Every so often, an effort is made to collect articles by leading practitioners, community organizations, and academics about the effectiveness of the Community Reinvestment Act (CRA). The last was in 2009, when the San Francisco and Boston Federal Reserve Banks published a volume about perspectives on the future of the Community Reinvestment Act.
Just a few weeks ago, Cityscape, a research and policy publication of the Department of Housing and Urban Development (HUD), published an issue devoted to CRA and its upcoming 40th anniversary this October. With a new administration planning changes to banking policy, including a review of CRA, this publication is timely.
I aimed for a careful read of the articles in the HUD volume because they cover a range of critical issues for CRA, such as whether its current implementation is effective in increasing access to credit and capital for traditionally underserved communities, what’s working well and what could be improved, and how should CRA evolve as the banking world changes? No one volume can answer all of these critical questions definitely, but this volume is a good start and road map to thinking them through carefully.
Public Data and Accountability
Intuitively, it makes sense that CRA would increase lending to communities, as it requires banks to meet community credit needs, particularly in low- and moderate-income (LMI) communities, that are consistent with safety and soundness. Under CRA, federal examiners assess banks’ lending, investment, and services in LMI communities and then give them ratings using publicly available data.
Anyone from the public can comment on a bank’s CRA record with the intention of influencing the examiner’s grade. This system of accountability should prompt a bank to make more loans, investments, and services to LMI communities than they may otherwise. As I often say when I give presentations, imagine if your report cards were posted on the internet—would you work harder to improve your grades? I certainly would.
Intuition must always be backed up by data analysis, and four articles in the HUD volume do just that. Bostic and Lee use a regression discontinuity design to document that CRA small business lending increases to a greater extent in moderate-income census tracts that are eligible for CRA consideration compared to middle-income census tracts that have income slightly over the CRA limit (a little higher than 80 percent of area median income).
This study is important not only because it is one of the few to use CRA small business data, but it also indicates that the “CRA effect” was stronger in the years preceding the financial crisis than in years after it. This makes sense, and also highlights that policymakers’ goal should be to prevent huge, gain-erasing busts in the future by enacting sensible policies and laws.
Like Bostic, Ding and DeMaria of the Philadelphia Federal Reserve Bank employed a similar methodology and found that CRA boosts lending by 10 percent in census tracts eligible for CRA (this study is not in the Cityscape publication but came out around the same time).
Butcher and Munoz also apply regression discontinuity design more generally to all types of lending using data from Equifax, and have findings consistent with Bostic and Lee. Importantly, Butcher and Munoz find that there is no difference in delinquency rates in census tracts that are CRA eligible compared to those that are not. This is yet another of several studies debunking the myth that CRA pushes banks to make risky loans in order to serve LMI borrowers. Despite the claims of its critics, CRA requires banks to make safe and sound loans; the evidence overwhelmingly demonstrates that banks and the regulatory agencies enforcing CRA have held true to this statutory requirement.
CRA encourages community group and bank dialogue and partnerships, which have increased lending to traditionally underserved communities. Casey, Farhat, and Cartwright find that when banks and community groups negotiate CRA agreements committing banks to specific increases in future lending, the lending to underserved communities increases in a statistically significant manner. The Metropolitan St. Louis Equal Housing Opportunity Council (EHOC) formed a coalition of groups, the St. Louis Equal Housing and Community Reinvestment Alliance (SLEHCRA) in 2009, which has since negotiated 46 agreements. Casey, et. al. find that since the formation of SLEHCRA and its agreements, lending has increased in underserved communities and in particular to African-American borrowers.
The spur of CRA-related activism motivates banks to work in partnership with community-based organizations to develop specific products and programs to serve borrowers outside of the financial mainstream. Quercia and Riley report on the experience of the Self-Help Credit Union’s Community Advantage Program (CAP) that relaxed traditional underwriting criteria and resulted in 46,000 loans issued over the last couple of decades to borrowers with credit profiles that made them targets of subrime lenders in the early to mid-2000s. They document that responsible lending programs like CAP performed much better than subprime lending with high default and delinquency rates, but acknowledge that the delinquency rates of programs like CAP are higher than traditional prime lending. With careful planning and capital reserve practices, banks and secondary market institutions like Fannie Mae and Freddie Mac can bring these programs to scale.
One important question that Quercia and Riley did not attempt to answer in their piece is how much CRA lending can occur without underwriting flexibilities, subsidies, and higher reserves. In other words, there are many different subgroups within the LMI population, including those with shakier credit, but also those with no credit issues who happen to fall outside the financial mainstream. How much lending needs to be like CAP and how much lending can be just regular prime lending made more accessible? Answering this question will do much to introduce more light and less heat into the discussion.
The Cityscape volume, in an attempt at balance, provided space for a CRA critic, but the critic misfires badly. Yezer of George Washington University contradicts himself when he says that “…economists have been unsuccessful in determining that having institutions with high CRA ratings makes a significant difference in overall economic performance.” Later in the article, however, he blames CRA for contributing to unsustainable housing bubbles by “encouraging banks to make loans even in areas where housing prices threaten housing affordability.”
So, let’s get this straight: CRA cannot take credit for contributing to positive economic development, but can only effectively intervene at the city or neighborhood level to exacerbate negative trends like rapid housing value appreciation? If CRA has not contributed to local economics, then it is likely that it has had neither good nor bad impact (rather than just bad). The truth of the matter probably lies more closely with Bostic’s and others articles, which demonstrate that CRA spurred increases in safe and sound lending. This would be the case particularly in instances of market failure in which banks and/or consumers lack information that inhibit lending. The findings of CRA lending jumping in census tracts near the CRA income level boundary suggest that lenders are making more of an effort to overcome barriers to lending in neighborhoods just under the CRA income level boundary.
