When Ohio Savings Bank failed in December 2009, it was taken over by New York Community Bank, a much larger institution that currently has about $48 billion in assets.
In South Euclid, Ohio, a suburb of Cleveland where the population is 40 percent African-American, the local Ohio Savings Bank branch has $95 million in deposits, mostly from people who live nearby. But the consolidated bank hasn’t made a loan in South Euclid for the past three years.
“They are the largest depository institution in South Euclid,” South Euclid City Housing Manager Sally Martin said earlier this year. “Yet they don’t lend. Period. That’s disturbing.”
Bigger banks gobbling up failed ones wasn’t unusual in the post-subprime loan meltdown crisis, but advocates for equitable investment worry about how these larger merged institutions are now using some communities as piggy banks for loans they make elsewhere. In Ohio, branches of the former regional bank have been shuttered since the takeover, many of them in poorer communities. The new consolidated bank has also been accused of not making enough home mortgage and small business loans in the area it serves, which is required by the Community Reinvestment Act, passed in 1977 to prevent redlining, the deliberate practice of denying loans to people based on race and geography.
The dissatisfaction with how financial services companies meet local credit needs is an ever-growing national issue — one that’s spilling into the 2016 presidential race. In a poll conducted in America last year, 70 percent agreed with the statement that “most people on Wall Street would be willing to break the law if they believed they could make a lot of money and get away with it.” At the same time, 73 percent said Wall Street “benefits the country.”
Some say regulations on banks are too restrictive and others say lack of enforcement is the problem. The presumptive nominees for their parties, Democrat Hillary Clinton and Republican Donald Trump, have decidedly different views on the matter. In terms of who wins the election in November, the issue centers mostly on changes to the Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in 2010 in response to the failing banks in wake of the Great Recession. Among the stakes: investment in struggling neighborhoods in U.S. cities and predatory lending in underserved communities.
Dodd-Frank was designed to provide stricter regulatory structure and “to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail,’ to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices.” At roughly 2,300 pages and with more than 400 new rules and mandates that have to be enforced by federal regulators, some have theorized that Dodd-Frank is too big to succeed.
Trump is clear on one aspect of this issue: He wants to get rid of Dodd-Frank. But he hasn’t offered a replacement option. “We have to get rid of Dodd-Frank,” he told Fox News last October. “The regulators are running the banks.” He added in an interview earlier this year that Dodd-Frank “has to be either eliminated or greatly changed.”
Clinton has expressed a similar dissatisfaction with Dodd-Frank, but from a perspective that it is not enforced properly and doesn’t go far enough in its regulations. “As president, I would not only veto any legislation that would weaken financial reform,” Clinton wrote in a New York Times op-ed last December titled “How I’d Reign in Wall Street,” “but I would also fight for tough new rules, stronger enforcement and more accountability that go well beyond Dodd-Frank.” She said during a debate in January that “no bank is too big to fail, and no individual is too big to jail.”
What makes this election unique is both the timing of the financial issues being raised and that both candidates have strong New York City connections. In many ways, Dodd-Frank was emergency legislation designed to get the financial services industry stable and out of the intensive care unit, and many analysts think it needs revisions as follow-up care. But both Trump and Clinton have been accused of being too cozy with Wall Street to back any changes that would benefit consumers at the expense of hedge fund managers.
For community organizers who follow this from a grassroots level, there are several key components to the debate. Caroline Nagy, deputy director for policy and research for the Center for New York City Neighborhoods, says the industry has changed greatly since the Community Reinvestment Act was passed in 1977. “We have to keep up with the technological changes and make sure they are fair for the bank customers,” says Nagy, citing the increase in online banking as an example. “One of the most important things that came out of Dodd-Frank was the establishment of the [Consumer Financial Protection Bureau]. As advocates for fair lending to homeowners, we support strong standards and protections that encourage investment in our communities in an equitable way.”
Charles Bromley, founder and director of the Ohio Fair Lending Coalition, says that it might be wise to enforce the existing regulations before trying to get rid of or reconfigure the current laws. “The rules have been there, but the unwillingness of the bank regulators to put their foot down is what has been the problem,” he says.
Bromley points to the case of South Euclid as a perfect example. “The bank has depositors in a community, makes no loans in that community, and the federal regulators have never held the bank accountable as they do their assessments that are mandated by law,” Bromley says. “It’s almost the same as grade inflation in colleges. The banks get an automatic passing grade while the neighborhoods fail.”
A few fines have come out of federal oversight. Most recently the U.S. Department of Justice and the Consumer Financial Protection Bureau leveled a $10.6 million judgment against a Mississippi bank, alleging its lending practices in Memphis deliberately discriminated against minorities.
The issues at play can be extremely complicated. In an age of online banking, when customers can be anywhere, what are a financial institution’s geographic boundaries when it comes to deciding where they need to make loans? Quicken Loans, for example, has closed on $220 billion worth of loans in all 50 states since 2013, according to the company’s website, without any real savings or checking account operations tied to any specific geographic location.
But for Bromley, the issue is clear and the public needs to take notice. “The government insures the deposits for the banks [through FDIC insurance], and we as taxpayers pay for that protection, and those deposits we make still drive the lending side of the industry,” he says. “You cannot separate the deposits from the loans. So as a part of that loan assurance from the government, the banks should be obliged to meet community credit needs. Because without that investment, many urban neighborhoods will fail, and the public has to pick up that cost.”
Daniel J. McGraw is a writer living in Lakewood, Ohio.