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‘There you go again’ – CATO Institute joins chorus of falsehoods levied at the Community Reinvestment Act

In the Age of Fintech and Bank Competition,1CATO Policy Analyst Diego Zuluaga maintained that the Community Reinvestment Act (CRA) should be repealed and replaced with a system of tradable credits. He started off his argument by asserting that the rationale for CRA is outdated since branching restrictions and other regulations that constrained competition have been lifted from banks. However, he neglected the nine-decade history of redlining and segregation that created structural barriers to access to credit and capital in low- and moderate-income (LMI) and minority neighborhoods that needed to be addressed by CRA as well as with other laws and policies. He then asserted that CRA has not successfully increased access to loans for LMI and minorities and that CRA lending is risky. He alleged that CRA has, in fact, intensified the displacement of minorities from gentrifying neighborhoods. The overwhelming body of research demonstrates that CRA has not only increased safe and sound lending to minorities and LMI borrowers and neighborhoods, but that it is doubtful that CRA accelerated displacement in gentrifying neighborhoods because of this increased lending to people of color.

Zuluaga repeated common and discredited arguments that CRA imposes regulatory burden and costs that have led to branch closures and, therefore, have increased the number of unbanked people and banking deserts. The evidence for this allegation is paper-thin since the Federal Deposit Insurance Corporation (FDIC) has found that branching per capita has actually increased over2 the decades. In addition, Zuluaga maintained that CRA has politicized the merger approval process by substituting the opinions of regulators and community groups for those of banks. The merger approval process has even promoted monopoly, according to Zuluaga, by encouraging banks to negotiate with community groups over ill-considered agreements to increase lending and investing in underserved communities. The evidence again does not support these assertions since the vast majority of merger approvals do not involve agreements with community groups and the relatively few agreements have resulted in increases in safe and sound activity in traditionally underserved communities.

Lastly, Zuluaga proposes a system of tradable credits that would introduce inefficiencies associated with credit allocation with which he is so seemingly concerned and thereby adding an additional contradiction to his claims. Ideological approaches seldom solve real-world problems like redlining.

Introduction

In the presidential debates against Jimmy Carter preceding the 1980 election, then-candidate Ronald Reagan responded to some of Carter’s points by saying, “There you go again.” Over the years, Reagan would employ this slogan to defang debate opponents, and disarm and discredit their positions.

It is fitting to use the Gipper’s quote in response to the latest screed against CRA. Every so often, opponents of CRA will repeat discredited arguments to assert that the law has failed in its mission to expand lending to LMI people and communities and instead merely imposes costs on banks. Zuluaga conjured up every possible anti-CRA argument, embellished some, and even seemed to invent a few of his own. The alchemy, however, failed and offered fool’s gold as the antidote to ongoing disparities in access to credit and capital. There you go again, Zuluaga.

Rationale for CRA

Zuluaga asserted that CRA is outdated because its rationale no longer applies. When Congress passed CRA in 1977, banking law and policy effectively created an oligopoly for banks by restricting branching across state lines or even branching within states. Certain regulations such as regulation Q also created opportunities for banks to extract “rents” or excess profits from consumers by restricting the interest rate offered on-demand deposits. Since these laws enabled banks to extract excess profits from consumers and protected banks from vigorous competition, CRA required a quid pro quo: banks would have to reinvest deposits back into the local communities. However, now that Congress opened up branching across state lines in 1994 and Regulation Q was repealed, CRA is not needed to protect local consumers by requiring that banks reinvest in local communities. According to Zuluaga, the increased competition among banks will take care of consumer needs.3

There you go again. If only life was this simple. Repeal some regulations and all problems will be solved.

