It’s rare for loans to be extended to certain groups, especially Black and brown communities and, often enough, by the metrics banks use, those considered to be “not promising” or “high risk.” Unless you’re already well off, getting a loan is iffy at best.
In New Jersey, this is the picture that keeps being ignored, overlooked or swept under the rug.
Redlining
New Jersey data shows that high income Black applicants were more likely to be denied a single-family home purchase loan than low-income white applicants. The practice, drawing red lines on maps around communities deemed too risky for lending, usually using flawed and racist criteria, is called “redlining,” and it has been outlawed since 1968, but, of course, that doesn’t mean it’s gone.
The good news is that banks, at least here in New Jersey, are being called to account.
Lakeland Bank agreed to a $13 million settlement for steering services and branches away from Black and Latinx neighborhoods; the bank has 40 branches in Essex, Somerset and Union counties;
Hudson City Savings Bank agreed to a $27 million settlement and Trident Mortgage Company, discriminating against Black and Latinx communities in three states, including New Jersey, is contributing $20 million to a fund that will be dedicated for lending in redlined neighborhoods.
Will exposing the practice and the cost to the banks — not to mention the business these banks may lose because of their practices — have an impact?
Barriers to home ownership continue. In New Jersey, for example, just 38% of Black families own a home, compared to over three-quarters of white families. As home ownership is a prime driver of wealth, the disparity directly contributes to New Jersey’s staggering $300,000 racial wealth gap between white and Black residents.
And there are other challenges, including, in Newark, for example, the high rate of corporate home buying now, just as the city is trying to increase individual homeownership and mitigate the impact of the rising appeal of the city to wealthier buyers that drives out longtime residents.
One way to assist individual buyers and “level the field with corporations” is by making low-interest loans available to nonprofit community development corporations that offer below-market rents and sales to first-time buyers at rates they can afford, and by making low-interest mortgages available directly to individuals as well. These objectives are certainly consistent with the promise of public banking.
Public banking
Funded with government revenues/tax dollars, public banks create loans locally and share profits and interest with localities, giving them capital to serve the public instead of private shareholders. And, rather than depositing all taxpayer dollars in corporate banks, some funds go into public banks.
Public banks can assume more risk and serve specific needs, and, as they are not solely focused on profit-making, they can do what private banks are often reluctant to do: lend to those institutions, including nonprofit community development organizations and to individuals who have a tough time getting loans from private banks, certainly at reasonable rates; they can provide below-market-rate capital for creditworthy and socially beneficial projects, including those that support small business lending, affordable housing, and student lending, help community banks and credit unions and community-based financial institutions in under-served communities.
The continued absence of public banking in New Jersey amounts to an inexcusable missed opportunity.
If we can’t, by public policy and banking rules, “encourage” banks in our state to broaden their interpretation of risk, allowing greater amounts of capital to flow to those who lack it — and have for a long time and for all the reasons that we know — what else might we do?
Why no public banks in New Jersey?
Among his signature campaign commitments in 2017, Gov. Phil Murphy promised to create a state public bank. In November 2019, he did just that, traveling to Newark to announce its creation:
Surrounded by community and financial justice advocates, the governor pledged to leverage “state resources to provide greater access to capital for our communities, small businesses, municipalities, and students.” He emphasized that a public bank can be “an important component of building a financially inclusive New Jersey.”
The bank that the governor promised has not been delivered. There was a lot of public support for it and public support remains but, when it comes to the state’s private banking industry, there was no support and there is none today, despite the fact that public banking is neither duplicative of, nor competitive with, existing lending or other investment activity. Still, the bankers resist.
Despite efforts to resurrect the public bank, then, and to press the governor to follow up on his promises, it seems unlikely to happen under his administration. The public bank, it seems, never had a chance.
So, what else might be done?
A future for public banking
It is way past time for public banking advocates to produce a bold but prudent vision of what public banking can be. A process that brings together a small group of knowledgeable people to provide preliminary answers is one wide open path, to be followed, perhaps, by a process that introduces the document the group produces to some set of political leaders whose support could put its version on the legislative agenda.
A more immediate solution is to encourage the state legislature to enable legislation now to permit, not one, but a number of public banks, in municipalities, counties and/or regions, requiring investments of funds that derive from local, county and state governments that, given present practices, would go to private, commercial banks.
Some conditions would have to be met, of course. The banks would need to have the capacity to interface with private, nonprofit and federal credit providers to succeed, for example, and they would need to be organized in a way that would enable an array of public and private institutions to participate in public banking activities.
Public banking is innovative. It refrains from activities provided by other public agencies and products offered by commercial lenders. Its agenda is to do things that other lenders don’t know how to do, don’t recognize as something needing to be done, and/or that other lenders are not interested in doing, including providing reasonable rate loans to those perceived to be at high risk.
The private, commercial institutions that currently dominate the banking landscape that vigorously oppose the admission of non-competitive newcomers they have no interest in serving, frankly, have no business blocking the creation of public banks.
Society has to find a way to provide access to capital to those who need it and will make responsible use of it. Public banks offer a way.
