Is Gay Banking a Strive for Equality or Just Risky Business?

Warren Albrecht | @drw_albrecht

Superbia Credit Union will offer non-traditional banking specifically supporting the Gay community, also known as “Gay Banking”. The state of Michigan has approved the formation of America’s first Gay Credit Union. The “buying power” of the LGBTQ community in 2014 was about $884 billion and up to $987 billion in 2017, as estimated by Witeck Communications which has been following the potential PGBT market since 1993. However, this is not wealth.

From Witeck Communications,

Disposable personal income (DPI) – also known as buying power – according to economists, is the amount of money that individuals (or households) have available to spend and save after paying taxes and pension contributions to the government (roughly 86% of income).

Is this just optimal specialization, the progression of equality,  or is it expanding the potential risk of banks? Gay Banking is not a new concept.

Gay Banking 1.0

Even though this may be the first credit union formally catering to the LGBT community, specialized gay banking businesses have been tried. Atlas Savings and Loan Association was the first documented loaning institution formed by gays and lesbians in the United States. It was in San Fransisco. It opened its doors in 1981 and by 1985, had three branch sites.

In 1985, Atlas was sold because of insolvency. Bad loans and investments were found in its books, similar to other S&Ls during that time. People Magazine printed an expose on Atlas in 1982. Atlas had started with good board members and supported by a great number of investors. What may be a different tone to LGBTQ conversation today, John Schmidt, Atlas founder,  discussed trying to make a good impression for business in the People article,

“I don’t wear dresses, I don’t wear makeup and I don’t hang out in bars,” he declares. “The impression I want to leave with people is that not all gays are that way. Gay people pay taxes, support charities and hold good jobs. They are also,” he adds, “good business.”

Schmidt saw Savings and Loans for Blacks, Hispanics, and Chinese and wondered why Gay Banking systems? But similar problems were found in other specialized banking institutions.

Black Banking

The Bureau of Refugees, Freedmen, and Abandoned Lands, later to be known as the Freedman’s Bureau, was established in 1865, before the end of the Civil War and essentially became a welfare program. But within it, it did establish the first Black bank. Unfortunately, through bad investments, most blacks lost more than 50% of their savings, and it was disbanded.

Mehrsa Baradaran, author of The Color of Money: Black Banks and the Racial Wealth Gap, discussed the outcome of the Freedman’s Savings and Trust bank along with an example of how even black banks during 2007 got caught needing TARP money.  Baradaran described a small black bank in trouble having to foreclose on a black church. This shows that banking is dependent on good investments which are the loans.

Myles Meyers, the founder of the New York-based Superbia Credit Union, discussed particular reactions when he is banking with his male partner. John Schmidt described this also in 1981. Schmidt seeing Savings and Loans for minorities gave him the idea to found Atlas Savings and Loan. Is the need for specialized banking secondary to discrimination or just seeing a business opportunity?

Gay Banking and Discrimination

Two specific studies have looked at the discrimination of same-sex loan borrowers for home loans. The first, “The Rainbow of Credit” by Lei Gao and Hua Sun, looks at same-sex mortgage discrimination. This is a very well-publicized research study written about in multiple magazines including Fortune. The authors used the Home Mortgage Disclosure Act, the Federal Reserve Bank of Boston and Fannie Mae Loan Performance to come to their conclusion that Gay couples are 73% more likely to be denied loans and if approved then possibly pay a higher interest rate.

We do not know how many FHA loans are within their data. FHA loans may require mortgage insurance which can be written into the loan and increase the loan interest rate without having any discrimination behind the cause. Also, though the primary person on the loan may be a good risk, the secondary person’s information is still weighed in the risk of the loan. Their data looked long before, through and after the housing crisis. Therefore, mortgage standards could be anywhere on the spectrum of a standard.

The Second refers to the above study, critiques it, and builds on it using mostly FHA loans. “An Empirical Analysis of Sexual Orientation Discrimination” as published in the University of Chicago Law Review, looked at sexual discrimination when dealing with FHA loans. In doing so they concede the FHA may make bad loans and since the FHA loans are guaranteed by the United States Government, then there is no reason for any loan officer to deny loans. Then they ask, then why any discrimination at all. Common sense may ask why trust poorly organized, higher risk loans for your study? Why not just look at traditional loans with more normal risk? From the Chicago law Review study,

The unique feature of these loans is that they carry the same low level of risk to the lender… In case of a default, the lender recoups the losses from the government. As a result, every FHA loan bears the same risk and expected a return to the lender regardless of the demographic characteristics of the applicant.

From Gao and Sun at Iowa State University,

Loan decisions should be based on fundamental economic factors, not skin color, sexual orientation or gender.

The problem is both of the studies have little data from individual credit scores and other personal financial information important to loan risk.

Gay Loan Risk

Peter J. Wallison, was a  co-director at the American Enterprise Institute and member of the Financial Crisis Inquiry Commission, which looked at the cause for the 2008 financial crises. In his book, “Hidden in Plain Sight”, Wallison correctly describes the cause of the 2008 financial crisis.

“The affordable-housing goals, the CRA, the FHA, the Best Practices Initiative, and the National Homeownership Strategy, operating together between 1995 and 2008, spread NTMs [non-traditional mortgages] throughout the financial system, degraded underwriting standards, built an enormous and unprecedented housing bubble, and ultimately precipitated a massive mortgage meltdown. ”

Wallison notes that the Federal Reserve study of Boston, mentioned in both studies above and used as a basis for study data quality and not to be a concern, was found to have data that was erroneous.

“The president of the Boston Federal Reserve at the time, Richard Syron, who would later lead Freddie Mac just before it was taken over by the government, concluded that “I don’t think you need a lot more studies.”  Later reviews of the Boston study, however, found many data errors and a failure to take important underwriting factors into account.”

Discrimination studies look for data compared to more traditional mortgages comparing apples to bananas. We must first look at mortgages based on risk assessment. The mortgage risk criteria have long been established and proven as written by Wallison.

Banks that adopt Gay Banking may give better data.

The Atlas Savings and Loan went under because of poor loans and poor banking standards. This is not a critique of LGBTQ applicants. Poor mortgage risk standards can be seen using this Savings and Loans as an independent study source.  Studies pointing to any discrimination of same-sex applicants have been very poor in showing good data.  These require several inferences using information loaded with too many variables to make reliable allegations.

Superbia Credit Union, in Michigan, will begin specialized loans, including possible loans for transgender medical transitioning. Superbia will be a test for the prosperity of specialized banking for a minority group. If made available, data will show the general LGBTQ community is a good loan investment risk.  Loan applicants should be judged on specific proven risk criteria no matter their sex, race, religion, etc.

Do not think either the success or failure of a Gay credit union will be without worth. If there are a great number of persons in the LGBTQ community having trouble getting to a position to have or pay off a mortgage, then we should all look at the current economy, job numbers, and market, individual savings, etc and seek to improve that. It will not be the LGBT community as the source of failure. At the end of the day, it will be the banking standards that will provide a win or loss for Gay Banking.

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