Unfortunately, the public and private sectors systematically engaged in redlining over decades, creating structural barriers to lending in neighborhoods that will likely take decades and multi-pronged approaches to tear down. Richard Rothstein, in his book, The Color of Law, described how federal, state and local law created redlining and discouraged both Federal Housing Administration (FHA) and conventional lending from serving communities of color.4 Reflecting the racial attitudes of the time, the private sector readily complied. As a result, the neighborhoods that were originally redlined remain predominantly lower-income and minority, according to NCRC research.5 It will take not only CRA but comprehensive reforms to public sector laws including restrictive zoning laws and reforms to private sector practices to successfully address redlining, segregation and discrimination.

Zuluaga acknowledged that “informational asymmetries” may impede lending and the provision of banking services in LMI communities but he erroneously concludes that CRA cannot overcome information barriers. Redlining over the decades has caused markets to be under-developed in LMI communities. In other words, lenders do not have readily available information on borrower and housing stock characteristics such as borrower creditworthiness, appraisals or physical housing conditions. CRA compels banks to serve LMI communities and make efforts to acquire information and data enabling them to lend and serve these communities. However, Zuluaga asserted that since CRA applies its obligation to geographical areas where banks have branches, CRA is redundant because the bank branches are already acquiring information on borrower and housing stock characteristics.6 He overlooks, however, the motivational factor of CRA. In the absence of CRA, a bank may be much more devoted to using its branches to serve middle- and upper-income communities than LMI communities. A branch in a LMI community, in the absence of a CRA obligation, could be content to collect deposits but not make an effort to acquire information and data with which to overcome information barriers to lending. This is, in fact, what happened all too often before CRA’s passage when branch personnel would tell residents of LMI communities that they were not authorized to lend in their communities.7

Was CRA successful?

CRA has increased access to loans

Zuluaga maintained that CRA failed in its mission to increase access to credit for LMI borrowers and communities. Interestingly, he grudgingly contradicted his assertion in the opening pages of the white paper by acknowledging that the 1995 regulatory reforms to CRA which introduced more objective measures of performance “appeared” to have increased lending. Indeed these reforms did increase lending. From 1993 through 1998, the Department of Treasury documented that home mortgage lending to LMI borrowers and communities increased at double the rate than middle- and upper-income borrowers and communities (39% versus 17%).8 

When a census tract gained eligibility as an LMI tract due to a metropolitan area boundary change, Federal Reserve economist Daniel Ringo found that lending by a single bank increased by 2% to 4% from 2003 to 2004. Moreover, Ringo found that the impact was greatest for low-income borrowers, those with less than 50% of area median income, than for moderate-income borrowers, those with between 50% to 80% of area median income. He hypothesized that banks face less competition in extending loans to low-income borrowers than to moderate-income borrowers, so efforts to increase lending to these customers–prompted by the new CRA eligibility of the tracts–were more effective at filling unmet demand9 

Similarly, Lei Ding and colleagues at the Philadelphia Federal Reserve Bank updated Ringo’s analysis and applied it to Philadelphia when the Office of Management and Budget (OMB) changed metropolitan area boundaries in 2013. They concluded that when census tracts lose CRA eligibility because they are no longer considered LMI, the number of home purchase loans decreases between 10% to 20%.

10 Ding, Bostic and Lee found a similar impact in small business lending.11

By examining and rating banks, CRA has motivated increases in lending because the law holds banks publicly accountable for lending, investing and providing bank services to LMI borrowers and communities. In contrast, mortgage companies, financial technology companies (fintech) and credit unions do not have publicly available CRA evaluations and hence cannot be held accountable for serving LMI borrowers and communities. Zuluaga, however, maintained that the nonbanks make a higher percentage of their loans to LMI borrowers and communities than banks. He based his argument on the retreat of very large banks from government-insured lending and the reliance of large independent mortgage companies on this same lending.12 However, when the typical bank is compared to the typical mortgage company or credit union, NCRC found that the typical bank makes a higher percentage of loans to LMI borrowers and communities. In other words, a higher percentage of banks make a higher percentage of their loans to LMI borrowers and communities than mortgage companies and credit unions.13

