Borrowing To Buy A Home Is Hard, But The Federal Reserve’s New Proposal Will Make It Even Harder

Borrowing To Buy A Home Is Hard, But The Federal Reserve’s New Proposal Will Make It Even Harder
Black Americans applying for a mortgage loan are two and a half times more likely to have their application rejected than white Americans.

That isn’t a stat from the 1950s, when the racist practice of redlining deprived countless Black Americans from achieving the dream of homeownership. It’s a reality that we live in today. The troubling gap that exists in Black homeownership is a major issue that leaders at the NAACP, Urban League, and other civil rights groups have worked to address, but we know this fight won’t be easy. In fact, a recent proposal by the Federal Reserve threatens to make our efforts to close the homeownership gap even more difficult.

The proposal is called “Basel III endgame,” and there isn’t anything specifically wrong with the intent behind it – financial regulators are trying to make sure banks are as resilient as possible and propose doing this by increasing the amount of capital that banks need to keep on hand. The problem is in the proposal’s unintended consequences for Black borrowers. Under the Fed’s proposed framework, banks are required to hold even larger capital reserves, which, in turn, will lead to banks becoming excessively cautious when granting loans.

Both history and recent analysis tell us that this added caution will disproportionately impact minority borrowers – adding financial barriers for those we should be aiming our focus at helping. Instead, banks will tighten their lending standards, making it harder for a low-income Black family to secure a loan for the home they’ve dreamed of owning, or for the Black business owner who will be unable to grow their small business without a much-needed line of credit. What makes the Federal Reserve’s proposal even more puzzling is that experts do not think it is needed.

When it comes to the largest, most systemically important banks in our country, financial leaders like Fed Chair Jay Powell, Treasury Secretary Janet Yellen and others have repeatedly acknowledged that capital levels are at historic highs and our banking system is safe. How our banks survived the unprecedented pandemic is a reflection of this and a testament to the work leaders in Congress and federal regulators have done to shore up the stability of our banks in the years following the 2008 financial crash.

Why the Federal Reserve is choosing to move forward now is anyone’s guess. The timing could not be worse. High interest rates and high home prices are locking too many borrower’s of color out of homeownership. This proposal will put the American Dream further out of reach. The proposed rules will also undermine a lot of progress made by the Biden administration over the last two years. The President has used the powers of government to invest in solutions that benefit the marginalized communities that have too often been pushed to the back of the line. For those of us who have applauded this progress, the Federal Reserve’s proposal feels like a real step back.

Whether it be my hard working colleagues at the NAACP, our larger national organization, or other civil rights groups like the National Urban League, advocates have spoken out to warn that this proposal will exacerbate problems that potential Black homeowners and minority small business owners face. I urge our elected leaders in DC and our financial regulators to rethink this set of rules before it is too late.