Redlining redux

>> Canadian banks fight proposal that could invigorate slums

by KRISTIAN GRAVENOR

Imagine you're a loan officer at a major Canadian bank. Combed hair, conservative outfit, air-conditioned office, glass wall, polished shoes: the whole kit. One day, in comes a gangly, loud-talking hippie longhair sporting a shirt fresh off the dirty laundry pile. He wants to borrow your bank's crispy cash to buy a triplex in one of Montreal's poorer neighbourhoods. His credit is fine, but, well, he's a freak and you've got a career in banking to worry about. You've got to make a decision. Do you overcome suspicion and prejudice and accept his request to borrow money for a triplex? Or do you turn him down and hope he never again steps freakish foot in your corporate cubicle?

The case is far from hypothetical. The freak is a real Montrealer who escaped call-centre hell by saving his every unspent penny and buying into a modest existence as a professional landlord. The pony-tailed property owner had previously bought and sold properties without incident and had successfully bid on two triplexes in the Pointe. All that was holding back much-needed repairs was the mortgage cash required to make the property his own.

The real-life loans officer turned him down flat. When asked to explain the reason for the refusal, she vaguely stated that the property is in a part of town the bank doesn't do business in.

Is this kind of geographic- and look-based discrimination legal? In Canada, yes. Much to the frustration of certain bank watchers, no enlightened law exists that compels a bank to transcend their suspicions or geographical prejudices against potential loan applicants. Or as one top Canadian mortgage industry official tells the Mirror, "They're allowed to say no for whatever reason they choose. Maybe the loans officer didn't like his face or wasn't interested in putting money into that part of town."

How slums began

While the story might seem at best a cynical confirmation of lazy corporate fiat, refusing loans based on prejudice is the process which contributed to the growth of inner city slums in the United States, according to bank watchdog Duff Conacher of Ottawa-based Democracy Watch. "Banks took money out of communities through savings accounts and then refused to reinvest that money into those same areas," he says.

Redlining, as the practice is known, led to the impoverishment of neighbourhoods through asphyxiation of capital. The practice was attacked in the States through the Community Reinvestment Act (CRA) of 1977, which requires U.S. bankers to submit detailed reports on loan applications they've rejected. Banks whose reports suggest prejudicial lending habits based on gender, ethnic background or geography are ordered to enact a five-year plan of corrective action. Repeat offenders are hit with restrictions or refused permission to merge or take over other banks.

"It has been shown that in the States, blacks, Hispanics or people living in certain neighbourhoods remain two to three times more likely to be refused [a mortgage loan] than a white person from a white neighbourhood," says Conacher. Those who want to know what the numbers reflect in Canada will have to be left wondering. No mechanism requires Canadian banks to report any data about their patterns of loan refusals.

This is partly because Canadian banks have long fought against importing the anti-discrimination legislation north of the border, arguing that inner city poverty and racism don't exist in Canada the way they do in the States. "I don't think we'd see the CRA as necessary because the situation in the States is different from Canada," says TD-Canada Trust bank rep Jeff Keay. "Our lending policies and practices are ethical, competitive and fair."

Bankers balk at disclosure

The Canadian Bankers Association agreed to certain minor reforms passed through Commons June 14. For example, the CBA did not oppose a suggestion that banks require only two, rather than four, pieces of identification for those requesting to open a bank account. But they have aggressively fought proposals requiring the government to analyze their patterns of loan refusals for signs of prejudice.

The Canadian Bankers Association uses the same rationale to oppose any importation of CRA-style loan-refusal disclosure laws. "It's not the same environment that they have in the States versus what we have here," says Caroline Hubberstey of the CBA. She notes that such recent bodies as the 1998 MacKay Task Force on the Future of the Canadian Financial Services Sector, the House of Commons Standing Committee on Finances, and the Senate Banking Committee have all backed off from recommending a CRA-type law in Canada.

"They say that there are no ghettos and no racism in Canada but we know there's a well-documented problem for people with low incomes trying to get affordable housing," says Conacher. "We have enough anecdotal evidence to require the disclosure of bank loan rejections. If they find there aren't any problems, then we can get rid of the disclosure system after a few years anyway."

He notes that banks already have reams of data on their markets and that providing the extra report wouldn't be much extra work. "I'm sure the banks know Canada neighbourhood by neighbourhood and generally know probably five to 10 things about almost every household. Most people have a bank account and that gives the banks a huge amount of information about you."

As interest rates remain low, purchasing a home can be a way out of poverty for many who could be building equity rather than paying rent. Refusing a mortgage applicant can be tantamount to sentencing them to long-term poverty. But Conacher suspects that Canadian banks are refusing to divvy up their loan refusal data because such information would prove that they maintain prejudicial methods of determining who can get their hands on bank money. He says that generally the banks, rather than spend valuable time checking an applicant's credit history, quickly judge loan applicants on a crude formula called "debt income ratio." Simply put, if an applicant owes more than a third of what he earns, then it's likely thumbs-down time.

"The debt income ratio is not an indicator as to whether you'll be able to service a mortgage loan," he says, "because poor or indebted people still find a way to pay their bills. Many of these refused mortgage applicants are people who haven't missed a rent payment in years."

He says that by forcing U.S. banks to supply their loan refusal data for government perusal, the American legislation has enticed U.S. banks to loan $1-trillion to once-poor American neighbourhoods in the last two decades. The simple administrative requirement that the U.S. government has forced on banks has sparked a recent renaissance in American inner cities, "simply because the law forces the banks to lend to these areas," says Conacher. "But our banking policy remains 20 years behind the American banks in terms of social responsibility."