In its classically quiet fashion, the Government Accountability Office (GAO) recently released a significant study, Community Reinvestment Act: Options for Treasury to Consider to Encourage Services and Small-Dollar Loans When Reviewing Framework, that grapples with the continuing scarcity of basic banking services and small dollar consumer loans in low- and moderate-income communities. Senator Elizabeth Warren and Representative Elijah Cummings had asked the GAO to examine the CRA and assess how it could be more effective in encouraging banks to offer basic banking services to low- and moderate-income consumers. In response to their requests, the GAO conducted a careful and somewhat plodding study over the last couple of years that in typical GAO impartial style does not come out with strong conclusions but contains insightful data analysis compelling stakeholders to try harder.
The GAO gathered a large amount of data on bank branches and census tract demographics to conclude that residents of low- and moderate-income tracts have as much access to branches as residents in middle- and upper-income tracts in rural areas and large metropolitan areas but not in small metropolitan areas with population of less than 100,000. At the same time, however, low- and moderate-income customers are less likely than middle- and upper-income customers to have a bank account and more likely to use alternative financial service providers for services like check cashing or obtaining small dollar consumer loans.
It seems like half the battle has been waged successfully in achieving better-than-expected access to branches for low- and moderate-income communities but that the other half of the battle, access to banking services for low- and moderate-income consumers, is still being lost. Why is that?
My sense is that access to branches is not as even as it appears. In many large cities, low- and moderate-income neighborhoods are still near central business districts, making it appear they have access to branches when, in reality, the downtown branches could still be inaccessible due to lack of transit or cultural dissonance. A blue-collar worker may not feel comfortable walking into branches utilized by starched shirts.
Furthermore, access was measured as having a branch within two miles. Two miles is likely to be more of an impediment for lower income people with less reliable transportation than their more affluent counterparts.
Even in cases where branches are accessible, there could still be impediments such as the cost of banking services or unfamiliarity and hesitation on the part of lower income people. This begs the question as to what extent banks are marketing themselves to modest income people or designing affordable basic banking services for them.
In response to the GAO interviews some bank representatives commented about the low profit of basic banking services or consumer loans for modest income people. But does low profit mean no profit? Suppose the banks got a little more push from CRA to offer basic banking services and small dollar loans?
The GAO report included a survey of 219 CRA exams of banks of all sizes to see how often different aspects of banking services were examined. The report revealed that just 46 percent of large bank exams scrutinized bank provision of deposit products. However, the GAO did not probe further and investigate whether the exams merely mentioned the products or actually looked at how many were offered to low- and moderate-income people. The frequency of exams looking at consumer lending, including small dollar lending, was even less. Only 25 percent of large bank exams looked at consumer lending while only 3 percent of intermediate small bank and 6 percent of small bank exams evaluated consumer lending.
The paucity of evaluations of basic banking services and small dollar consumer lending is due to the incomplete nature of the CRA regulation. The federal agencies do not require banks to submit data on the number and percentages of bank accounts offered to low- and moderate-income customers. Likewise, the exams do not routinely look at consumer lending and will only do so if consumer lending constitutes a substantial majority of a bank’s loans.
While Congress was considering the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, NCRC worked with members of Congress to insert a provision requiring banks to submit data on deposit accounts by income level of customer so that CRA exams could regularly evaluate bank provision of deposit accounts. Unfortunately, conservative pundits including the late Andrew Breitbart started screaming that this provision would invade customers’ privacy. Just as with the Home Mortgage Disclosure Act (HMDA), the privacy argument is a big red herring. Among other things, the provision had a clause instructing the agencies to collect the data in such a manner as to protect customer privacy. Then Senator Snowe got wind of this “controversy” and succeeded in passing an amendment to delete the data provision. Sunshine on deposit accounts in CRA exams got snowed on to the detriment of low- and moderate-income bank customers.
Despite this episode, I remain convinced that data on deposit accounts and consumer lending that are used on CRA exams would motivate banks to increase their provision of these important services to modest income customers. It is not all that is needed to combat gaps in banking services by income but it would certainly help to expand access. As to the GAO study, it lists improving data on CRA exams as one of the options that the Treasury Department and the federal bank agencies should consider. While not a strongly worded recommendation, the GAO report nevertheless points the Treasury Department and the agencies in the right direction. Over the next few months as Treasury and the agencies consider CRA reform, all of us concerned about access to banking for underserved populations need to keep singing the mantra that data drives the movement for economic justice.