Progress Illinois

Searching for a politically convenient scapegoat to the nation’s mortgage meltdown, conservatives have focused their attention on the Community Reinvestment Act (CRA), a law passed by former President Jimmy Carter that requires banks to lend throughout the communities they serve. As the theory goes, CRA regulations placed tremendous pressure on banks to extend loans to people who were unfit to borrow, leading to an explosion in subprime mortgages and eventually a rash of foreclosures.

Chicagoan Ron Grzywinski, a co-founder of ShoreBank, thinks this argument is hogwash. And he should know.

In 1976, Grzywinski proposed the idea for the CRA and later became the only banker to testify on Capitol Hill in favor of the legislation, drawing criticism from many of his colleagues in the banking industry. His courage paid off. Once enforced, the CRA brought safe, sustainable investments to communities long-ignored by traditional financial institutions, spurring an increase in homeownership rates as well investment in affordable housing, small businesses, and community facilities. And contrary to the revisionist line of attack, the lenders subject to CRA have engaged in less of these dangerous lending practices – not more.

Grzywinski has witnessed at close range the power democratizing credit can have on underserved communities. Measuring success by development and conservation goals -- rather than simply earnings -- the once-floundering ShoreBank he operates (based in Chicago’s South Shore community) has transformed into the nation’s premier community development bank. In Chicago alone, ShoreBank has invested $3 billion, financing improvements to churches, homes, health clinics, and the construction or rehabilitation of 52,000 affordable housing rental units.

With an eye toward the environment, they now finance the decontamination and redevelopment of abandoned manufacturing sites, provide information to real estate borrowers on ways to improve buildings’ energy efficiency, and operate nation’s first environmental development bank. Grzywinski has consulted with some of the leading micro-financers globally, including former President Bill Clinton and 2006 Nobel Peace Prize winner Muhammad Yunus. On top of all that, the South Side institution has assets worth $2 billion and netted $5.3 million in profits last year.

Less than 12 hours after he returned from a bank opening in Belarus, I had the chance to speak with Grzywinski about community banking in Chicago, the origins of and impetus for the CRA, and the difference between responsible and irresponsible lending. Here’s an edited version of our discussion on Wednesday.

AD: First off, can you describe the economic and social climate in South Shore when you acquired the bank in 1973. What type of changes were taking place in the neighborhood and how did that affect the lending practices in the community?

RG: The late 1960s and early 1970s was a time of riots in Chicago. Neighborhoods were being abandoned; many parts of the near South side and West sides were being torched. The adjacent neighborhood of Woodlawn was one of those neighborhoods that probably had 75 percent of its housing stock torched. Nobody was ever indicted, but the housing went down. South Shore was threatened because it had a similar housing stock – about 75 percent of the stock then, and now, is multi-family walk-up buildings built between 1910 and 1930 – and it had experienced rapid racial change that started in about 1963. The two census points between 1960 and 1970 went from 100 percent white to 70 percent black.

So the expectation was, if that’s what happened to Woodlawn, that’s what’s going to happen to South Shore. And the South Shore National Bank, which had been here since 1939, had experienced a 50 percent drop in its deposits between 1968 and the time we got here. It tried to relocate to downtown Chicago, out of what banks euphemistically called “deteriorating market conditions” -- otherwise known as racial change -- but was denied permission in December of 1972, probably the first time a bank was denied in U.S. history.

We bought the bank on August 23, 1973. There were four of us: two African American men, Milton Davis and James Fletcher, Mary Houghton, and myself. ... We bought this failing bank with the idea of using it to rebuild the neighborhood. So that was the beginning.

AD: Can you talk a little about what you and your colleagues wanted to change about the way business was being conducted in the neighborhood?

RG: We knew that there was a lot of discrimination and prejudice in the system and that redlining was fairly rampant. At one point, it was official policy of the FHA [Federal Housing Administration] to redline neighborhoods based on various conditions, with the most prominent one being racial minorities. And so what we knew from our prior experience was that there were many credit-worthy borrowers in these neighborhoods with whom we had had good success. So starting in the South Shore neighborhood, we were interested in demonstrating to the larger banking community that there was good business on market terms and conditions that could be done. The basic idea was using the banking system to rebuild urban neighborhoods without being dependent on deep public subsidy.

AD: What kind of success has your bank had ensuring both economic and environmental sustainability? What are a few achievements that you’re most proud of to date?

RG: Well, the bank is modestly larger – about 60 times larger – than when we started [laughs], so it’s gone from a $40 million failing bank to a $2.4 billion bank. It’s expanded to other domestic locations and since 1983 has been doing a lot of work in developing countries with local development banks … We started working with the Gramean Bank in 1983 -- that’s where Muhammad Yunus just won the Nobel Prize -- and we did that for over a decade. We started working in Poland in 1990, eighth months after the change of governments there, too, so that’s the international side.

On the domestic side, in addition to growth and size, every year for the last decade we put out about four times the shareholder’s capital in the form of new development credit around the U.S. The cumulative total that’s gone out is about $3.5 billion. But if you talk about other things we’re proud of, the bank has operated profitably every year since the first year. We created in 1995 and 1996 the nation’s first environmental development bank – it’s a wholly-owned subsidiary that was founded in a small Washington town at the mouth of the Columbia River with offices in Portland and Seattle. We’ve been able to bring the whole business of conservation into our Midwest banks -- we have significant programs now on home energy conservation loans that are tied into rehab.

