The Kresge Foundation, March 18, 2020: Mission, Money & Markets: Changes to Little-Known Banking Law Could Suck Billions Out of Poorer Communities
By Jesse Van Tol, CEO of National Community Reinvestment Coalition
For decades, African Americans, immigrants and people with low wealth of all races and backgrounds couldn’t borrow money to buy homes or grow small businesses. Starting at least in the 1930s, banks, real estate agents, local officials and surveyors from the federal government labeled their neighborhoods “hazardous” and marked those neighborhoods with red lines on maps.
The “redlining” of whole neighborhoods was devastating for millions of working families in virtually every city and town nationwide. They were intentionally and systematically excluded from the American dream, unable to get bank credit to make purchases that would have allowed them to accumulate wealth and pass it on to their children the way white families could.
Congress took an explicit step against redlining when it passed the Community Reinvestment Act (CRA) in 1977, requiring banks to serve all communities, particularly low- and moderate-income ones. The law was simple. It required banks to lend money in the communities where they had branches and took deposits, including the poor ones. Banks could no longer siphon deposits out of low-wealth neighborhoods to reinvest in wealthier ones.
In January, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) published a plan to rewrite the rules banks must follow to comply with the CRA. The proposed rule changes are flawed in many ways. But the bottom line, for lower-income communities and foundations that seek to strengthen them, is that the proposal would significantly weaken a law that accounts for tens of billions of dollars of loans and philanthropic support every year. Although little known outside of banking and housing circles, the financial impact of CRA on communities and nonprofits that serve them rivals the $427 billion in annual charitable giving from all sources and for all causes in the U.S. (including $76 billion from foundations in 2018).
There is no doubt that the rule changes proposed by the government would diminish the effectiveness of a law that was desperately needed when it was enacted and which remains essential to ensure banks meet the credit needs of all communities where they take deposits, not just the wealthy ones.
That’s wrong, entirely counter to the purpose of CRA — and it threatens families, entire communities and nonprofit grantees that foundations care about.
To learn more about CRA, visit TreasureCRA.
