What to Make of New Community Reinvestment Rules


            New Orleans        The Community Reinvestment Act or CRA is pushing towards its 50th anniversary.  ACORN was one of the many groups pushing for its passage, and the first to challenge its effectiveness before the Federal Reserve.  The CRA was designed to stop redlining and increase lending in minority and lower income areas where it received deposits.  The impact has been in the billions and created homeownership opportunities in the millions over that period. Unfortunately, the CRA has never won any love from the banks that fall under is regulations, even as they have made big money on the required lending.  Over all of the years since it’s passage, lobbyists and politicians have whittled away at its protections and incentives.

At the same time, the CRA needed modifications and adjustments to begin to meet the changed banking environment over these last decades.  Earlier attempts by one or the other of the regulating agencies, particularly during the Trump time, ended in confusion, stalemates, and indecision.  The effort by the Biden group seems to have gotten to the finish line finally, but the real impact of this touted modernization still leaves the jury out.

One huge problem is that so many mortgages are now issued by so-called nonbanks who are not regulated by the CRA.  Unfortunately, this is not an issue addressed in the new regulations from the Federal Reserve and the Office of the Comptroller of the Currency (OCC), because their inclusion would require Congressional action.  It goes without saying these days that there is nothing but Congressional inaction on every issue, much less the needs of lower income families to access credit.

What the new rules try to address is the many sources of deposits that are no longer based on the diminishing number of physical branch banks.  There will still be a requirement for banks to prove that they are serving the neighborhoods and communities where they have a physical presence, but new metrics will measure their total retail and mortgage lending, no matter the source of the local deposits, and judge the banks of various sizes accordingly.  This pushes more money from more banks out the door, which is an obvious win.

Reports of the changes and compromises between the draft and final rule are less a reason for celebration.  The banks argued that they were worried about the added difficulty of getting the best rating for their CRA lending, and the final rule basically assured them that they would be graded on a curve.  Essentially, the Fed fixed a problem before it even existed, rather than challenging banks to meet the new standards and then adjusting them later.  Some advocates tout the new rules as adding billions for lending, but clearly the compromises left many billions on the table and out of the reach of lower income families.

The Fed also added an extra year for banks to implement the new rules, from 2025 to 2026.  Doing so, means we won’t have the data until 2027, four years from now, to see whether the new rules really improved the CRA or not.  For a final judgement on this long-drawn-out process, we’re all going to have to just wait and see.  Maybe we’ll have something to celebrate at the 50th anniversary then, or maybe not.