Furthermore, Zuluaga probably did not want to admit in the case of large banks compared to mortgage companies that the mortgage company advantage is largely due to a public sector intervention, that is, government-insured loans. Finally, comparisons to banks and fintechs cannot be made conclusively due to lack of data. Most fintechs are not mortgage lenders but instead, make small business or consumer loans and do not publicly report data. Limited evidence suggests from a review of CRA exams, that banks with a fintech model (no branches) do not perform well in making mortgage loans to LMI borrowers and communities.14

CRA promotes safe and sound lending

Zuluaga continued his line of attack on CRA by saying not only has CRA failed to increase access to credit, but it has promoted risky lending. On its face, this assertion is contradictory. If CRA was not successful in increasing bank lending to LMI borrowers and communities, then how could it have pressured banks to make lots of risky loans? To compound the logical flaw in the argument, the overwhelming evidence concludes that CRA lending is safe and sound. The CRA statute requires it.15 And federal agencies, banks and community groups that work with banks have acted to uphold this statutory requirement.

Laderman and Reid of the Federal Reserve Bank of San Francisco used the Home Mortgage Disclosure Act (HMDA) data and other data to control for a wide range of lender, borrower and loan characteristics. They found that loans issued by banks were about half as likely to result in foreclosure as loans issued by non-CRA covered mortgage companies during the time period of 2004-2006, the height of subprime and irresponsible lending. Laderman and Reid suggested that the retail bank branch channel contributed to safer and sounder loans than wholesale channels commonly employed by mortgage companies.16

Similar to Laderman and Reid, Federal Reserve economists Bhutta and Canner analyzed the 2005 and 2006 HMDA data and found that just 6% of all higher-priced loans were issued by banks in their assessment areas to LMI borrowers or census tracts. In other words, 94% of all higher-priced lending (a proxy for subprime lending, according to Bhutta and Canner) were made by mortgage companies or banks outside of their assessment areas and thus had nothing to do with trying to serve LMI borrowers for CRA compliance purposes.17

After the crisis, key policymakers on both sides of the aisle affirmed that CRA had been a positive force in communities and had little to do with the financial crisis. Citing the Canner and Reid studies, Federal Reserve Governor Randall Kroszner, an appointee of President George W. Bush, and the Financial Crisis Inquiry Commission (FCIC) concluded that CRA did not contribute to the crisis.18 The FCIC states “The Commission concludes the CRA was not a significant factor in subprime lending or the crisis.”19 Similarly, Bush appointees John Dugan, who was the Comptroller of the Currency, and Sheila Bair, former FDIC chairperson, stated that CRA did not cause the crisis.20

Zuluaga rested his case regarding risky lending primarily on one study that was widely discredited because the analyst included lending not considered in the geographical areas on CRA exams and focused on an increase in LMI lending shortly before CRA exams even though such lending is not often on exams due to time lags in the release of publicly available data.21 The focus on a few critical studies of CRA is similar to the climate science debate where 98% of the studies say global warming is a major issue while 2% doubt it. Zuluaga hung his hat on the 2%. There you go again.

Zuluaga tried to build his case about risky lending motivated by CRA by quoting from NCRC. In particular, Zuluaga took aim at community benefits agreements (CBA) or CRA agreements that are negotiated in the context of a merger application. Bank merger law requires banks to achieve a public benefit as a result of their merger instead of the merger causing declines in lending, branching or increases in prices for bank services.22 Some banks have negotiated CBAs with community groups as a way of promising that they will increase their lending, investing, branching and service to communities in the wake of their mergers.

