During the 1992 presidential debates, independent candidate Ross Perot coined a phrase that perfectly summarizes the Office of the Comptroller of the Currency’s (OCC’s) massive diversion of bank resources from low- and moderate-income (LMI) neighborhoods with its new emphasis on funding infrastructure in its recently issued Community Reinvestment Act (CRA) final rule. While Perot was talking about trade policy, not CRA regulations, whenever you think of the OCC’s fixation on infrastructure, think of this Perotian phrase, “It will be a giant sucking sound,” draining neighborhoods of desperately needed CRA lending and investing.
Over the years, the CRA regulation has included a definition of community development which has focused on affordable housing, economic development and activities that revitalize and stabilize LMI neighborhoods. The OCC for some reason became fixated on infrastructure. The agency added to its definition of community development, the following two criteria in their words:
Essential community facility means a public facility, including, but not limited to, a school, library, park, hospital or health care facility, and public safety facility.
Essential infrastructure means public infrastructure, including, but not limited to, public roads, bridges, tunnels; and essential telecommunications infrastructure, mass transit, water supply and distribution, utilities supply and distribution, sewage treatment and collection, and industrial parks.
Let us stop to think about this for a moment. This list is a comprehensive listing of infrastructure in the United States. Roads and bridges are huge infrastructure projects as are telecommunications and water supply and distribution. This would have quite a large price tag. Would this compete with projects that more directly benefit LMI neighborhoods?
Also, let us think of the original motivations for CRA, which was to combat redlining. NCRC, in a previous post summarizing the 1977 congressional hearings leading to the passage of CRA, highlighted that lawmakers and witnesses were focused on lack of home and small business lending in LMI neighborhoods. Well-targeted community development financing can help promote home and small business lending in LMI neighborhoods. This would include financing that rehabilitates affordable multifamily housing, fixes sidewalks and other neighborhood infrastructure, helps retain and attract businesses, or expands child care centers or health clinics.
In contrast, infrastructure financing that is not directed to formerly redlined neighborhoods will not immediately help them and will instead divert bank financing from these neighborhoods. Examples include large bridges that connect interstate highways, major hospitals that are not located in poor neighborhoods or water treatment plants that serve an entire city.
The OCC may protest that it intends that the infrastructure projects are to benefit LMI neighborhoods. However, the OCC included in its final rule that community development financing can partially benefit LMI neighborhoods. Under the previous OCC rule, this financing must have primarily benefited LMI people and neighborhoods (more than 50% of the financing) with some narrow exceptions like mixed-income housing. Explaining its new final rule, the OCC says that banks would not abuse the partial benefit allowance by stringing together several large projects, each of which have a minimal benefit for LMI people and communities. However, as a hypothetical, what would stop a bank from saying that 15% of the cars have LMI passengers in them that go over a bridge that was financed with a $50 million loan? The partial benefit and infrastructure financing could interact in ways that divert significant financing from LMI neighborhoods.
Another consideration is the unmet needs for infrastructure financing in the United States. Every four years, the American Society of Civil Engineers (ASCE) calculates total dollars needed to finance infrastructure. Their most recent report estimated needs for $4.6 trillion in infrastructure financing. Only 55% of this amount has been financed or identified by the public sector, leaving $2.53 trillion in unmet financing that must be secured by 2025, according to ASCE.
In 2018, the most recent year for which data is available, banks issued $102 billion in community development loans. In a forthcoming report, NCRC estimates that banks also make investments equaling about 35% of the community development lending amount. Thus, the annual level is approximately $137 billion for community development lending and investing.
Comparing $137 billion in annual bank financing for community development with more than $2 trillion in unmet infrastructure needs shows how quickly a large amount of this annual $137 billion could be gobbled up.
Is CRA needed for financing large infrastructure projects? One way to think of CRA is “but for CRA, the need would not be financed.” This makes sense in retail lending because mortgage and small business lending in LMI neighborhoods involve lower dollar amounts than in affluent neighborhoods. Banks have an incentive to neglect the LMI market since they can make more money on fees and commissions for loans with larger dollar amounts. CRA puts the “thumb on the scale” by imposing a mandate to serve LMI neighborhoods and by measuring lending in LMI neighborhoods. It thus leverages increases in lending in LMI neighborhoods.
In contrast, is the CRA “thumb on the scale” needed for large infrastructure financing. It turns out that most infrastructure financing is not done by banks. When examining reports and manuals about infrastructure financing, it becomes evident that state and local governments finance infrastructure through taxes and bond issuances. Also, if one googles bank financing of infrastructure, one is lead to articles of banks, including central banks, financing infrastructure overseas. Over the years, I have reviewed hundreds of CRA exams and cannot recall many large infrastructure projects extolled as examples of community development financing. The community development financing is more focused on LMI neighborhoods.
So one of two possibilities can occur after implementation of the OCC’s CRA final rule. It will either be ineffective in leveraging funding for large infrastructure because banks are just not active in this financing or needed for it, or banks are drawn to investing in bonds that governments issue for infrastructure. In this case, it could be a giant sucking sound from LMI neighborhoods. Moreover, policy experts in infrastructure call for more public sector financing including from the federal government, not bank financing. This means that infrastructure financing may not be the most efficient use of bank resources. At the very least, CRA should not be the policy tool used to generate bank financing for large scale infrastructure. In order for CRA’s statutory purposes to be realized, the focus must remain on LMI neighborhoods.
In addition, could LMI neighborhoods be harmed by banks financing large infrastructure? Credit for large scale infrastructure conjures up memories of “urban renewal” from the 1960s that focused on bridges and highways that destroyed neighborhoods. In Washington, DC, a proposal to build the Three Sisters Bridge would have demolished homes, displaced thousands of residents and decimated communities of color. Community protests accompanied by a lawsuit halted this project in the early 1970s. The OCC did not address how their essential infrastructure addition to community development would not repeat this history. In this context, the new criterion of community development of essential infrastructure is ominous and sadly ironic.
Further, the final rule contemplates allowing banks to support public safety facilities, which include police and fire stations. Historically, local jurisdictions have used tax and bond financing to build and maintain these facilities so it is questionable whether banks are needed. Also, given the high levels of police brutality against people of color, CRA policy must not be involved in financing police stations. There are much more productive and direct ways to use CRA to combat disinvestment.
The poorly conceived addition of infrastructure as eligible community development will at best be under-utilized and at worst a giant sucking sound draining resources from LMI neighborhoods and even threatening some of them with physical destruction. The OCC should have followed the Hippocratic Oath and done no harm by leaving the definition of community development alone.
Josh Silver is a Senior Policy Advisor for NCRC.