March 21, 2019 By NCRC
2019 Policy Agenda for the 116th session of Congress
For over 25 years, NCRC has worked to create a just economy. We believe private capital of various forms must be engaged in building an equitable and fair economy. There is both a legal and a moral obligation for banks and other financial institutions to invest and lend in low- and moderate-income (LMI) communities. More than a decade after the last financial crisis, many borrowers, and particularly African-Americans, struggle to access homeownership. The nation continues to rebound from a 40 year decline in business startup activity, and underserved communities, including rural areas, struggle to attract private investment.
Redlining, a discriminatory practice outlawed by the Community Reinvestment Act (CRA) and other fair lending laws, remains a potent issue today. The Consumer Financial Protection Bureau (CFPB) alone brought nearly $40 million dollars in enforcement actions against institutions for redlining under the leadership of Richard Cordray as Director. In a groundbreaking study, Reveal from The Center for Investigative Reporting found modern- day redlining persisted in 61 metro areas even when controlling for applicants’ income, loan amount and neighborhood.
Homeownership remains the best vehicle for low- and moderate-income families and people of color to build wealth and enter the middle class. And, small businesses and start-ups are an essential source of new job creation. To ensure the widest and most equitable access to credit across the country, the affirmative obligations, or Duties to Serve on the nation’s financial institutions must be defended and expanded. Leading experts in affordable housing, Adam Levitin and Janneke Ratcliffe, summarized the vital role the Duties to Serve play:
“Fair lending concerns the obligation not to discriminate on unlawful grounds in the actual granting of credit and its terms. But, the Duties to Serve concept is broader and it recognizes that merely prohibiting discriminatory lending is insufficient to address the disparity of financial opportunity.”
CRA, the affordable housing goals at Fannie Mae and Freddie Mac, and other provisions in law ensure the nation’s largest institution have a continuing and affirmative obligations to reach out and serve traditionally underserved communities and borrowers.
Defending CRA: Regulators Have Initiated a Major Rewrite
NCRC’s TreasureCRA campaign has mobilized thousands of community activists around the country to defend core principles embodied in CRA, as bank regulators announce a major regulatory rewrite of the law. The Office of the Comptroller of the Currency (OCC), regulator of the nation’s largest banks, took the first formal step to overhaul the law’s regulatory framework last fall . Over 1500 organizations responded to 31 reform questions posed by the agency. The Federal Reserve System has convened over 25 roundtables and symposiums around the country on the law.
How CRA Operates Today
Under CRA, depository institutions “have a continuing and affirmative obligation to help meet the credit needs of the local communities in which they are chartered.”Those obligations are to be met “consistent with the safe and sound operations of such institutions.” The law was enacted to end redlining (the practice of banks refusing to consider mortgage applications from minorities based on the neighborhood they lived in rather than their personal credit and financial situation) and to defeat capital export (banks using the deposits made by persons from low- income neighborhoods to lend to persons in more affluent neighborhoods).
CRA is implemented by the three federal bank regulators (the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Federal Reserve System) through periodic lender examinations of all federally insured depository institutions. These CRA examinations vary in occurrence and detail based on lender asset size, with small lenders under $250 million in assets being evaluated less frequently (usually once every four or five years) and less thoroughly (one test area instead of the three applied to large banks). Upon completion of the examination, regulators award banks one of four ratings based on their compliance with the CRA – outstanding, satisfactory, needs to improve or substantial noncompliance – which are made public at the Federal Financial Institutions Examination Council (FFIEC) website along with the bank’s CRA performance evaluation.
Regulators can then use a poor rating to deny lender applications for such things as opening a new office or acquiring another bank. Feedback from community stakeholders on how banks are serving their community is considered by banks examiners during CRA exams and during bank mergers and acquisitions.
All financial institutions should have a CRA obligation
Today CRA covers only a fraction of the marketplace. For mortgage lending, for example:
- 1993, 41% of mortgage loans covered by CRA review
- 2006, 26% of mortgage loans covered by CRA review
- 2016, ~30% of mortgages were in banks’ assessment areas
Two forces have driven the decline: increased lending by nonbanks not covered by CRA and banks covered by CRA lending more online and otherwise outside their CRA assessment area.
Depository institutions are compelled to meet their affirmative obligation under CRA in exchange for taxpayer support, such as bank charter status and federal deposit insurance. Other financial institutions also benefit from direct and indirect government support – economic, regulatory and infrastructure. As the financial marketplace evolves, it is critical that the playing field be level for all financial institutions. Financial technology companies (fintech) such as online marketplace lenders, independent mortgage companies, credit unions and other financial institutions have continued to gain significant market share since the financial crisis, doing more and more mortgage and small business lending. These institutions also have a responsibility to provide fair access to financial services by helping to meet the credit needs of their entire community and should be examined under a CRA framework.
NCRC joined other organizations in supporting the introduction of the Affordable Housing and Economic Mobility Act (S. 3503; H.R. 7262) during the 115th Congress, which extends CRA obligations to more financial institutions and modernizes other aspects of the law.