Zuluaga took NCRC quotes out of context when he asserted that we touted “higher debt-to-equity ratios than . . . conventional loans,” “flexible underwriting standards” and “low or no down payment[s]” as provisions in CBA agreements. He concludes that “Raising loan-to-value ratios, relaxing borrower standards and pushing secondary market institutions to buy more bank loans all make lending riskier.23” He attempted to link CBAs with the financial crisis and the risky lending government-sponsored enterprises (GSEs) financed for LMI populations. He states that “the $4.5 trillion in CRA commitments between 1992 and 2007 tracks closely with the excess in affordable housing loans made by the GSEs. Pre-crisis accounts of the CRA’s “success” support this hypothesis, as they focus on the growth of LMI lending and homeownership, rather than the CRA’s suitability for borrowers or its implications for bank safety and soundness.”24 

Zuluaga’s sleight of hand indicated his primary interest in discrediting CRA rather than understanding how it works or objectively analyzing the available data and studies on it. The large figure he quotes for CBAs includes investments in economic development, small business creation, community service facilities, multifamily lending and single-family lending. It is thus fallacious to attempt to correlate dollar amounts in CBAs with GSE financing of single-family lending during this time period. Secondly, the special affordable housing lending that featured lower down payments and underwriting flexibilities have involved partnerships among banks, nonprofit counseling agencies and community-based organizations. These partnerships and programs have been operating for decades and ensure success by carefully preparing homebuyers through intensive counseling.

A Federal Reserve Board report required by Congress found that these CRA special affordable programs dedicated to serving LMI populations were prudent in terms of their size; they were a small portion of banks’ lending portfolio.25 Moreover, the majority of the programs had low delinquency and default rates. The median charge-off rate was zero, meaning that defaults were successfully avoided.26  More recently, I had an opportunity to examine a special affordable housing program offered by a local nonprofit developer and housing counseling agency. I found that the foreclosure rates of homeowners in this program were considerably lower than foreclosure rates experienced by District of Columbia residents overall during a multi-year time period that included the financial crisis.27 In contrast to Zuluaga’s assertions, CRA-related programs are conducted carefully and serve LMI borrowers and communities in a responsible and safe and sound manner.

CRA is not restrictive

A favorite bug-a-boo of right-wing economists is that any government intervention automatically decreases efficiency and decreases the market’s optimal allocation of resources; only the market magically maximizes consumer satisfaction and provides sufficient capital for investment. One theme that Zuluaga brought up a few times is that CRA implicitly requires a ratio of loans to deposits.28 CRA, therefore, interferes with market efficiency because there are instances in which banks seek to make investments beyond their branch and deposit base that would either earn high returns and/or serve an economically distressed area.

CRA does not allocate credit

Zuluaga overlooked Senator William Proxmire’s insistence that CRA was not designed to allocate credit nor tell banks where and how to lend. In the first draft of the bill, banks were required to designate a primary service area in which they anticipated they would receive more than one-half of their deposits. They were then supposed to indicate the proportion of loans that they would reinvest in and how they were meeting the needs of their primary service area.29 After listening to concerns about credit allocation, Senator Proxmire dropped this provision.

He stated that “[The proposed CRA bill] does not provide for credit allocation. To criticize reinvestment incentives as a form of credit allocation is disingenuous. It would not allocate credit, nor would it require any fixed ratio of deposits to loans. But it would provide that a bank charter is indeed a franchise to serve local convenience and needs, including credit needs.”30

Today, CRA exams scrutinize geographical areas where banks take deposits and make loans, but they do not require any explicit or implicit loan-to-deposit ratio in any specific geographical area. Instead, CRA exams evaluate lending, investment and bank services across a wide variety of geographical areas, including states, metropolitan areas and rural counties to ensure that banks are meeting needs in a diversity of areas instead of focusing on mechanistic loan-to-deposit ratios. CRA examiners are required to use performance context analysis to ensure that banks are meeting a multitude of needs and will favorably assess situations where banks are making investments to revitalize distressed areas including those where they are not receiving significant levels of deposits.31 This is not an exam regime that interferes with market efficiency or cuts off bank opportunities to pursue investments that enhance the public welfare.

