May 10, 2022
New Orleans A lot has changed since 1977 when the Community Reinvestment Act was passed. ACORN and many other groups worked hard to secure the passage of the CRA in order to stop redlining by banks. There was a huge, discriminatory disconnect between deposits made in minority and low-and-moderate income neighborhoods and the way that banks lent the money. In effect, lower income families were financing suburban development while unable to get even minor loans for home improvements on their own properties. To some degree that effort has been successful, but over the last 45 years, CRA has been continually watered down and defanged. Banking has changed. Mortgage lending has changed. The CRA has not changed sufficiently to keep up with these developments, leaving lower income communities less protected from the vicissitudes of the modern financial system.
Now, change may finally be coming, but it is unclear if it is enough. Certainly, it is better than the Trump administration’s efforts which would have diluted the CRA even farther. The Biden administration pulled the plug on those controversial modifications before they could go into effect, and that’s a good thing. This time all three regulatory bodies are at least on the same page rather than pulling against each other, so that’s progress.
Reading the outline of the changes that are now open for comment until August 5th, there is indeed forward motion. One central recognition is the decoupling of CRA requirements from physical locations like branches and headquarters and towards metrics that look at a broader scope of the banks lending and community development activity. This change could theoretically force more money to be invested in actual neighborhoods. As the Wall Street Journal reports:
Banks would generally be assessed for the CRA obligations in areas where they don’t have physical offices if they make 100 mortgage loans or 250 small business loans in a particular area for at least two years.
Hopefully, banks won’t try to game the system.
Small banks, important to many communities, will be able to escape the new rules and work under the old ones, unless they chose the new regime. That seems odd to me as a sort of weird way they will be able to pick their own poison, but this was likely a political move to blunt opposition from community banks. The new proposed rules would also include auto loans and encourage small loans, which would also be improvements, allowing families to escape more predatory lenders. The unanswered question in all of this will be how sharp the regulators teeth will be, and are they prepared to use them?
The biggest disappointment in weighing the role of the CRA after all of these years is that the regulations are impacting a declining slice of the home mortgage market. Nonbank financial institutions now make 75% of the mortgage loans, not banks. They continue not to be under CRA regulation. Even the head of the Federal Reserve has tried to prod legislators that like activities need to have similar regulations, but there’s been no action from Congress. CRA has become too often a case of closing the barn door after too many of the cows have already left and only corralling the slower ones that remain.
Changes to the CRA are good, but we need a CRA that regulates all the activity in lending in order to prevent the persistent discrimination that is inherent in the financial system now and escaping accountability and reform.