Community Reinvestment Act (CRA) and HMDA: Tools for Reinvestment, by Chris Bohner

For the last twenty years, community activists across the country have organized residents to fight banks and thrifts that “redline”: i.e., refuse to provide credit and services to low-income and minority communities. Opposing the wholesale abandonment of urban and rural communities by America’s financial institutions, community organizations have convinced lenders to target loans to underserved areas for unmet needs such as affordable housing, economic development, and social services. Key tools in this struggle, the 1975 Home Mortgage Disclosure Act (HMDA) and the 1977 Community Reinvestment Act (CRA), now face an uncertain future before a less-than-friendly Congress.

The CRA requires banks and thrifts to meet the credit needs of low- and moderate-income communities in exchange for federal deposit insurance and other public benefits and subsidies. Under the law, the federal banking agencies assign lenders one of four ratings: “outstanding”, “satisfactory,” “needs to improve,” or “substantial noncompliance.” Yet disobeying the CRA does not necessarily result in sanctions or fines. Instead, when banks apply to expand, merge with or acquire another bank, or open a branch, citizens may challenge an application and request that it be denied based on the bank’s poor lending performance in minority or low- and moderate-income communities.

Although federal regulators deny few applications, community activists have used the challenge process to organize and educate members of the community around credit and reinvestment issues. Faced with strong opposition, many banks and thrifts relent to community demands. Over the last 15 years, hundreds of challenges to applications by community groups have resulted in over $30 billion in loans for single-family and multifamily housing, small business and economic development, social services, and community development financial institutions and community development corporations.

For example, New Jersey Citizen Action recently negotiated a comprehensive plan with NatWest Bank, under which the bank agreed to provide over $151 million in below-market rate mortgages for low- and moderate-income families, discounted home improvement loans, loans for construction and permanent financing for nonprofit housing developers, and loans to women- and minority-owned businesses. Other community groups have pressured banks to expand services to their neighborhoods. Inner City Press of the South Bronx pushed two banks to open full-service branches in an area where there were none for decades.

Critical to CRA challenges has been the use of data disclosed under the 1975 Home Mortgage Disclosure Act (HMDA). Strengthened in 1989 as part of the S&L bailout, HMDA requires banks, thrifts, mortgage companies, and credit unions to disclose the number of home mortgage applications, originations, and denials by race, income, sex, and census tract. Using this data, community organizations have traced the flow (or lack of flow) of housing finance to low-income and minority neighborhoods and families. Numerous reports and studies by local and national watchdog groups have documented the redlining practices of mortgage lenders and compelled them to improve their records.

While protests of applications and HMDA studies have been essential to increasing the flow of finance to disinvested communities, a growing number of lenders, drawn in part by the promise of untapped markets, have begun voluntarily changing their practices and reinvesting in low- income and minority communities. Some of the largest banks in the country – e.g., Bank of America, NationsBank, and Chemical Bank – have set up community development divisions and pledged billions of dollars to low-income communities. In many cases, lenders have planned their reinvestment strategies in partnerships with community groups. And evidence suggests that many of these investments are producing substantial profits for lenders-a win-win situation for all.

The relationship between the Pittsburgh Community Reinvestment Group (PCRG) and twelve local financial institutions serves as a model for a collaborative approach to reinvestment. PCRG is a coalition of 32 community organizations formed in 1988 to promote equal lending patterns and practices in Pittsburgh. Although PCRG began by challenging banks, the group now meets with lenders on a regular basis and has helped devise many innovative programs to target credit to low-income and minority communities. Examples include the “Ain’t I A Woman Housing Initiative,” which targets loans to African-American women; the “Upstairs/Downstairs” program, a mixed commercial/residential program in low-income communities; and the “Housing Recovery Program” for low-income neighborhoods in Pittsburgh. PCRG estimates that such programs have led financial institutions to reinvest $2.4 billion in Pittsburgh, and lending to African-Americans has increased by over 200 percent. Says PCRG representative Stanley Lowe, “PCRG is no longer at odds with financial institutions; rather, banks are competing vigorously for deals in our neighborhoods.”

