Black-owned banks protected black segregated neighborhoods against predatory lending practices in 2006 that led to the nation’s subprime mortgage crisis, but fell short of building black wealth, according to a new UC Irvine study. Findings, published in Social Science Research, suggest these financial institutions served as cultural assets during a period of intense racial targeting by subprime lenders, says author Asia Bento, UCI sociology assistant professor, and, given their community embeddedness, could be sources tapped to increase future economic resilience and development in predominantly black neighborhoods.

“Black-owned banks during the subprime lending boom were not significant investors into black segregated neighborhoods, but did offer protective benefits against lending practices diluting homeownership’s returns,” says Bento. “This is important because the subprime lending boom and subsequent housing market collapse triggered a devastating loss of wealth for black homeowners. In a short period of time, the wealth black homeowners acquired during the first decade of the 21st century disappeared.”

“The consequences of this loss of wealth likely endure today because it left black households and neighborhoods with fewer resources to invest into their long-term well-being,” she adds. “As black wealth evaporated, so too did the resources to start a local business, fund community organizations, or cover home repairs and renovations that boost a neighborhood’s home values.”

Using data from the Federal Deposit Insurance Corporation, the Home Mortgage Disclosure Act, and the American Community Survey, Bento tracked total mortgage applications approved alongside the number of subprime loans originated in a neighborhood with a black-owned bank in the U.S. In 2006, these financial institutions comprised 48 banks operating over 150 branches with collective assets totaling $6.7 billion, she says.

“It's also important to note that 98 percent of black-owned banks at this time were community banks with long histories of serving their local neighborhoods," says Bento.

Through statistical analysis, she found that while black-owned banks did not significantly increase mortgage originations during this period, in the neighborhoods they served they were effective in reducing the prevalence of the high-cost subprime mortgage loans, which led to the housing market collapse when compared to neighborhoods absent a black-owned bank.

“As corporations, foundations and policy makers look to invest in black-owned banks to counter racial injustice and legacies of lending discrimination that undermine black economic mobility, future research should focus on identifying the underlying factors that help these community-oriented banks promote economic resilience in black neighborhoods,” she says. “This will ensure that more recent gains in black wealth remain secure and can continue to be reinvested into these neighborhoods.”

Findings are available online at https://www.sciencedirect.com/science/article/pii/S0049089X24000474.