This is the second part of a series of briefs making the case for expansion of the Community Reinvestment Act. The third covered the securities industry.
As a vital part of the financial industry, banks must be engaged in lending and investing in modest income neighborhoods and communities of color if these communities stand a chance of developing wealth and vitality. Yet, if the Community Reinvestment Act (CRA) remains confined to banks, our nation’s underserved neighborhoods will have a harder time revitalizing. Banks are one part of the total financial industry and a shrinking part at that.
Over the last few years, banks’ share of home lending has stood at less than half of total lending. Independent mortgage companies made 56.4% of the home loans and 58.1% of the refinance loans in 2019, according to NCRC’s research. Non-bank mortgage companies, Quicken Loans and United Shore Mortgage, were the largest loan originators in the country with 550,000 and 339,000 loans, respectively.
Mainstream credit unions have also become formidable competitors against banks. Navy Federal Credit Union, for example, cracked the top 25 lenders in the country, offering more than 82,000 loans in 2019. Over the years, bank trade associations have called for CRA to be expanded to credit unions. NCRC agrees with this and also believes that CRA must be expanded to independent mortgage companies as well.
If one segment of the lending industry complies with CRA while the other segments do not, this ultimately will make lending to underserved communities more difficult. The non-CRA covered institutions can skim the most profitable parts of the market and focus their lending on the most affluent borrowers. Although lenders have made safe and sound loans to modest-income borrowers for decades, they do not make as much profit or fees off of these loans due to smaller loan balances. Thus, CRA has applied the thumb of regulatory pressure to make sure modest-income borrowers are served. However, if a large part of the lending sector remains outside of the CRA realm, the lenders complying with CRA could lose market share since they cannot serve the affluent market with abandon.
Since insurance companies are intimately connected with the lending process, they also need to comply with CRA’s reinvestment and fair lending policies. If they do not, they could become obstacles to lending in modest income neighborhoods by making it more difficult for lenders to offer home mortgage loans to households that cannot obtain private mortgage insurance or property insurance.
So how would CRA be applied to non-bank institutions?
Applying CRA to Non-Bank Institutions – Mortgage Companies and Credit Unions
For decades, the state of Massachusetts has been implementing a state CRA law, applying it to banks, independent mortgage companies and credit unions. The law is a good model for how to apply CRA to non-bank lending institutions.
Mortgage companies chartered in the state of Massachusetts and mortgage companies chartered in other states, but operating in the state, undergo periodic CRA exams. They can earn one of five ratings: Outstanding, High Satisfactory, Low Satisfactory, Needs to Improve and Substantial Noncompliance. The federal bank agencies use a rating scale with only four ratings that combines High and Low Satisfactory into a singular Satisfactory rating. NCRC has advocated for five ratings as a means for better distinguishing lender performance and encouraging lenders that are significantly below High Satisfactory performance to do better. Currently, the federal ratings system does not realize its potential in terms of motivating improved performance by awarding about 90% of lenders with a Satisfactory rating, even though it is unlikely that such a high percentage of banks perform in a similar manner.
The mortgage companies examined by Massachusetts have a lending test that is similar to banks. The test measures the number and percentage of home loans issued to low- and moderate-income (LMI) borrowers and communities. The test makes comparisons among the percentage of loans to LMI borrowers, the percentage of the population that is LMI and the percentage of loans to LMI borrowers issued by other lenders in the area. Like federal CRA exams, the Massachusetts exams also scrutinize the extent of innovative and flexible loan practices such as offering loans with low down payment requirements.
Massachusetts CRA exams for mortgage companies and banks have sections that are more rigorous than federal exams in terms of fair lending reviews and examination for abusive lending. The Massachusetts lending tests have a section called “loss of affordable housing” that probes whether abusive lending as reflected in high delinquency and default rates has caused LMI borrowers to lose affordable housing. A particular mortgage company’s delinquency and default rate is compared against industry peers. In addition, a fair lending review compares a mortgage company’s percentage of applications from racial and ethnic groups to peer lender percentages. NCRC has been recommending that federal CRA exams contain these sections that Massachusetts’ exams have had for several years.