Challenges Remain

Yet while community activists have won impressive victories, serious challenges remain. HMDA data still suggests that redlining and disinvestment are alive and well, and a recent US News &World Report study of lending practices nationwide over a six-month period documented the low number of branches in minority neighborhoods compared to white neighborhoods, the low level of lending in minority neighborhoods, and the high rejection rates for black mortgage applicants. While no surprise to community activists, these results reinforce the need for continued progress.

Equally troubling for the reinvestment movement is the rapid restructuring of the financial system. Increasingly, obstacles to the free flow of finance are being torn down at the national and international levels, creating an integrated world financial system in which credit-starved urban and rural communities are forced to compete for capital against investment opportunities worldwide. Further, the role of banks in the financial system is rapidly declining, replaced by a loosely regulated parallel system of mutual funds, mortgage banks, finance companies, insurance companies, and pension funds not subject to CRA requirements. These are issues that advocates must confront to achieve successful and sustainable reinvestment.

The federal regulatory agencies’ performance in enforcing the CRA is also a critical obstacle to further success. Under the existing system, CRA ratings bear little relationship to a lender’s actual lending to low- and moderate-income and minority communities. Institutions that advocates identify as poor lenders routinely receive passing CRA ratings. In 1995, over 95 percent of all banks received a satisfactory or better rating. Community activists have also complained about the lack of adequate data on small business lending. Small businesses, especially women- and minority-owned firms, face severe problems accessing credit. Without data, community leaders and the regulatory agencies have no way to accurately assess a lender’s performance in meeting the credit needs of these sectors of the economy.

The Clinton Administration and the New Congress

With the election of President Clinton in 1992, community activists hoped for new initiatives to improve and strengthen the reinvestment laws. After all, Clinton’s urban policy platform invoked the CRA as a tool for renewal, and the CRA fits perfectly with Clinton’s New Democrat ideology: it costs taxpayers nothing, provides substantial public benefits, and relies on the private sector. To some extent, community activists’ hopes have been realized. The Administration has strengthened enforcement of existing fair lending laws through the Department of Justice and HUD. The Department of Justice has settled five cases against lenders accused of discriminating against minorities, and HUD has moved aggressively to enforce fair lending laws.

The administration’s most ambitious move concerns the rewriting of CRA regulations. For the last two years, the banking agencies have attempted to address community and banker complaints about the CRA and design a more “performance-based” regulation. Although the regulation was rewritten three times – with each draft weaker than the previous version through the influence of the banking industry lobbies – many activists and lenders agree that the new regulation is an improvement. The new rule explicitly ties banks’ CRA ratings to actual lending to low- and moderate-income communities and individuals, makes more small business lending data available to the public, and codifies the important role of community organizations.

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Yet this regulation may never see the light of day. The new Congress, inflamed with anti-regulation fever, is preparing to deal the CRA and other fair lending laws the worst setback in the history of the reinvestment movement. Flush with millions in campaign contributions from the lending industry, House and Senate Banking Committee members are heeding industry voices complaining of paperwork burdens, “credit allocation,” and extortion by community groups. Bills introduced in the Senate and House Banking Committees (S. 650 and H.R. 1362) would overturn many provisions of the new regulation (including the new small business data) and critically weaken the law.

Two provisions of the proposed legislation are raising the most concern with community activists. One would prohibit community groups from challenging the application of a bank that has a satisfactory or higher CRA rating. This “safe harbor” would effectively exempt 95 percent of lenders from challenge by community organizations. Second, the bills would effectively waive CRA requirement for banks with assets under $250 million. Roughly 88 percent of all banks and thrifts in America would be eligible for exemption, and in many cases, small banks have done a worse job than larger ones in complying with the CRA.

The administration, community and consumer organizations, many state and local governments, and some lenders are actively working to stop the legislation, arguing that any changes to the CRA should be postponed until the new regulation has had adequate time to work. While some Republicans may oppose the bills, the legislation could end up on the president’s desk. If that happens, community and consumer groups are sure to demand a veto.

Whatever the outcome of the anti-CRA legislation, the community reinvestment movement has solid organizational and grassroots power and will not easily fold. And as communities begin to feel the effect of the drastic budget cuts at the federal level, support for ensuring that financial institutions do their part will only grow.

 

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