When practitioners in the affordable housing and community development field think about the Community Reinvestment Act (CRA), they think about the federal CRA, and for good reason; the federal CRA has been around for a long time. In 2017, the federal CRA will be 40 years old. But a number of states, including Massachusetts, New York, Connecticut, and a few others also have CRA requirements applied to lending institutions. Why is this important, and should more states institute CRA requirements?
On a federal level, CRA imposes an affirmative and continuing obligation on banks to meet the credit needs of low- and moderate-income borrowers and communities, consistent with safety and soundness. Three federal agencies: the Federal Reserve Board, the FDIC, and the Office of the Comptroller of the Currency, conduct CRA exams and rate banks based on their level of lending, investments, and services to low- and moderate-income borrowers and communities. Different types of banks receive different CRA exams depending on their asset sizes and capacities. State CRA works in basically the same manner. In the case of state-chartered banks, a state conducts CRA exams jointly with a federal regulator. However, in the case of Massachusetts, its CRA differs from the federal CRA in that it also applies CRA requirements to mortgage companies and credit unions.
The National Community Reinvestment Coalition's (NCRC) research indicates that it would be beneficial for states to impose CRA requirements on lending institutions, particularly for those that are not covered by the federal CRA. During the 2000s, NCRC conducted two reports examining and comparing bank and credit union performance. Banks are covered by the federal CRA, while credit unions are not. In our reports, we found that banks perform better than credit unions on a number of measures such as the percent of loans made to low- and moderate-income borrowers and communities. This makes intuitive sense: banks face more accountability because they are examined and rated on the number of responsible loans made to low- and moderate-income borrowers while credit unions are not.
NCRC also compared the performance of state-chartered credit unions in Massachusetts with CRA responsibilities to federally chartered credit unions making loans that are not covered by CRA. Again, NCRC found that the CRA-covered institutions performed better in making loans to traditionally underserved communities. For example, in Massachusetts, state-chartered credit unions issued 34 percent of their refinance loans to low- and moderate-income borrowers, compared with only 25 percent issued by federally chartered credit unions to this borrower group.
This research suggests that more states should institute CRA requirements, and states with CRA requirements should maintain and strengthen those requisites. However, the Massachusetts Division of Banks is thinking of weakening CRA requirements for small credit unions and mortgage companies. NCRC submitted testimony in opposition to the weakening of the CRA requirements. Our review of CRA exams for small lenders indicated that they have the capacity to meet their CRA obligations. For example, small credit unions with assets under $50 million actually made the majority of their loans to low- and moderate-income borrowers as recorded by the CRA exams which NCRC reviewed. If the lending test for these credit unions is eliminated as proposed, a likely possibility is that the number of loans to low- and moderate-income members of these credit unions will decline. Likewise, the amount and quality of homeownership counseling offered by small mortgage companies will probably decrease if the service test for mortgage companies is eliminated as proposed.
If the Massachusetts Division of Banks proceeds with its proposal, it is my bet that a “before and after” analysis will document decreases in CRA activity. This has happened before. In the mid-2000s, one federal regulator that no longer exists (the Office of Thrift Supervision, or OTS), made CRA exams for thrifts easier by allowing them to choose how to weight each part of their exam. NCRC and New York Law School documented decreases in community development lending and investing after the OTS changes. Fortunately, the OTS rescinded its changes before the agency itself was abolished by the Dodd-Frank Act.
We haven’t had many controlled experiments that look at lending institution behavior before and after the implementation of CRA requirements. But the existing research suggests that lending and investing in low- and moderate-income communities does vary based on the existence and/or strength of a CRA requirement. There could be more opportunities to test this proposition. These opportunities would arise if more states implement CRA requirements, particularly for mortgage companies and credit unions that do not have federal CRA requirements. NCRC would be eager to examine the lending, investment, and service records of these institutions before and after implementation of new CRA requirements.
(Photo credit: Michael W. May, via flickr, CC BY-NC-ND 2.0)