California Governor Gavin Newsom recently announced a historic $100 billion budget surplus and signed a $300 billion budget into law. At the same time, researchers published a detailed report on the widening racial wealth gap in the U.S., highlighting how wealth concentration and “the recent role of capital gains,” made during the early pandemic market boom played a significant role in exacerbating the racial wealth gap.
As the wealthy grow wealthier in California, the need for policymakers to address ongoing segregation in our economy–and the role our financial system plays in perpetuating it–has never been more urgent.
The Community Reinvestment Act
For those that weren’t born into generational wealth, gaining a foothold in our financial system is a long, arduous process. That’s because the practices of redlining and other forms of legal discrimination barred low-income communities and communities of color from accessing the capital that enabled other communities to grow and flourish.
The federal Community Reinvestment Act was enacted in 1977 and established a baseline for regulating financial institutions to prevent redlining, discriminatory lending and disinvestment based on race. However, because discriminatory lending was legal prior to this–and exists in less obvious forms today–communities of color still do not access home purchase loans at rates comparable to White communities. In addition, the federal CRA has known gaps–like not including racial equity in its mandate.
State legislatures across the country have signed their own versions of the CRA into law to address gaps in the federal framework and ensure state-chartered or licensed financial institutions meet the needs of the state’s communities–particularly those that have been redlined historically. Unfortunately, California, despite being a leader in many other areas, has not been able to enact its own state-level CRA framework.
In California, Latino households only access 22% of the state’s home purchase loans, despite making up over 39% of the population, and Black households access 3% of home loans, while making up over 5% of the population. Women of color, 30% of the state’s population, receive just 8% of home purchase loans. And Pacific Islander and Native American communities lag even further behind White communities.
At the same time, “fintechs”—technology-based financial service providers—and other nontraditional lenders are now more likely to make home loans to low-income borrowers than traditional banks. These nontraditional lenders aren’t held to the same standards as traditional banks when it comes to lending transparency and accountability, leaving the door open to unchecked discrimination against borrowers in need with few alternatives. These are just some of the new frontiers of redlining.
The Uphill Battle Towards a California CRA
Earlier this year, the Greenlining Institute and the California Reinvestment Coalition partnered in support of a piece of legislation that would have started the process towards a state CRA. Sen. Monique Limón’s Senate Bill (SB) 1176 would have established a framework for evaluating the performance of state-regulated financial institutions in meeting the financial services needs of underserved communities. In other words, we could start to understand the magnitude of the problem in the Golden State.
Unfortunately, powerful financial interests and industry pushback helped to halt progress, and the bill was watered down behind closed doors during the legislative committee’s secretive process. The fact that this occurred against the backdrop of a national conversation on the need for reparations to acknowledge and redress past discrimination is telling. While California’s laws and systems have historically served as a beacon of progressive ideals and an example for other state governments to follow, when these policies bump up against powerful interests in Sacramento, these powerful interests too often prevail.
The fight to enact policies in California that hold financial interests accountable is far from over. Until the state shows progress towards narrowing the racial wealth gap, and until low-income communities and communities of color have a true path towards building generational wealth, we will continue to push for a state CRA. It’s time for state laws to keep up with the realities Californians face.