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Proposed CRA Rule Receives Mixed Reviews from Housers

Public comment is open through Aug. 5 on proposed Community Reinvestment Act rule changes. They are worlds better than the Trump-era proposal. Why are some advocates still disappointed?

Photo by Flickr user vistavision, CC BY-NC-ND 2.0

A ground-level view looking up at the entrance to The Peoples First National Bank and Trust Company. The name is carved over the door and topped by a ledge and flanked by fluted columns of stone.

Photo by Flickr user vistavision, CC BY-NC-ND 2.0

Federal bank regulators have released a long-awaited update to the Community Reinvestment Act (CRA), the federal government’s main tool to combat redlining. The proposal is receiving mixed reviews from fair housing advocates, who are pushing for more fundamental changes before it is finalized by the regulators.

The CRA encourages banks to provide mortgages and other services to people living in low- and moderate-income (LMI) neighborhoods, and regulators can theoretically punish banks for non-compliance by blocking mergers, acquisitions, and branch expansions. The CRA was passed in 1977 in response to banks’ common practice of not lending in urban Black communities, the “redlined” areas.

CRA Comments

The deadline to submit comments about the proposed changes to the Community Reinvestment Act is fast approaching. Comments must be submitted by Friday, Aug. 5. View and submit comments here.

In the decades since, however, the law has failed to narrow the homeownership or wealth gaps between Blacks and whites, despite a major regulatory update in 1995 and other tweaks along the way. There are far more white LMI people than Black, diluting the impact of LMI-focused investments on racial equity. In addition, due to deep, persistent patterns of discrimination, even higher income Black people still often have fewer assets and less access to credit than low-income whites. For example, Black homeowners with incomes between $75,000 and $100,000 have higher mortgage interest rates than white homeowners with $30,000 or less in household income, according to an analysis of 2019 American Housing Survey data.

As a result, advocates have for years been pushing for broader changes to the CRA to explicitly incorporate race and incentivize lending specifically to people who live in communities of color.

With the new CRA rule, the bank regulators—the Federal Reserve, the FDIC, and the Comptroller of the Currency—are trying to extend the reach of the LMI paradigm. In an acknowledgment of the growth of online banking, large banks would have to assess the services they provide to LMI communities wherever their customers are, not just near branches. They will have to start providing data measuring their lending and community development activity in those communities. Regulators also want to make the CRA scoring system somewhat more rigorous, in response to complaints that banks almost always receive “satisfactory” or “outstanding” ratings.

“There’s been a lot of change in banking over the last 25 years. This rule is going to be a really important part of adjusting the CRA to account for that,” says David Dworkin, president and CEO of the National Housing Conference. “We’re going to have made a lot of improvements in this [rule]. And we will be able to make more improvements through adjustments and procedures without having to change the [rule] again, for a while.”

[RELATED ARTICLE: Pulling the Rug From Under Community Development? No CRA = No Community Development?]

But despite offering numerous technical changes in its 679 pages, the proposal does not add significant new language on race, disappointing advocates. For example, while regulators can penalize banks for excluding LMI neighborhoods from their assessment areas, the revised rule still would not address exclusion of communities of color.

In one significant change, the regulators plan to look at data describing banks’ mortgage lending by race, which is already available through the Home Mortgage Disclosure Act (HMDA). That information could be used to show discrimination during a separate fair lending exam. But it still would not affect banks’ CRA ratings, out of concern that requiring banks to preferentially lend to racial minorities, or to people in majority-minority areas, would bring legal challenges and adverse court decisions, Dworkin and others say.

The regulators are also so far holding back from giving banks CRA credit for setting up special-purpose credit programs (SPCPs), which provide loans to people in specific underserved groups, although the rule asks for comments on the programs with the apparent goal of incorporating them in the final version. The National Fair Housing Alliance and others have pushed for creation of race-conscious SPCPs, but the CRA rule only considers LMI-based programs.

The regulatory agencies are accepting public comment through Aug. 5 and can make more changes before the rule is finalized. The National Housing Conference, National Community Reinvestment Coalition (NCRC), and other groups are preparing detailed suggestions for further improvements. Advocates say they fear that without critical changes, including explicit references to race and stronger requirements for the small banks that serve rural areas, financial institutions will continue their historic avoidance or neglect of struggling majority-minority communities.

“I think we all have seen very clearly that focusing on low- and moderate-income issues is not going to advance racial equity. It’s not going to close the racial wealth gap or the racial homeownership gap, quite frankly. It’s just a reality,” said Lisa Rice, president and CEO of the National Fair Housing Alliance, during an event at the Urban Institute in June.

“We thought that this rulemaking would be an opportunity to really mold the CRA tool into being an effective tool for advancing on racial equity. So right now, if the rule stays the way that it is, we think it’s a missed opportunity,” Rice said.

