Federal Reserve Chairman Jerome Powell recently observed that across all kinds of financial services, activities that had once been principally the province of banks have moved into the nonbank sector, including IMBs. In discussing whether more financial institutions should have a duty to serve the capital and credit needs of lower-income communities — an obligation akin to that of banks under the Community Reinvestment Act (CRA) — he said that generally “like activities should have like regulation,” and that consumers require protection and lower-income communities require credit support regardless of the nature of the financial institution providing those services.
He’s right and we disagree with the Community Home Lenders Association’s assertion that such an affirmative obligation should not also extend to independent mortgage companies.
Bank CRA obligations cover far more than their mortgage lending. It extends to their checking and savings accounts, small business and community development debt and equity financing, bank branch locations, financial literacy, grantmaking and more. It examines the quantity and, equally as important, the quality of credit and services provided.
Following the 2008 financial crisis, the federal commission examining the causes concluded that loans made by CRA-regulated lenders in neighborhoods in which they were required to lend were half as likely to default as similar loans made in the same neighborhoods by independent mortgage originators not subject to the law.
Because of CRA, banks have entered loan pooling arrangements, local lending consortia, are the biggest investors in housing tax credits, have partnered with nonprofits and community development intermediaries and more — sharing information and helping to break down the informational barriers and costs of serving harder to reach markets.
We’re a year into the pandemic, and while smart policy has delayed a default wave, the threat still looms large. Servicers must be powered by nimble technology to be heroes to borrowers, stalwarts to investors, and stewards of consumer protection to regulators.
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IMBs and other nonbanks have followed banks into these once redlined and overlooked markets, benefiting in many instances from a CRA-driven financial infrastructure. IMBs have expanded because of the warehouse lending and short-term credit provided them by the nation’s depositories and because they can sell their loans into the government-guaranteed agency secondary market (Ginnie Mae, Fannie Mae, Freddie Mac).
It has to be recognized and lauded that IMBs have played an important role in providing access to credit and homeownership since the 2008 financial crisis. They stepped into the void created as some large banks retreated from the mortgage market. Given the sheer range of credit and capital needs of lower-income consumers and communities of color that have endured underinvestment and disinvestment for decades, what more could IMBs do if they also had an affirmative obligation to serve these communities? CRA drove the nation’s banks to innovate and break down barriers, and updates to modernize CRA must strengthen that bank commitment.
While it is true that IMBs are subject to fair housing requirements and state supervision, so are the nation’s banks, and unlike IMBs, banks have a range of post-crisis capital and liquidity requirements administered by the nation’s prudential regulators, and in some cases, in conformance with international Basel Standards. Banks, like IMBs, can’t discriminate against customers, but unlike IMBs, they have to go beyond that to customize and market their products and services to reach and meet the needs of lower-income and underserved communities, including communities of color. They are bound to do more.
It is also true that banks have access to the Fed’s Discount Window and have insured bank deposits, but most IMBs wouldn’t exist without the credit extended by the nation’s depositories and a government-backed secondary mortgage market.
Like banks, IMBs lead or have significant market share in specific markets around the country. It should not be a heavy lift to better understand the small finance, rehabilitation and other capital needs in those markets and to participate with banks as well as the public sector in bridging capital gaps in sustainable and equitable ways.
Today, the state of Massachusetts examines IMBs for state CRA compliance and yet IMBs are the top mortgage lenders in both Boston and Worcester. We recognize that a duty to serve applied to IMBs may require a flexible approach. Some IMBs may already be taking the affirmative steps to help build the kind of durable financial and community development infrastructure in the markets in which they operate, but others aren’t.
Duties to serve across the financial sector are about all market players, not just banks, examining how they can and should do more to bridge the gaps in financial access and capability in low- and moderate-income communities and communities of color across the country resulting from decades of redlining, disinvestment and underinvestment.
Quite frankly, the nation needs more hands on deck.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the author of this story:
Jesse Van Tol at JVanTol@ncrc.org
To contact the editor responsible for this story:
Sarah Wheeler at email@example.com