Despite the need for modernization, CRA is a powerful incentive today
Together with anti-discrimination, consumer protection, and disclosure laws, CRA remains a key element of the regulatory framework for the nation’s banks, encouraging the provision of mortgage loans, small business loans, investments and other financial services in their local communities and the nation’s low- and moderate-income neighborhoods.
Although CRA ratings are inflated, the law has proven to change institutional behavior and leveraged significant increases in lending and investment in LMI communities. Recently, researchers at the Philadelphia Federal Reserve Bank found that when census tracts lose CRA eligibility it leads to about a 10 percent or greater decrease in purchase mortgage lending by CRA-regulated lenders. Nonbanks help offset about half, but not all, of the decrease in purchase originations by CRA lenders. Similarly, the Federal Reserve researchers found losses in small business lending also based on a national sample, with the largest effects in inner city neighborhoods.
Defending the affordable housing goals and other obligations
In the secondary mortgage market, Fannie Mae and Freddie Mac (“the Enterprises”) have “an affirmative obligation to facilitate the financing of affordable housing for low- and moderate-income families…while maintaining a strong financial condition and a reasonable economic return.” The Enterprises have affordable housing goals, which require the Enterprises to purchase a set percentage of mortgages to finance single family and multifamily housing for low- and moderate-income borrowers and communities. For 2018-2020, each Enterprise has an annual low-income affordable housing goal, for example, for their single family mortgage purchases set at 24% for properties with borrowers with income of no greater than 80 percent of area median income. Each also has a multifamily goal to purchase multifamily residential housing that finances315,000 units affordable to low-income families.
As a result of their affordable housing goals, the Enterprises have provided leadership in developing loan products and flexible underwriting guidelines and have taken other steps to increase the flow of responsible mortgage credit to low- and moderate-income borrowers and communities. For example, the willingness of the Enterprises to purchase three-percent down payment mortgage loans from financial institutions in the primary market over the years has provided homeownership opportunities to millions of working families across the country.
The Enterprises’ duty to serve rule; the housing trust fund and capital magnet fund
Fannie Mae and Freddie Mac have other affordable housing responsibilities as a result of the affirmative obligations in their charters and the law. In January 2018, Fannie Mae and Freddie Mac began targeted work to encourage mortgage financing in three underserved markets: manufactured housing, affordable housing preservation, and rural housing. This work stems from a new Duty to Serve rule finalized in 2017. Both Enterprises can receive duty to serve credit by developing mortgage products, purchasing mortgage loans, doing outreach and making investments in the three underserved markets.
The Enterprises also dedicate a portion of their revenues to the National Housing Trust Fund (NHTF) and the Capital Magnet Fund (CMF). The HTF and CMF provide grants to states and state housing agencies and competitive grants to Community Development Financial Institutions (CDFIs) and nonprofit housing organizations to increase affordable housing for low-income families and areas.
The ongoing debate over the future of Fannie Mae and Freddie Mac
As a result of mortgage credit losses suffered during the financial crisis, both Fannie Mae and Freddie Mac were seized by the federal government and placed in conservatorship. They have remained under strict federal
oversight ever since, with all of the quarterly earnings from their mortgage credit guarantee business being swept into the U.S. Treasury each quarter for general government spending, largely unrelated to housing. Over the last decade, there were continuous conversations during the Obama Administration and now the Trump Administration about whether to release the Enterprises from conservatorship as well as Congressional proposals to replace
the Enterprises or remake them and the government-backed secondary mortgage market entirely. Most bills put forward have proposed to eliminate the affordable housing goals in favor of approaches that NCRC and other advocates have argued will produced less access to affordable mortgage credit for LMI borrowers and their communities. The latest proposal put forth by Senate Banking Committee Chairman Crapo (R-ID) would eliminate the affordable housing goals and the duty to serve, among other steps.
Don’t blame the affordable housing goals for the housing crisis
Conservative critics who oppose the active role of the federal government in the nation’s housing policy have placed blame on the affordable housing goals, as well as CRA, for the housing crisis – a claim numerous federal researchers and NCRC have roundly rejected and disproven.
Key budget and tax issues bear on affordable housing and community development
Changes in the nation’s federal tax code and federal budget policies also pressure homeownership, affordable rental housing communities, and economic development. With the passage of federal tax reform in 2017, the nation now has a flatter tax code with fewer direct incentives for low- and moderate-income households to buy a home. A lower corporate tax rate has diminished the value of key tax credits that have long facilitated affordable housing projects and other community and economic development investments in underserved communities. While federal spending caps have been lifted somewhat, there have been years of cuts and slower growth in domestic programs critical to local community development efforts, such as the Community
Development Block Grant (CDBG), Community Development Financial Institutions (CDFIs), and HOME Investment Partnership, to name a few. With fewer valuable federal tax credits and declining “soft subsidies” in the federal budget, it could be far more difficult to finance affordable housing and community development projects in underserved/disinvested communities.
