The state of New York recently adopted legislation applying the Community Reinvestment Act (CRA) to nonbank mortgage lenders, also known as independent mortgage banks (IMBs). This comes after similar action by Illinois. While driven by good intentions, these new requirements are likely to be ineffective and counterproductive — and there are better ways to achieve those intentions.
The Community Home Lenders Association (CHLA) previously published an oped in Housing Wire on the subject. CRA for IMBs is a solution in search of a problem. During the past decade, as CRA-regulated banks withdrew from home mortgage lending, IMBs stepped up to become the dominant source of mortgage loans, doing a much better job than banks of lending to underserved borrowers [See CHLA’s 2021 IMB Report].
Applying CRA to IMBs fails to recognize that IMBs are very different from banks. CRA was created to require banks that receive taxpayer backing to reinvest in the communities they take deposits from. IMBs have no taxpayer backing, don’t take deposits from communities, and instead of diverting capital out of communities, access capital markets to bring affordable mortgages into underserved communities.
CRA may be effective with regard to banks providing access to checking accounts, consumer credit, and small business loans. But, as the last decade shows, it has not worked very well for mortgage loans (and banks often meet CRA requirements simply by buying IMB-originated loans). So why do proponents think CRA will be any more effective for IMBs?
Still, we hear proponents of CRA for IMBs ask “What’s the harm?” As we point out in a recent letter to the Conference of State Bank Supervisors (CSBS), CRA could be counterproductive, imposing burdensome and costly regulations that discourage smaller IMBs from doing business in a state.
Our letter highlighted the main evidence we have to date — from Massachusetts, which imposed CRA on IMBs in 2007. According to HMDA data, in 2008, the 26% Massachusetts IMB share of mortgage loans was above the national IMB average of 24%. By 2020, the Massachusetts IMB share of mortgage loans had grown to 55% — but it also had fallen to significantly below the national average of 63%.
And HMDA statistics also suggest it had no positive impact on IMB lending to underserved borrowers. The IMB share of mortgage loans to low and moderate income borrowers in Massachusetts increased from 27% in 2008 to 62% in 2020 — a significant increase to be sure, but below the national average increase in IMB lending to such borrowers, from 29% to 67%.
CHLA and its IMB members embrace the policy goal of increasing mortgage lending to underserved borrowers. So what could have an impact? Our letter to CSBS outlined more effective actions states could take to help IMBs do an even better job of lending to underserved and minority borrowers.
These include: (1) reducing barriers to minority and lower income individuals becoming licensed as a mortgage originator — by waiving the cost of the SAFE Act test and subsidizing the cost of the 20 hours of required SAFE Act pre-licensing courses, (2) ending the unfair use of credit reports to deny mortgage loan originator licenses, and (3) ending requirements that loan originators must be within 100 miles of an IMB office — a restriction that makes it harder for IMBs to serve other communities.
What about states that have already adopted CRA for IMBs? Unfortunately, the new laws provide little guidance on how to implement a regulatory structure designed for banks on entirely different types of lenders. So CHLA’s letter to CSBS outlined our vision of how CRA in states like New York and Illinois could be carried out, to avoid the discouraging results we see in Massachusetts.
The emphasis should be on performance. HMDA data shows a lender’s percentage of mortgage loans to low and moderate income borrowers. If a lender’s performance is comparable to a statewide average (of all loans, including bank loans), a lender should receive a satisfactory score. There is no reason for a costly and burdensome exam for such IMBs, particularly smaller ones.
To avoid discouraging smaller IMBs from lending in a state that adopts CRA, such states should set an appropriate minimum annual loan volume threshold. And, instead of imposing branching requirements, states should pursue our recommendations to help expand the number of low income and minority loan originators, which are IMBs’ lifeline to underserved borrowers and communities.
States should not impose requirements on IMBs to fund community organizations or housing counseling — the costs of which would be simply passed along to borrowers in the form of higher fees or rates. Community groups do great work to help underserved borrowers. But if a state wants to support community groups, it should do so directly (e.g., by using a portion of the billions of dollars they receive in federal CDBG and HOME block grants). If more funds are needed for homeownership counseling, Congress should increase the funding it provides for this important activity.
Finally, enforcement mechanisms should be reasonable and proportionate. The goal should be good performance, not punitive fines or excessive penalties like non-renewal of an IMB’s mortgage license.
CHLA fully supports the objectives of proponents of CRA for IMBs – which is to do the best possible job of serving underserved borrowers. But CRA for IMBs imposes new compliance burdens that are neither needed nor effective. Instead, let’s focus on actions that will bring real results.
Craig Thomas is the Policy Director of the Community Home Lenders Association (CHLA).
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
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Craig Thomas at communitylender.org
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