We note with interest the designation of Urban Partnership Bank as a Minority Depository Institution. According to Crain's Chicago Business, "The $1 billion-asset bank based on Chicago's South Side (formerly South Shore Bank) is officially a minority lender despite an ownership dominated by Wall Street giants like Goldman Sachs Group Inc. and JPMorgan Chase & Co."
A Minority Depository Institution, under Section 308 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, used to be strictly defined as a bank in which 51% or more of the common stock was owned by one or more members of the following groups: African-American, Asian-American, Hispanic-American or Native American. The MDI designation is valuable because banking regulators use deposits in minority banks as evidence that a nonminority bank is not breaking the law by discriminating against racial minorities and that it is meeting community credit needs.
In 2002, the Federal Deposit Insurance Corp. expanded the MDI definitions because it said it found the old definition "ambiguous." Now a bank that does not meet the ownership test can be designated an MDI if 51% or more of the directors on the board are members of those minority groups and the community the banks serves is primarily minority. This is how Urban Partnership Bank was able to obtain recognition as an MDI.
The MDI designation originally helped black-owned banks, whose historical significance was clear: the first was created after the Civil War at a time when discrimination against black people was legal in the United States. They served as the only financial service providers to the community. Black banks do not have the same level of significance to the black or minority community today. They are too small to serve the community in any meaningful way. For example, they cannot serve as a line of defense against predatory lending. The result: banks like Wells Fargo (WFC) have been free to target wealthy black communities for predatory loans, in a nakedly discriminatory (and ultimately successful) campaign to strip wealth out of the black community.
According to an article in The Washington Post, one Wells Fargo loan officer, "in sworn court testimony ... described watching loan officers comb through heavily African-American areas such as Baltimore and Prince George's County, forging relationships with churches and community groups to sell their members [predatory] mortgages." This same loan officer "processed loans for [black] homeowners with sterling credit ratings with higher interest rates than they needed to pay." Of course, some claim that the actions of a few bigoted individuals cannot mark an entire institution as racist. We disagree, and refer to the clear double standard concerning these matters, evidenced by the treatment of ACORN after a few individuals at the nonprofit made mistakes.
What's specifically relevant in this case is that Goldman Sachs, one of the owners of this newly designated "minority bank," has a history of discriminatory behavior. The firm's long-running mistreatment of blacks and women is described, in great detail, by William D. Cohan in "Money and Power: How Goldman Sachs Came to Rule the World" (2011). While some of the examples are decades old, as recently as 2010 current and former female employees filed multiple suits alleging discrimination, including in pay and promotion, by Goldman.
At any rate, Urban Partnership Bank's designation prevents an honest and ethical explanation of the Minority Depository Institution designation. I have been producing statistical reports on women and minority banks for 30 years. Lowering the bar for the MDI definition has hurt my ability to derive meaningful insights from data on banks' social and financial performance, since we are no longer able to make apples-to-apples comparisons. It makes any long-term statistical analysis meaningless.
More important, the Urban Partnership Bank investment removes any real social meaning from the MDI status designation, since it is the first time that large, nonminority financial institutions with highly questionable track records with respect to discrimination have been able to participate.
William Michael Cunningham is the author of "The JOBS Act: Crowdfunding for Small Businesses and Startups" and is a social investing adviser at Creative Investment Research Inc.