CRA does not restrict bank product offerings or branching

According to Zuluaga, CRA not only restricts geographical areas served by banks but also the types of loans and services banks can offer to consumers. He noted that since CRA exams mostly focus on home mortgage and small business loans, CRA exams dissuade banks from making consumer loans and other types of loans that respond to consumer needs.32 He neglected that CRA also examines bank lending and investments for multifamily affordable housing, economic development and community service facilities.33 Moreover, consumer lending, including credit cards and car loans, are also evaluated on CRA exams. A valid question is whether CRA exams scrutinize these types of loans often enough. NCRC has advocated for more frequent evaluation of these loans, particularly credit card lending by major credit card banks, which are often not on CRA exams.34 However, instead of reforming CRA exams to improve them, Zuluaga was mainly interested in criticizing and damming CRA in an effort to advocate for its repeal.

Zuluaga maintained that CRA’s restrictions on bank branching reduces consumer choice, increases banking deserts and the number of people that are unbanked and underbanked. However, he incorrectly asserted that agencies have the authority to close branches that are primarily in the business of deposit production and do not make sufficient loans to the local community.35 This is an interesting allegation because in my career that has spanned three decades, I have not encountered a single case of a federal bank agency forcing a bank to close a branch. On the contrary, agencies are careful to avoid incurring inefficient outcomes by imposing costs on bank entry and exit from markets. For example, federal agencies do not order banks to keep open unprofitable branches. Instead, when a bank wishes to close a branch in a LMI community, federal agencies will hold hearings on the request of affected communities to explore alternatives to branch closures that do not leave communities bereft of banking services.36 For example, banks will sometimes keep the branches open to see if new marketing campaigns can increase usage or banks will sell or donate the branches to credit unions or community-based financial institutions.

CRA does not create inefficiencies in the agency merger approval process

As a coup de grace crowning his arguments about CRA’s restrictiveness, Zuluaga implied that community groups have successfully hijacked bank merger policy and have encouraged regulatory agencies to approve anti-competitive mergers as long as banks make splashy commitments to make risky loans to LMI people and communities. He stated, “Indeed, groups such as the National Community Reinvestment Coalition have explicitly linked periodic waves of bank mergers to increases in those banks’ commitments to lend, suggesting that the merger would not have taken place without the banks’ lending promises.”37 He continued that “The CRA has thus become a tool of industrial policy, rewarding institutions for meeting political goals and threatening to punish those perceived to have fallen short.” Finally, “banks were willing to spend heavily (on CRA lending commitments) to please their regulators once branching liberalization increased merger and expansion opportunities.”38

Since 1956, bank merger law has required banks to demonstrate a public benefit as a result of their merger activities. The federal government has been sensitive to the issue of monopolies or oligopolies in the wake of mergers that increase prices and reduce lending and branching for communities. Recent research, in fact, reinforces the harm of branch closures after mergers as evidenced by significant decreases in small business lending in LMI communities for years after mergers.39 Community groups are motivated to negotiate CBAs with banks not to pursue inefficient or political industrial policy but to commit banks to avoid branch closures and lending decreases after mergers. Some banks, not all, are motivated to negotiate CBAs because they are mindful of the public benefit requirement in bank merger law. It is ludicrous to assert that community groups have promoted monopoly by giving banks an easy way via CBAs to get their merger approved. If Zuluaga was really concerned about monopolistic banking markets, he would do well to research federal agency bank merger policy and practice. The vast majority (almost 100% of bank mergers) are approved and the vast majority of mergers are approved without CBAs. From 2014 through the first half of 2018, the Federal Reserve Board approved 5,054 mergers and other applications and only denied one.40 The relatively few CBAs that community groups are able to negotiate with banks are designed to preserve the public benefit requirement of merger law.

