Opinion: CRA doesn’t work for banks or IMBs

Let's focus on changes that could actually have an impact

Last year, in a Housing Wire op-ed, Community Home Lenders of America took the lead nationally in opposing calls to extend the Community Reinvestment Act (CRA) to independent mortgage banks (IMBs). 

The National Community Reinvestment Coalition (NCRC) then returned the volley in an op-ed by Jesse Van Tol advocating for extending CRA to IMBs. And HousingWire brought us together for a spirted “Lunch and Learn” debate on the topic.

As bank regulators conduct a major CRA rulemaking, an honest assessment of CRA is that it has not been effective when it comes to bank mortgage lending. So why would we extend it to IMBs? Instead, there are more effective ways to increase mortgage lending to underserved and minority borrowers.

Many community banks do a great job of mortgage lending to underserved homebuyers.  But that is driven more by their commitment to their customers and to their communities than by CRA. In contrast, since 2008, many large banks have exited the mortgage market or targeted loans to higher FICO, higher wealth borrowers, in order to support their strategic objective of cross-selling other lucrative products. 

CRA has not made a difference. And NCRC seems to agree. In 2018, NCRC said banks have “almost completely” abandoned loans to low income and working class borrowersNCRC’s March HousingWire op-ed even called the federal government’s enforcement of CRA “feeble” and asked “Will it get the teeth to police banks.”

So, CHLA eagerly awaited NCRC’s comment letter on the current federal CRA rulemaking. We assumed NCRC would focus on things like:

(1) raising the weight that affordable mortgage lending plays in CRA evaluations;

(2) addressing the widespread large bank practice of intentionally excluding underserved borrowers through the use of mortgage credit overlays, or

(3) making tangible suggestions to banks accountable for making mortgage loans for underserved borrowers and communities.

But nowhere in NCRC’s 129-page comment letter are any of these changes seemingly addressed. 

Instead, NCRC seems to go out of its way to propose even more ways that banks could pass their CRA exam without serving the mortgage needs of underserved borrowers and communities. On its website, NCRC prominently features posts that advocate for banks getting CRA credit for climate mitigation projects, for food justice activities, and for child care.

These are all laudable social objectives. But giving more CRA credit for even more non-mortgage activities means de-prioritizing bank mortgage lending for underserved borrowers and communities. 

Arguably, if CRA itself were to undergo a CRA exam for its performance on bank mortgage lending, the rating would be “Substantial Noncompliance.” 

NCRC’s March op-ed seems to conclude there is little bank regulators can do about this, except with respect to a few banks seeking mergers or acquisitions, where banks can be pressured to commit to a “community benefits agreement.” But even these are largely reformulations of actions the banks were going to undertake anyway.

So, the question is obvious. If CRA is not working for banks, why would we extend it to nonbanks? Why give up on holding banks accountable for affordable mortgage lending — and in desperation turn to IMBs (which already do a much better job than banks) and try to force them to do even more?

As CHLA explained last year, extending CRA to IMBs is not needed, is not justified, and would be counterproductive.

Last year, NCRC defended extending CRA to IMBs by citing Massachusetts, which did so in 2007. 

But, before more states do the same, we ask them to take a close look at the empirical evidence from Massachusetts. Statistics and analysis in a recent CHLA letter to CSBS show that IMBs’ relative performance in Massachusetts since then has lagged their performance in the rest of the country.

We believe this is because the main impact of a state adopting CRA for IMBs is to create new compliance burdens and regulatory costs — with little or no real impact — that discourages IMBs (particularly smaller ones) from deciding to lend in that state.

Extending CRA to IMBs in more states may give housing advocates the satisfaction of a “victory.” But Massachusetts shows that the likely result will be less — not more — mortgage lending by IMBs in that state. 

Instead, let’s focus on practical ideas that will have a positive impact. 

The Federal Reserve is pressing some community banks to originate more majority/minority mortgage loans (loans in census tracts where minorities make up a majority of the population). Community banks are developing loan programs, such as offering 100% financing without mortgage insurance in conjunction with down payment assistance.

But apparently, banks do not receive credit for such loans if they are purchased from IMBs.  As with CRA, community banks should get credit for qualifying loans purchased from IMBs.

CHLA has also laid out other concrete actions which would help IMBs do even more than they already do to serve underserved and minority borrowers — like cutting FHA premiums, LO Comp reform for state mortgage bond loans, and reducing the cost of licensing for new minority mortgage loan originators.   

Let’s focus on changes that could really have an impact.

Scott Olson is the Executive Director of the Community Home Lenders of America.

This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.

To contact the author of this story:
Scott Olson at [email protected]

To contact the editor responsible for this story:
Sarah Wheeler at [email protected]

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