And then a year ago, we started in Chicago the Rescue Loan Program, which is designed to reach out to people who are not our customers but who have been disadvantaged by these explosive ARMs [adjustable rate mortgages], these loans given to people with no credit reports, no jobs, no anything. What were finding is about 70 percent of those borrowers qualify for fixed rate conventional mortgages, so we’re doing a lot of outreach in the neighborhoods to get people familiar with that and that’s going quite well. We also created and run the Center for Financial Services Innovation, which has now become the national go-to place for the large financial institutions who are trying to help banks reach the “underbanked” in the U.S., which is a significantly larger amount of the population than you might imagine. And then along the way I was able to testify in favor of the Community Reinvestment Act, which is getting a bit of flak these days.

AD: That had to be a lonely time for you, as the only banker in the nation to stand up and speak to Congress in favor of the bill.

RG: Well, it seemed like the right thing to do then and it seems like the right thing to have done now.

AD: From a broader historical perspective, would you consider CRA a success? Has it fundamentally changed the way banks see markets in cities?

RG: If you go back to that time, there was a lot of concern about redlining in general. You can put it all in the context of the changes that were going on in the country. In my mind, it’s all a part of voting rights and civil rights and opening up society and anti-Vietnam protests and all of that. So it was within that context that there was growing awareness and community organizing around the issues of redlining and the damage that was being caused by it. [National Training and Information Center co-founder] Gale Cincotta, here in Chicago, who is now deceased, was a national leader of that, but they did a lot of organizing to create awareness that this kind of redlining was not right and proper and that it was bad business.

The opportunity to think through the way that the banking industry might get involved came during a conference in which people who thought that Jimmy Carter was going to get elected wanted to create a new federal organization which would be a community development bank. I was one of a handful of people who were invited. In the meeting, I suggested to that it didn’t make much sense to make another federal bureaucracy because it would just mean that all the resources would be focused in a narrow funnel. What we really had to do was figure out a way to release the energies of the nation’s banking system in a responsible and profit-oriented way. Nobody was especially interested in that except for one guy, [American Prospect editor-in-chief] Bob Kuttner, who at the time was on Sen. [William] Proxmire’s [D-WI] staff on the Senate Banking Committee. Bob happened to be there, and I didn’t know him, but he was interested in the idea, so we chatted a little bit about what the potential was for banks. He went away and I didn’t hear anything more for close to a year, but then he called one day and asked if I would come and testify. Thankfully, it got passed and became a law. […]

But contrary to all this stuff that anybody against it has ever said, there is never any suggestion by anybody that banks should be making irresponsible loans. And the last time, about five years ago, when somebody got fairly far in Congress and tried to ditch CRA, the big banks all testified in favor of it.

AD: Do you think the regulations are still important today? What do you think the lending landscape would look like without CRA?

RG: Well, I don’t know. That makes for good speculation. Despite what I just said, getting involved in public policy isn’t what ShoreBank does a lot of. I think in this current environment, it’s very hard to say what it would or will look like. Because it’s easy for the story to get clouded up and make it look like the regulating banks under CRA were the cause of the problem.

I think part of what [Chicago Tribune columnist] Clarence Page and others have pointed out is that probably about 75 percent of the what are called subprime mortgages were done by mortgage brokers and not by regulated banks. In his Boston Globe piece this morning, [Harvard University’s Joint Center for Housing Studies director] Nicolas P. Retsinas makes a point that almost 250,000 people worked at mortgage brokerage firms and they all focused on selling mortgages -- the solvency of the borrower was secondary. What you had was a whole industry that had absolutely no skin in the game. They were just writing and peddling stuff … and there was nobody checking. It was just reckless stuff -- sell it, make your fees, and move on. And people have no down payments and they were told they could own a home – why wouldn’t they?

AD: How are the loans that your bank gives out to lenders who might also qualify as subprime different from some of these peddled loans from the bigger mortgage firms?

RG: We do it the old fashioned way. It sounds like an advertisement but it’s the truth. We don’t do credit scoring; we do it after the fact in order to put a piece of paper in the file in case we ever do decide to sell it. We do not do variable rate loans or subprime adjustable rate mortgages. To the best of my knowledge we have never given out variable rate loans. And we meet with the borrower, and its old fashioned lending. Who is the borrower? What kind of down payment do they have? Where’s the money coming from? How real is the value of the house? Can they make these payments? All that kind of stuff. We do verification of value and of income. We lend in the markets that we know, here on the South Side and West Side of the city. There’s no magic about it. And our numbers right now in our homeowner portfolio are just about where they have historically been. They are up a touch, but that’s mostly the economy. It’s not rocket science [laughs]. We’re just old fashioned bankers.

AD: After the success of your bank and the high-profile success overseas of the Gramean Bank, do you think the community banking movement has blossomed in America as you would have hoped or expected? And if not, do you think the mortgage meltdown here could push some energy in that direction?

RG: I think that it probably has not blossomed here the way that we had hoped that it might. What has blossomed is just much more consciousness and awareness on the part of banks and others to become involved one way or the other. What are some of the other things that have happened? There’s been an entire Community Development Financial Institutions industry created, which are licensed by the Treasury Department. About 50 of them are commercial banks. There’s a much larger number of non-bank financial institutions that lend in communities, too. And the well-managed ones do quite well. They don’t get the leverage that commercial banks have but they raise money, they get loans from large banks, they get loans from individuals and they use those monies to finance community development activity. […]

When you start down a path, you never really know where it’s going to end. We’d probably like to see more truly dedicated community development banks than we have seen, but in terms of availability of credit and other financial resources, I think there is a lot there …. And when you do it the right way, with good management, these things are doing pretty well.

In this country, it’s unclear what the end will be for our current financial and market situation. I think when everything gets shaken out, were going to be back where we have been – that there is a need for credit and financing done the right way, for qualified small businesses, homeowners, everything else. That’s what’s needed.