CRA does not force banks to make unprofitable loans to LMI borrowers

According to Zuluaga, the upshot of all of this government coercion is that banks are forced to make loans to LMI people and communities that are more expensive, less profitable and more likely to default than loans to middle- and upper-income people and communities.41 However, banks would likely make loans to LMI people and communities in the absence of CRA but it is likely that lending would drop by 10% to 20% to these populations as estimated by the Federal Reserve of Philadelphia.

Lending would decline to LMI borrowers in the absence of CRA not because the lending is unprofitable but because the underwriting math does not favor LMI people due to lower loan amounts. If a bank had a choice of lending $1 million to one affluent homebuyer or ten $100,000 loans to LMI homebuyers, many of them would favor the one affluent homeowner. The $1 million loan incurs origination costs (which can equal a few percentage points of the loan) only once whereas origination costs are incurred ten times for the LMI borrowers. In addition, the origination costs will be modestly higher for the LMI borrowers not because they are necessarily less creditworthy but due to the information barriers and redlining legacy in LMI communities. Thus, without CRA, it is likely that LMI neighborhoods and borrowers will remain significantly underserved.

CRA is not insisting that banks engage in unprofitable activities. A Federal Reserve report to Congress found that a survey of banks indicated that 70% of them did not experience a difference in charge-off rates between CRA loans and non-CRA loans. Also, more than half of banks said origination and servicing costs on CRA and non-CRA loans were about the same. However, that left a significant number of banks reporting higher origination and servicing costs and hence lower profitability on CRA loans.42 

 This does not mean that CRA loans were huge money losers or had high default rates.

In any market activity, some segments of the customer base will be less profitable than others. However, if the suppliers of products only provided products to the more profitable consumers, they would ultimately pass up money-making opportunities (lower profits serving a less profitable customer segment nevertheless still entails money-making opportunities). Also, the country as a whole would experience less welfare since a segment of the population would not have its needs met. When discrimination and redlining have contributed to information barriers and a significant part of the differences in profit, a market outcome without government intervention is inefficient and results in welfare losses for society as a whole. Hence, CRA requires banks to overcome information barriers and serve all segments of the population that are creditworthy.

CRA does not drive displacement associated with gentrification

Zuluaga introduced another contradiction concerning his argument that CRA is forcing banks to make loans to LMI borrowers. In a companion op-ed published in Politico, Zuluaga maintained that CRA is exacerbating gentrification and displacement of LMI people by encouraging banks to make loans to middle- and upper-income borrowers in LMI tracts.43 Banks can currently receive CRA points for making loans to borrowers of any income group in LMI tracts.

So which is it – is CRA forcing banks to make loans to LMI borrowers or motivating banks to load up on loans to middle- and upper-income borrowers in LMI tracts. Zuluaga probably did not mind the inconsistencies in his arguments as long as one of them convinced the stakeholders he was trying to persuade. However, on the face of it, his gentrification argument is not convincing. If gentrification was a nationwide phenomenon associated with massive amounts of displacement of LMI people, he may have a point. However, NCRC has found that gentrification associated with displacement is primarily a big city and coastal phenomenon.44 Also, it is more likely that demographic change in gentrifying neighborhoods is driven more by demand factors (middle- and upper-income younger people wanting to locate in city neighborhoods) than supply factors (CRA-driven banks trying desperately to lend to middle- and upper-income people in LMI tracts). It is interesting that an analyst working at a libertarian think tank did not even consider the market-driven nature of gentrification. There you go again!

The thesis that banks are loading up on lending to middle- and upper-income borrowers in LMI tracts is contradicted by Ringo’s study cited above that CRA is effectively encouraging banks to lend to low-income borrowers in LMI tracts.