Bulbul Gupta, CEO of Pacific Community Ventures, notes that advancing racial equity was a key purpose in the CRA’s creation. “The CRA creates an affirmative obligation that banks serve the entire community, and that community includes people of color. This is what the law is meant to do,” Gupta says. “By failing to take a race-centered approach, the [Notice of Proposed Rulemaking] not only ignores that original purpose, it also ignores the Biden administration’s Executive Order on Advancing Racial Equity. This order, which rightfully acknowledges the persistence of exclusionary policies keeping people of color from full participation in our society, mandates federal agencies to take this problem seriously and propose real solutions. A colorblind CRA fails this mandate.”

Exempting Small Banks

The new rule broadly aims to incentivize banks to do more lending and support more community development work in underserved areas, Michael Hsu, acting comptroller of the currency, said at the Urban Institute event. It does that in part by giving large banks CRA credit for providing mortgages and small business loans in more of the LMI areas where they have customers.

The rule would mandate “new assessment areas outside of branch networks, wherever a bank has 100 or more home loans in each of the last two years, or 250 or more small business loans in each of the last two years, so that’s great,” says Josh Silver, senior adviser for policy at NCRC.

However, only the nation’s very largest banks would be subject to the new assessment area guidelines—91 banks for home loans and 26 for small business lending, according to NCRC. Likewise, although the revised CRA would for the first time require banks to provide detailed data on their community development activities and their volumes of deposits and car loans in LMI areas, it would only impose those requirements on financial institutions with more than $10 billion in assets.

“Intermediate and smaller banks are not required to collect, maintain, and report deposits based on location of depositors. They’re not required to report automobile lending data and a whole host of other accountability measures and metrics that large banks have to. So to me, that’s a huge red flag,” says Kiyadh Burt, vice president and interim director of policy and advocacy at Hope Policy Institute, which works to increase financial inclusion across the Deep South.

At the same time, the proposal would raise the asset thresholds for bank classifications, reducing the number that would have to meet certain requirements. NCRC says 217 large banks would become “intermediate small,” exempting them from certain tests, and 779 intermediate banks would be labeled “small,” releasing them from community development finance responsibilities.

Burt recalls that when banks started giving out forgivable loans from the federal Paycheck Protection Program two years ago, huge numbers of low-income self-employed people across the rural South—barbers, real estate agents, restaurateurs, Uber drivers, and others—missed out. They had no relationships with financial institutions, and the small banks that serve their towns did not bother to reach out to them, he says.

Rather than exempting more banks from CRA requirements, regulators should be expanding the law’s reach, especially with regard to small banks, he says.

“You have some developments [in the law], but who do they really apply to? Many of our communities are served by these smaller banks, if they have a bank at all. So we would encourage CRA [regulators] to ensure that the banks that are already in these communities continue to do what’s right in servicing [them],” Burt says.

Silver also notes that even when banks will be required to disclose data to regulators, the CRA rule does not provide for the information to be released to the public.

Fear of Court Reversal

The rule proposes a number of other changes to motivate banks to serve LMI communities. For example, it would encourage greater investment in mission-driven organizations like community development financial institutions and minority depository institutions by making it easier for banks to identify the partnerships that will boost their CRA scores.

The proposal also aims to address the grade inflation problem by modifying the ratings system: on a subtest, a bank could receive a “low satisfactory” rating for not meeting mortgage lending benchmarks in its LMI communities. That could motivate banks to provide more mortgages in those areas, although the final, public CRA scores will still fall into the same old four categories of outstanding, satisfactory, needs to improve, and substantial non-compliance. Historically, 98 percent of banks receive “passing” grades of outstanding or satisfactory.

In its initial analysis of the CRA rule, NCRC points to a number of other flaws and urges regulators to refine their proposal. The proposal would not create assessment areas for the growing number of banks that take deposits but do not make loans, exempting them from some obligations. A formula for calculating bank service levels risks overweighting activity in big cities and allowing banks to do less in small cities and rural areas, NCRC says. Regulatory agencies should do more to integrate comment on bank exams from community organizations, hold more hearings on bank mergers, and require merging banks to sign community benefits agreements.

On the central issue of race, fair housing organizations urge the regulators to use the comment period to add a requirement for examinations of lending by race and ethnicity in areas experiencing ongoing discrimination or showing major racial disparities in lending. The agencies should at least do more fair lending reviews when data from HMDA and the Consumer Financial Protection Bureau shows poor performance by a bank, advocates say.

Dworkin says it is likely the rule does not consider racial equity in CRA exams because lawyers at the three regulatory agencies fear courts would find that doing so violated the Fair Housing Act and the Constitution. “It would get thrown out. That would be more disruptive than not doing anything at all,” he says. “If we cross the line and risk court reversal, then we’ll actually have created more confusion and will undercut what we’re trying to do.”

Other advocates argue that CRA has fallen far short of its goals in its current form and approving an update that does not incorporate race is little better than leaving the law unchanged. They also say race-conscious SPCPs are clearly permitted under existing law, and that because of the evidence of past and present discrimination in lending, race-conscious CRA evaluations could survive a strict scrutiny test in federal courts.

“I’m not sure why people think that there’s some legal jeopardy here,” says Debby Goldberg, vice president of housing policy and special projects at NFHA. “There was evidence in 1977, and there is a way more evidence now, that communities of color at all income levels, not just low and moderate income, but at all income levels, are not being effectively served by banks in this country.”

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