The Massachusetts’ exam for mortgage companies also includes a service test and an optional investment test. The service test considers the level of community development services such as financial education that prepare borrowers for receiving loans. The service test also looks at how the company delivers loans whether it is through the phone and internet and whether branch locations are in LMI census tracts. The optional investment test assesses the level of grant making and community development investments that support affordable housing. The optional investment test appears on only a few exams; a good case can be made for mandatory inclusion to stimulate grants and investments that support the issuance of safe and sound loans. The service test is a valuable element in that it establishes expectations that mortgage companies must market to underserved populations and locate branches in LMI tracts.
Credit Union CRA Exams Tailored for their Size and Field of Membership
NCRC has advocated that CRA be extended to mainstream credit unions for several years. In the mid-2000s, NCRC published reports showing that credit unions trailed banks in the percentage of loans they issued to underserved populations. The credit union lobby vehemently opposed efforts to extend CRA to credit unions, claiming that the credit union business models do not lend themselves to CRA exams.
In spite of the noise and heat in the nation’s capital over CRA for credit unions, Massachusetts has been quietly applying CRA to credit unions of various asset sizes from a few million dollars to several hundred million dollars. The exams vary based on the size and complexity of the credit union.
Some credit unions define their membership based on a specific employee group or religious or civic institution. Under Massachusetts law, these credit unions define their assessment areas to be their field of membership, such as firefighters wherever they live, instead of a geographical area. Other credit unions define their field of membership to be one or more counties. These credit unions designated the county or counties as their assessment area. For those credit unions that have no geographical assessment areas, the lending test looks at the distribution of loans to borrowers only and discards an analysis of distribution of loans to census tracts. The geographic-based credit unions, in contrast, have a lending test that looks at both the distribution of loans to borrowers and census tracts. Lastly, smaller credit unions have just a lending test while larger ones have a lending test and a community development test that looks at community development services, loans and investments.
Create a Data Reporting Requirement for Insurance Companies and Base CRA Exams on the Data
CRA can be readily applied to mortgage companies and credit unions because a substantial majority of these institutions publicly report Home Mortgage Disclosure Act (HMDA) data on their lending activity by demographic characteristics of their borrowers. In contrast, the insurance industry is not subject to a comprehensive data reporting requirement. However, precedents for this type of data collection exist.
From 1999 through 2012, major private mortgage insurance (PMI) companies voluntarily reported HMDA-like data that the FFIEC assembled and made publicly available. The data revealed the number of applications received, approved and denied by demographic characteristic of borrower and the census tracts in which they resided. In the last year of disclosure, five major PMI companies disclosed this data, including CMG Mortgage Insurance Co., Genworth Mortgage Insurance Co., Radian Guaranty Inc. and United Guaranty Co. The data enabled the user to look at metropolitan level activity. For example, in Akron, Ohio, during 2012, one PMI company insured one African American applicant in contrast to insuring 118 of 144 White applicants. Comparisons on CRA exams could be made among PMI companies, banks and demographics in terms of the number and percent of policies made to various groups of borrowers and census tract categories.
Property insurers, unlike PMI companies, have not voluntarily reported their data to a federal agency. However, a few state insurance commissioners have instituted data reporting requirements. In a paper published in the early 2000s, Greg Squires documented that eight states required property insurers to provide data to commissioners while four of these states had various levels of public data disclosure. Some states made data publicly available on policies written and cancellations as well as premium and loss data. The public disclosures varied on whether the data on individual companies was made available versus industry-wide disclosure. The level of geographical detail also varied. While this paper was published several years ago, it nevertheless points to an important precedent regarding data disclosure for property insurers.
If homebuyers cannot obtain PMI or property insurance, their home purchases cannot be completed. Therefore, CRA applied only to lenders will be insufficient to ensure that unfair practices or policies do not exist that impair the ability of modest-income or people of color from purchasing homes. CRA should also be applied to automobile insurers and other types of insurers that facilitate car ownership and other daily necessities. CRA exams can be designed to assess retail activities via tests like the lending test and can assess community development financing and services through a community development test.
CRA must be expanded broadly throughout the financial industry because the industry is the custodian of community and consumer wealth. The wealth must be reinvested in a manner that benefits communities instead of harming them or even extracting wealth from them through predatory lending. Because the financial industry is the guardian of our wealth, it has received a considerable amount of federal subsidies and guarantees, further undergirding the public responsibilities the industry owes to communities. Lastly, non-bank lending institutions and insurance companies must have a CRA obligation because if they continue to operate outside of CRA, the competitive position of banks eventually will be undermined to the detriment of access to safe and sound credit and capital for LMI communities.
Josh Silver is a senior policy advisor at NCRC.