Nevertheless, a discussion about prudent changes to CRA in the case of gentrifying neighborhoods is a valid discussion to have when it is not pointed towards tearing down the law. Zuluaga was probably not aware that the agencies already have guidance discouraging banks from financing activities that primarily displace LMI people.45 Moreover, NCRC has proposed that the agencies identify gentrifying census tracts in a manner similar to our research. After identifying gentrifying tracts, CRA exam procedure can place limits regarding the extent to which loans to middle- and upper-income borrowers count in the gentrifying tracts as suggested in NCRC’s letter on the Advance Notice of Proposed Rulemaking (ANPR).46

CRA’s cost does not decrease bank branching or lending

Another mantra repeated by Zuluaga was that CRA’s regulations entail so much cost on banks that “growing regulatory expenses contribute significantly to the rising cost of operating bank branches, increasing the likelihood of branch closures and contributing to the spread of banking deserts.”47 

But there you go again! The application of logic immediately casts the plausibility of this assertion into doubt. Zuluaga cited a Federal Reserve Bank of St. Louis study saying that CRA contributes to 7.2% of a bank’s compliance costs but that other regulations such as the Bank Secrecy Act (BSA) impose higher compliance costs.48 In addition, CRA is over forty years old and it seems implausible that CRA has stifled home mortgage lending or bank branching over such a long time period. In fact, branch density or branches per capita actually increased over the decades. The number of branches more than doubled from 1970 through 2014 while population growth in the United States was 50%. Even in more recent years with the increase of mobile and on-line technology, branch density was higher than in previous years.49

Another flaw in Zuluaga’s regulatory cost argument was that he only discusses costs but does not assess whether CRA’s benefits outweigh those costs. A standard cost-benefit analysis applied to CRA would most likely determine that benefits significantly outweigh costs, even for just one activity such as home mortgage lending. For example, if CRA increases bank home mortgage lending in LMI tracts by a magnitude of 10% to 20%, it would seem that the profit associated with this increase would exceed the relatively low CRA’s cost of 7%. Banks would likely incur a significant amount of CRA’s costs even in the absence of CRA since banks would still likely collect internal data on their lending and investing activity to LMI borrowers and neighborhoods. Banks collect data because they want to track the performance of their loans and they want to know how well they are faring in various lending markets. So while not denying that regulations impose costs, a full cost-benefit analysis is needed before hurling outlandish criticisms at CRA. Not only do the benefits exceed the costs for banks, but the benefits to society in narrowing racial and income disparities in lending are significant.

Tradeable obligations are not a serious CRA reform

Zuluaga said if CRA is to remain in place, he would rather see a system of tradable obligations than the examination process now in place that he regards as subjective and difficult. Under his tradeable obligation regime, the federal agencies would quantify the credit needs of each assessment area, which would then help determine a bank’s obligation. The bank would presumably be assigned an obligation in terms of a dollar amount of activity. The bank could either lend, invest or offer bank services equal to the dollar amount or would sell its obligation to another bank.

This proposal, however, encounters all of the problems associated with credit allocation that Zuluaga sought to avoid. How would the agencies quantify credit needs? Calculating a dollar amount of credit need is extraordinarily difficult if not impossible. For example, are we to assume that there is a credit needs gap if the number of loans issued to LMI borrowers is less than the number of creditworthy LMI borrowers in a locality? And how would an agency measure the number of creditworthy potential borrowers? Next, how would an agency calculate the dollar gap associated with the number of missing community development investments? Would an agency use data on the number of vacant and dilapidated housing units or data on poverty and unemployment to calculate a dollar amount of needed community development investments? Trying to derive this figure is nearly impossible because an investment in one community needed for successful revitalization could be very different than an investment in another community due to differing economic and demographic conditions and characteristics. And then if an agency somehow manages to quantify credit and community needs via a dollar figure, how would the agency apportion this need to various banks. Would it be done based on market share? Zuluaga made a reference to using deposit market share.50 But doesn’t this restrict bank lending and investing activity based on deposits, which is anathema to Zuluaga? Zuluaga sought to tear down CRA’s existing evaluation methods for a system that would result in massive credit allocation and market inefficiencies.

