Regulators are updating Community Reinvestment Act protections, but will they do it without giveaways to banks?
by Paula Melton
Redlining may be coming back.
The practice of denying loans to people and businesses based on their neighborhood effectively became illegal in the U.S. in 1977 with passage of the Community Reinvestment Act (CRA). This law requires deposit-accepting banks to meet the credit needs of all neighborhoods throughout their “assessment area,” the geographical tract in which they do business. Banks are examined using an elaborate process and receive a grade that’s publicly available.
But upcoming rule changes would weaken the law, civil rights groups say, and it may be too late to do anything about it.
What the CRA has accomplished
Although it’s not perfect, the CRA has been “a key driver of financial equity and helped spur hundreds of billions of dollars of investments,” says Melissa Stegman, senior counsel at the Center for Responsible Lending.
“I’ve been working in low-income Asian-American communities and other communities of color throughout my career,” said Seema Agnani, executive director, National Coalition for Asian Pacific American Community Development. “The CRA is one of the most important tools we have in the community development field to put pressure on the financial institutions to give back in the places where they are making profits—particularly in low-income communities.”
The CRA hasn’t removed “discrimination and structural barriers,” said Josh Silver, senior advisor at the National Community Reinvestment Coalition. And though “it’s been working well” overall, he said, the last time the CRA saw major reforms was in 1995. “I was just getting email,” he said. “There wasn’t even really the internet.” And that’s a problem because of the amount of banking that now takes place online. “A lot [of banks] are still making loans through branches, but we can’t keep our heads in the sand. We need to update it and make sure it continues to be effective.”
That’s not the only problem.
“It should be a much bigger tool to address structural racial barriers,” Stegman argued. “It has been really important for driving investments, but it hasn’t always reached the communities that are harder hit during times of economic uncertainty and crisis.”
Agnani agreed. In her organization’s research, “we found … that a lot of those communities that are predominately lower income are not actually accessing good mortgages and are paying more.” Predatory lenders “have language access and market very heavily. They are often able to meet credit needs that the banks are not filling.” This means higher closing costs and higher interest for the lowest-income families.
And beyond civil rights concerns, there’s also the grading system, which banks have complained about for years, saying it’s not sufficiently standardized and is therefore too subjective.
Given these problems, civil rights groups and banks alike were ready for reform. When it came, through rulemaking by the Office of the Comptroller of the Currency (OCC), finalized in May 2020, it didn’t address many of these issues. Instead, critics argue, the OCC has weakened the law under the guise of modernization, incentivizing large infrastructure projects instead of community needs and potentially bringing full-fledged redlining back.
The final(?) rule
“It took away the original spirit of the CRA,” argued Agnani. “There is really broad consensus around the nonprofit sector that it does not achieve what CRA is intended to do.”
Silver spoke even more strongly. “The OCC rule would be a disaster,” he said. “They are basically trying to reduce the CRA to a single number or ratio. … It’s going to encourage banks to seek the largest deals regardless of the needs of communities.” So instead of small business loans and energy retrofits, banks would be incentivized to “go out and finance bridge rehabilitation of $50 million. … Large infrastructure projects would be emphasized.”
What’s more, “It would allow banks to ignore 20% of assessment areas and still pass,” according to Stegman. “This could really result in unchecked disinvestment and a return to redlining.” Also, she said, “The rule disincentivizes investment in low- and moderate-income communities and communities of color. The activities of investment don’t have to primarily benefit low- and moderate-income communities.”
Strangely, however, the OCC is just one of three regulatory bodies that oversees banks and their CRA grades, so it’s unclear whether its final rule will stand. (The OCC agreed to an interview but did not follow through.) The OCC “went rogue,” joked Agnani. And in fact, the Federal Reserve Board (the Fed) recently released a competing Advance Notice of Proposed Rulemaking (ANPR) for the CRA. The third regulator, the Federal Deposit Insurance Corporation (FDIC), hasn’t engaged in rulemaking.
The Fed’s proposal
The Fed has only released an ANPR, which means it’s at the information-gathering stage, encouraging stakeholders to weigh in with their ideas and needs. But, said Stegman, there are some signals suggesting that a Fed rule might remedy some of the civil rights issues with current CRA and the OCC final rule—while also modernizing the regulations and potentially simplifying the examination process.
“From what we can tell from the way the framework is laid out, there is much more focus on community needs, specifically low- and moderate-income communities” compared with the OCC rule, said Stegman. And the tests focus on the number of loans and branches within an assessment area instead of just straight dollars spent. “The ANPR proposes keeping the assessment areas around branches, but also [adds] other types of assessment areas, like internet banks.”
It’s unclear how the differences between OCC and the Fed might be resolved.
“The FDIC initially went in with OCC but then broke away” due to concerns about data availability, among other issues, according to Silver.
“My assumption is the Federal Reserve put out that ANPR to ensure there would be continued public discourse around CRA,” noted Agnani. “And it also kind of makes a statement that the OCC can’t just move on its own the way it’s attempting to.”
At the board meeting at which the ANPR was released, Fed chair Jerome Powell said, “Stakeholders have expressed strong support for the CRA and its goals and have called for the banking agencies to work together on a modernization plan. This proposal is an important step forward in laying a foundation for the agencies to build a shared, modernized CRA framework that has broad support.”
Meanwhile, it’s not too dramatic to say that whole communities are waiting to have their fate decided for them amid this regulatory back-and-forth. “The CRA is one of the most important tools we have to build affordable housing,” said Agnani. “I can’t even share how much things would shift if it were weakened.”