benchmarks of what is the average amount of community development lending for a [local] bank,” Silver suggests. “Say a bank is underperforming compared to its peers. A community organizer in the Bronx can say, ‘You’re about $20 million behind your peers. For you to get up to speed for your CRA exam, we have a piece of abandoned property and a willing buyer, but we need to get enough credit to make the deal fly.’”

Groups across the country have started to include the data when commenting on a bank’s CRA record. In Chicago late last year, for example, the Woodstock Institute used the small business data as part of an investigation of Twin Cities Federal, which had placed a bid to buy a portion of Bank of America’s local business.

If activists can make a convincing case that there’s a problem, government examiners can investigate further–banks must submit much more detailed information to the Federal Reserve than what is released to the public.

Meanwhile, community development practitioners and CRA advocates predict that, because the data’s many shortcomings are so abundant, it may be only a matter of time before the regulations are strengthened. “Clearly we can’t rest until this is changed,” Taylor says.