A new program created by the 2017 tax law proposes to fill in some of the gaps by granting private investors tax benefits for investing in newly created Opportunity Zone funds that are to finance projects and businesses in designated Opportunity Zones. 8,700 census tracts across the country have been designated as opportunity zones. The Internal Revenue Service is currently developing rules around the program. NCRC continues to monitor the program and has offered a series of reforms.
A new era of split government in Washington; many regulatory challenges on the horizon
The 116th Congress opened in January 2019 and major issues are on the national agenda on Capitol Hill and at the federal agencies. Democrats now hold the majority in the U.S. House of Representatives for the first time since 2010. Republicans control both the U.S. Senate and the White House, with most federal agencies now headed by a regulator appointed by President Donald Trump. We expect several NCRC priority issues to top national headlines in 2019: CRA, mortgage data and disclosure rules, next steps on Fannie Mae and Freddie Mac conservatorship and their affordable housing obligations, potential changes at the Federal Housing Administration (FHA), CFPB payday lending rule and other small dollar/short-term lending issues, a rewrite of key fair housing rules at HUD.
Rep. Maxine Waters (D-CA) the new chairwoman of the House Financial Services Committee has outlined an ambitious agenda, including strengthening consumer protection, focusing on affordable housing, homelessness and housing finance issues. She has also created a new Diversity and Inclusion subcommittee to examine the low representation of minorities and women in the financial services industry. Chair Waters will also utilize the Committee’s subpoena power to increase committee oversight and public pressure on financial companies and regulators to support the Committee’s objectives.
We also expect Congress to consider the nation’s growing issues around affordable housing supply – both single- family and multifamily. NCRC has formed the Affordable Homeownership Coalition to offer a comprehensive set of policy recommendations designed to improve the nation’s affordable housing supply and access to affordable homeownership for LMI families. In the changing financial marketplace and with the new political landscape, NCRC’s advocacy has gained a new urgency: to protect and strengthen the CRA; to preserve the affordable housing goals and the broader obligations on financial institutions to serve low- and moderate- income borrowers and underserved communities; to ensure enforcement of the nation’s fair housing and fair lending laws; and to protect federal funding for key affordable housing, community development, small business, and for social safety net programs.
 The State of the Nation’s Housing 2018. (Cambridge, MA: Joint Centerfor Housing Studies, Harvard University, 1988.) Retrieved fromhttp://www.jchs.harvard.edu/state-nations-housing-2018.
 Adam J. Levitin and Janneke H. Ratcliffe, Rethinking Duties to Serve in Housing Finance. (Cambridge, MA: Joint Center for Housing Studies, Harvard University, October 2013.)
 The campaign website is at: https://ncrc.org/treasurecra/
 Office of the Comptroller of the Currency (OCC), Advance Notice of Proposed Rulemaking (ANPR), Federal Register, Vol. 83, No. 172, September 5, 2018: https://www.regulations.gov/docu- ment?D=OCC-2018-0008-0001
 See NCRC’s public comment at:https://www.regulations.gov/document?D=OCC-2018-0008-1132. See an analysis of the other public comments at: https://ncrc.org/analysis-of-public-comments-on-the-communi- ty-reinvestment-act/
 For example, the Federal Reserve Bank of Philadelphia: https://www.philadelphiafed.org/community-development/events
 2 U.S.C. §2901, et al
 Jill Littrell and Fred Brooks, In Defense of the CommunityReinvestment Act. (Atlanta: Georgia State University, 2010.)
 Ding, Lei, Effects of CRA Designations on LMI Lending, Federal Reserve Bank of Philadelphia, Presenta- tion, Research Symposium on theCommunity Reinvestment Act, February 1, 2019:https://www.philadelphiafed. org/-/media/community-development/events/2019/research-symposium-on-cra/ding.pdf?la=en
 See for example: CRA at 40 Symposium: Cityscape Volume 19, Number 2, HUD (2017); The Communi- ty Reinvestment Act at 40: A Careful Review of the Reviews, Shelterforce, September 14, 2017; The Community Reinvestment Act After Financial Modernization: A Baseline Report, U.S. Treasury Dept., April 2000 (on market failures and externalities that CRA is designed for correct); Revisiting the CRA: Perspectives on the Future of the Community Reinvestment Act, Federal Reserve Bank of Boston and San Francisco (February 2009).
 12 U.S.C. §§ 4562, 4563
 Federal Housing Finance Agency, Enterprise Duty To Serve Underserved Markets, 12 CFR Part 1282 (December 29, 2016).Retrieved from https://www.gpo.gov/fdsys/pkg/FR-2016-12-29/pdf/2016-30284.pdf
 Don’t blame the affordable housing goals for the housing crisis, NCRC, at: https://ncrc.org/ dont-blame-affordable-housing-goals-financial-crisis/
 See more on the program on the Economic Innovation Group website at: https://eig.org/opportunity- zones/resources; and, at the U.S. Treasury website: https://www.cdfifund.gov/Pages/Opportunity-Zones.aspx