Over the past four decades, the landscape of banking and investment in the United States has changed in major ways, but the Community Reinvestment Act (CRA) has remained essentially unchanged.
Interstate banking, mortgage securitization, internet and mobile banking and the resurgence of America’s cities are just a few of the major changes we have seen in the past four decades.
Given these fundamental changes, the U.S. Treasury Department undertook a six-month initiative to “comprehensively assess how the CRA could be improved” through solicitation of input from stakeholders, including banks, regulators and consumer and affordable housing advocates. Now it’s the regulators turn and they need to step up and make thoughtful recommendations to make CRA more effective in the 21st century banking system.
Many assumed that Treasury would seek to gut the CRA, but in fact, Secretary Steven Mnuchin came at the issue from a very different perspective. As a former Goldman Sachs mortgage trader, he understood how many banks pay a premium for CRA-eligible loans at the end of each year. When he took over One West, he was certain he could do a better job of meeting the bank’s CRA requirements, but ultimately found himself having to buy CRA loans as well. His conclusion was that it should not be so difficult to do the right thing – especially when that’s your intention from the beginning.
Treasury officials held over 100 meetings with individual stakeholders, including financial institutions, trade associations, consumer and community advocates, think tanks and academics, among others. Their conclusions shocked many longtime supporters of CRA: improve it so it serves the low and moderate income people.
One thing the report did not mention is that not one of the dozens of financial institutions Treasury consulted recommended abolishing CRA. Not one. They all agreed CRA is an important tool in their business strategy and had detailed recommendations on how to make it better, many of which were similar or identical to those of the consumer advocates that Treasury staff met.
Now regulators must address where the CRA has fell behind major changes in the banking industry over the past 20 years. One of the most important areas that regulators will address is how investments are counted in and out of designated Assessment Areas. With the rise of interstate banking and bank consolidation, as well as the merging of investment banking and commercial banking in so many large banks, defining what constitutes a bank’s Assessment Area and how to count investments outside those boundaries is a key area of interest and one that potentially has the greatest impact for America’s cities.
Assessment Area definition and application present unique challenges today because banks have alternate channels for accepting deposits, like mobile and online banking, that did not exist in 1977; customers with deposits are much more mobile today, and rural areas have experienced a disproportionate number of bank branch closures not envisioned in 1977.
These factors have contributed to a condition known as CRA hotspots, where CRA investment incentives are concentrated in a few states, like Utah, South Dakota and Delaware, while other states, where banks are less likely to be chartered, have become CRA deserts.
If LIHTC investments in your city are pricing at more than $1.10 per credit, chances are that you are in a CRA hotspot. If they priced well below $1.00, you may be in a CRA desert – and if you don’t know what LIHTC is, then you are definitely in a CRA desert!
Treasury’s report, and ultimately, the regulatory actions of the independent regulators that enforce CRA – the FDIC, OCC and Federal Reserve Board – will have to address how CRA investments are measured in a way that doesn’t dilute the original intent of the law, while addressing changes in the banking industry over the past 40 years.
One of the most frustrating aspects of the current CRA regulatory regime is the differences in application of the rules by different regulators, and by different examiners within the same regulatory agency. This is as problematic for advocates as it is for banks. The three regulators are aware of these issues and are committed to addressing them. How it is framed in the ANPR will be an important indication of their seriousness.
Another challenging area for banks as well as community advocates is the inconsistence in when reviews are conducted and how long it takes to get a final rating. Some banks are still waiting for their final rating from 2013. By the time they receive them, many of the issues have been addressed, or conditions have changed, or concerns that could have been addressed in a timely fashion have been left to fester. Examination and rating schedules must be adhered to so they can be promptly explained or remediated.
The CRA was enacted in response to concerns over disinvestment in low-income communities and persistent allegations of redlining, the practice of avoiding investment in minority neighborhoods. As Americans continued to leave cities for new suburban “bedroom” communities, there was a growing disparity between where banks raised their deposits and where they invested, particularly in housing and mortgage finance.
While laws like the Fair Housing Act of 1968 prohibited discrimination, Congress sought to incent banks to invest in the communities where their branches were located. A high CRA rating was intended to provide that incentive. The first release of data under the Home Mortgage Disclosure Act in 1977 made clear that more tools were needed to address the disparities in lending to low- and moderate-income communities.
To understand why the Community Reinvestment Act continues to remain so important, one need only look at the numbers of minority homeownership in the 50 years since the passage of the Fair Housing Act.
Overall, minority homeownership plummeted during the Great Recession, falling from 52% in 2004 to 46% in 2016. The homeownership rate for African Americans is lower today than it was when the Fair Housing Act was passed in 1968. That is a national tragedy.
I believe there is a unique opportunity to improve this important tool to make access to credit and investment fairer while maintaining the safety and soundness of our financial institutions.
Most banks have long ago learned to appreciate the value of CRA; though they are often frustrated by the how it is applied. We want CRA compliance to be fair, timely and accurate, and so do they. I am optimistic that this process will result in a strengthening of the effectiveness of CRA through sensible improvements.