community reinvestment act, jerome powell, CRA

Expanding the Community Reinvestment Act

Ideas and Issues

May 5, 2021

New Orleans

This could be very good news for prospective homeowners, but of course that depends on Congress not being rerouted on the way to much needed reforms in the critical Community Reinvestment Act. Federal Reserve Chairman Jerome Powell speaking appropriately to total CRA-believers assembled by the National Community Reinvestment Coalition, longtime ACORN allies on fair lending rules, came out foursquare in favor of extending coverage of the CRA to all financial institutions that provide consumer credit, rather than just chartered and regulated banks.

The CRA passed in 1977 by a coalition of community-based organizations, including ACORN, and was designed to end the practice of redlining that has been extensively documented as federal and corporate policy preventing fair access to mortgage loans and extracting huge levels of wealth from lower income and minority communities. The law required banks to provide equitable service and access to credit to all income and racial segments of their service areas and branches or face severe penalties and restrictions for not doing so. Over the last forty-five years there have been extensive, and often successful, efforts to dilute the effectiveness of the Act, but it has remained a critical tool for organizing and enforcement of fair lending.

Unfortunately, that was then, and this is now. Nonbanks, operating outside the CRA, now supply the financing for 80% of all government-guaranteed mortgages as of the end of 2020, compared to 50% in 2014 and almost nothing in 1977 when CRA was passed. It goes without saying that the 2007-2008 recession also found many of these nonbanks as key actors in creating and maintaining this mess.

Under the Trump administration there were competing federal efforts to amend CRA. Enforcement of the Act largely lies with the Federal Reserve, but efforts to supposedly “reform” the Act several years ago ended up in disagreement, as the Office of the Controller of the Currency ended up trying to go solo. Efforts to get all agencies to come up with one plan failed, probably thankfully, and expansion to cover nonbank financial institutions was really not especially on the table, as OCC bend over backwards for community banks and increasing the size of the institution required to comply.

Should we get our hopes up? That’s a harder question to answer. Everything about the CRA tends to launch a lobbying-palooza in Congress. Add to that the deep pockets of many of these nonbank lenders who will resist having to make public their lending results in communities to critical scrutiny, and I can almost hear the screaming and protests from the well-heeled now. President Biden campaigned on this extension, and Chairman Powell is now on record firmly, but this is going to be a full-court fight that we desperately need to win for our neighborhoods, if homeownership is going to return as one of the components of achieving fair and equal citizen wealth.