According to new research from Urban Institute, when buying a home, people of color rely largely on black-owned banks for financing. As these banks, which are especially vulnerable during economic recession, struggle to continue lending, black borrowers face a lack of access to capital.
Citing the institute’s recent study on the benefits and limits of black-owned banks, Neal suggested a two-fold solution that includes both increasing capital to black-owned banks and promoting public policies that more broadly support community development financial institutions (CDFIs).
Black-owned banks are generally headquartered in and support predominately black neighborhoods, and these institutions work with black homebuyers at a much higher rate than other lenders. The typical black-owned bank originated between 75–100% of mortgages for black borrowers between 2004 and 2018, averaging 1260 purchase loans annually. Other types of lenders reportedly never exceeded 10% over the same period.
Black-owned banks tend to practice relationship banking, which means looking beyond financial status when assessing potential borrowers. This allows them to more creatively and widely meet credit needs within the communities they serve. And while these black-owned financial institutions are strong, Neal reported, “they are small in size and number.”
Black-owned banks represent just 0.4% of the 4,681 community banks insured by the FDIC and account for less than 1% of purchase mortgage loans going to black homebuyers each year.
Recessions mean dwindling numbers of black-owned banks and less hope for mortgage lending if you are a person of color. Numbers of black-owned financial institutions have been falling since 2001—that includes a 49% decline since 2008. At this point, black-owned banks alone cannot handle the demand.
Neal pointed out that, while all financial institutions could serve minority communities better, CDFIs, which enjoy U.S. Treasury funding, are already positioned to support neighborhoods of color. More than 40 percent of CDFIs loans today go to majority-minority communities, and public policies that support CDFIs would increase both mortgage and small business loans to many black communities and historically underserved areas.