In 1995, the last time federal banking agencies revised the rules of the Community Reinvestment Act (CRA), they promised to conduct a follow-up review in 2002. Now that 2002 is upon us, portions of the banking community are predictably clamoring for changes that would weaken CRA. But the upcoming review also offers CRA advocates an opportunity to push for changes to make the law even more responsive to the needs of low-income communities.
Passed in 1977, CRA mandates that banks and thrifts meet the credit needs of the communities in which they are chartered and from which they take deposits. Federal officials examine banks and issue them CRA ratings based upon the number of loans, investments, and services they offer to low- and moderate-income communities. In 1995, the federal banking agencies improved CRA by increasing the rigor of these CRA examinations.
The major bank trade associations complain that the 1995 changes set such rigorous standards that loan markets in underserved communities are saturated, and they warn that overly strict quantitative measures will force banks to make unprofitable loans with artificially low interest rates.
But while the changes have certainly increased the level of home mortgage lending in underserved neighborhoods, markets for prime loans in those areas are far from saturated. Research from Freddie Mac has shown that up to 35 percent of borrowers of subprime loans could have qualified for prime rates. Fannie Mae has said that the number may be as high as 50 percent. HUD calculated that residents of African-American neighborhoods are five times more likely to receive subprime than prime loans. Only discrimination and reverse redlining can explain these disparities.
The National Community Reinvestment Coalition and its member groups see the CRA revision process as an opportunity to create a strengthened CRA, providing a shot in the arm for our communities by focusing banks on profitable lending opportunities and increasing competition against predatory lenders.
The banking agencies have already taken general public comments. If they decide to proceed, in early 2002 they will take public comment on specific proposals. Here are some suggestions:
Examine lender performance in all the regions where the bank makes a significant proportion of its loans. Banks are becoming national in scope, lending far beyond their branches through brokers and the internet. But the current regulations adopt a rigidly narrow interpretation of the CRA statute, focusing CRA exams only on areas where banks have branches and deposit-taking ATMs. Preliminary findings by the Joint Center for Housing Studies at Harvard indicate that only 31 percent of the home loans in a typical metropolitan are scrutinized by CRA exams. Updating the regulations to include areas where banks make the great majority of their loans could bring an additional 34 percent under the exams’ purview. Since the Treasury has concluded that bank prime lending is higher in areas where they undergo CRA exams, expanding their geographic scope will encourage more such lending.
Explicitly consider lending to minority borrowers in CRA exams. Price discrimination and predatory lending are much more likely to affect minorities than whites. Adding this to CRA exams will encourage banks to make more prime loans to minorities.
Make the ratings match the evidence. Currently, banks that merit failing CRA ratings based on evidence of discrimination or predatory lending sometimes achieve satisfactory ratings based only on promises to do better. Such promises should be encouraged, but ratings should be based on behavior, not promises.
Preserve and strengthen the investment test. The investment test measures the number and dollar amount of community development investments in affordable housing and economic development projects in low- and moderate-income communities. None other than Federal Reserve Chairman Alan Greenspan talks about the dearth of equity investments for small businesses in these areas. Yet, some banks persist in asserting that they are forced to make unprofitable investments in order to pass the test.
Do not expand the small bank exemptions. The small bank exam, applied to banks with less than $250 million in assets, focuses only on lending and skips consideration of investments and services. Bank trade associations have asked federal agencies to allow banks with assets of up to $1 to $2 billion to qualify for the small bank exam, arguing that it is unfair to compare a bank with a few billion dollars in assets to giants like Bank of America. But the existing large bank exam avoids this by carefully comparing banks to their peers in asset size.
CRA has been a central and powerful tool for supporting our nation’s neighborhoods. As the banking industry evolves, CRA must evolve alongside it.
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