Moreover, if there are concerns with banks lending in overheated markets, stretching their underwriting criteria to make risky loans in order to pass their CRA exams, or otherwise engaging in other problematic practices, CRA examiners are supposed to take this into account when rating the banks. If CRA examiners were not taking these practices into account, this would not be the failure of the CRA regulation or statute that mandates safe and sound lending. It would be a failure on the part of the CRA examiners and their agencies. While there have been instances of lax CRA examination, the record of CRA suggests that preserving safety and soundness has not been a pressing concern with CRA implementation. Yezer advances arguments that must be addressed but then he makes assertions without rigorous data analysis.
The Future and Fintechs-A Moving Regulatory Target
In addition to the articles and studies that review CRA’s impact, several other articles explore how CRA must evolve to keep pace with industry developments. On top of everyone’s list in the fair lending arena is how can fintechs be covered by CRA, or a law or regulation like CRA.
Fintechs are financial technology companies that do not lend through branches, but over the internet. CRA is a branch-based law, which is implemented by examining lending in geographical areas covered by branches. As more fintechs, and even regular banks, make more loans outside traditional branch networks, how can a CRA framework assess such lending?
Gaughan explores this question and rightfully insists on objective measures of performance, but is vague on whether fintechs should be held to performance on a national level, by region, or some other geographical area. Since redlining is a local phenomenon that CRA sought to overcome, NCRC insists that all lenders, even ones on the internet, be held accountable for safe and sound local lending. As more fintechs apply for bank charters, let’s take a pragmatic approach and see if geographical examinations of their performance can occur. Social Finance (SoFi), for example, said in its application for a bank charter that it does the majority of its business in the ten largest metropolitan areas—so let’s hold them accountable for reaching underserved populations in these areas. NCRC will seek to determine through data analysis of lending concentrations and dialogue with fintechs what ways we can hold them accountable to local communities.
Immergluck explores how the new Affirmatively Furthering Fair Housing rules promulgated by HUD compares to CRA in terms of ease and effectiveness of implementation. The AFFH rules require local jurisdictions to develop plans based on data analysis that identify and seek to rectify patterns of segregation that ultimately retard local economies by diminishing opportunities for minorities to seek quality housing and jobs.
Immergluck hints that it may be harder to implement AFFH more rigorously than CRA. Another line of inquiry that NCRC is pursuing is how practitioners and policymakers can get AFFH and CRA working together, namely, how can stakeholders work with banks, cities, and counties to encourage banks to make CRA-related loans and investments to LMI borrowers in a manner that promotes integration?
Lastly, three articles (Bull, Willis, and Silver) address how improving the use of data and public input is vital to strengthening the impact of CRA. Willis discusses how banks’ home lending is compared against demographic benchmarks. CRA’s income definition usually targets 40 percent of households whose income is LMI or 80 percent or less of median income. Is it reasonable to expect banks to make 40 percent of their loans to LMI households, thereby matching their percent of the population? Willis suggests it is not reasonable because a segment of lower income households simply cannot afford homeownership. While I may not agree with Willis’ exact methodology and have used other methodology in the past to develop a reasonable demographic benchmark, he poses a fair question that requires thoughtfulness. It is also important to remember that CRA is not only about homeownership but also about meeting credit needs for affordable rental housing, small business development, and community facilities for LMI consumers and communities.
Bull tackles the issue of how community development corporations (CDCs) and other local nonprofits can use CRA. The answer is with great difficulty. When students working on behalf of CDCs tried to ask branch personnel for CRA exams, they received either defensive answers or blank stares. When students tried using CRA exams to identify local community development loans or investments in housing or small businesses in neighborhoods served by the CDCs, they were unable to do so. Since CRA is designed to respond to local needs, thwarts to such efforts also thwart its purpose.
NCRC has advocated for community development loan and investment data on the census tract level so that community based organizations can better track bank records of local neighborhood investment. At the very least, if not in CRA exams, the bank CRA public files ought to contain lists of community development projects organized by neighborhood or census tract.
Lastly but not least, Silver (the author) has a piece emphasizing that though CRA should and must be all about public participation, it sure doesn’t feel that way. Following up on Bull’s angle, I examine the extent to which CRA and the related bank merger application process encourages public input or places obstacles to input. To answer that question, I ask the readers of this blog whether they tried to figure out how to comment on CRA exams (it is very difficult to do so unless you work at an organization like mine). The merger application process is more advanced in this regard, meaning that the agencies can improve the CRA examination process by picking up on techniques and lessons learned from the merger application process.
In addition, I also examine how out-of-date examination procedures that include the geographical areas on CRA exams (reminiscent of the fintech discussion above) impede public participation—why participate if your smaller city or rural area does not really factor on CRA exams? All is not hopeless, however, as I suggest pragmatic fixes that do not involve Congress or the agencies rewriting CRA regulations.
President Trump issued an executive order requiring interagency review of the impacts of a wide array of regulations including banking regulations. The Treasury Department has already issued a report that a previous blog of mine reviewed. Treasury indicates that it will take a serious look at CRA in the fall, and we will be urging Treasury to look carefully at the evidence of CRA’s effectiveness as well as the thoughtful pieces in the Cityscape issue on CRA’s 40th Anniversary.
The genius of CRA is that it is not a top-down mandate by the government. Instead, it establishes a process for measuring bank reinvestment performance and a dialogue among banks, the community, and the regulatory agencies on how to improve bank reinvestment performance.
If the Trump administration takes steps to broaden this dialogue, the result will be more responsible loans and investments in communities. If the administration shortchanges or stifles this dialogue, it will not succeed in creating the jobs and prosperity that the president says is his goal.