In contrast, the current evaluation system for CRA is sensible and flexible enough to accommodate different bank business models. Let’s use an example of a metropolitan area with a housing stock that is old and in need of repair. Let us also assume that the housing stock is affordable but that unemployment is relatively high. In this area, the examiners will be looking to see if banks are responsive to need in terms of offering home improvement and repair loans. In addition, they may be looking to see if banks are engaged in job training or creation efforts. If a bank is not a home loan specialist, the examiner will not force or expect the bank to engage in home improvement lending. Instead, the examiner will see if the bank is either making small business loans or financing community development in some other manner such as purchasing municipal bonds for infrastructure development. This seems like a much simpler and straightforward examination regime that takes into account needs as well as bank business models than the convoluted tradeable obligations proposed by Zuluaga.

It just goes to show you that before you seek to tear down a law that has been quite successful and sensible for a new approach that makes no sense, perhaps you ought to try to understand the existing system first. Ideological approaches seldom solve real-world problems like redlining.

Josh Silver, Senior Advisor, Policy and Government Affairs, NCRC

Photo by Em Taylor on Unsplash


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  1. Diego Zuluaga, The Community Reinvestment Act in the Age of Fintech and Bank Competition, in Policy Analysis, July 10, 2019, Number 875, CATO Institute, https://object.cato.org/sites/cato.org/files/pubs/pdf/pa-875-updated.pdf
  2. Zuluaga, p. 11.
  3. Diego Zuluaga, The Community Reinvestment Act in the Age of Fintech and Bank Competition, in Policy Analysis, July 10, 2019, Number 875, CATO Institute, https://object.cato.org/sites/cato.org/files/pubs/pdf/pa-875-updated.pdf
  4. Richard Rothstein, The Color of Law: The Forgotten History of How Our Government Segregated America, https://www.epi.org/publication/the-color-of-law-a-forgotten-history-of-how-our-government-segregated-america/
  5. Bruce Mitchell and Juan Franco, HOLC “redlining” maps: The persistent structure of segregation and economic inequality, https://ncrc.org/holc/
  6. Zuluaga, p. 12.
  7. Community Credit Needs: Hearings on S. 406 Before the S. Comm. on Banking, Housing, and Urban Affairs, 95th Cong. (1977) [hereinafter Banking Committee Hearings], pp. 50-51.
  8. Robert Litan, Nicolas Retsinas, Eric Belsky and Susan White Haag, “The Community Reinvestment Act After Financial Modernization: A Baseline Report,” produced for the United States Department of the Treasury, April 2000.
  9. Daniel Ringo, Federal Reserve Board, Mortgage Lending, Default, and the Community Reinvestment Act, June 15, 2017, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2585215, pg. 4 and 13.
  10. Lei Ding and Leonard Nakamura, Don’t Know What You Got Till It’s Gone: The Effects of the Community Reinvestment Act (CRA) on Mortgage Lending in the Philadelphia Market, Working Paper No. 17-15, June 19, 2017, https://www.philadelphiafed.org/-/media/research-and-data/publications/working-papers/2017/wp17-15.pdf
  11. Lei Ding, Raphael Bostic, and Hyojung Lee, Effects of CRA on Small Business Lending, Federal Reserve Bank of Philadelphia, WP 18-27, December 2018, https://www.philadelphiafed.org/-/media/research-and-data/publications/working-papers/2018/wp18-27.pdf
  12. For more on FHA and very large bank lending, see Jason Richardson, 2017 HMDA Overview, https://ncrc.org/2017-hmda-overview/
  13. Jason Richardson and Josh Silver, Home lending to LMI borrowers and communities by banks compared to non-banks, April 2019, https://ncrc.org/home-lending-to-lmi-borrowers-and-communities-by-banks-compared-to-non-banks/
  14. The following CRA exam shows that banks operating as fintechs can have difficulty making home mortgage loans to LMI borrowers and communities: OCC CRA exam of Bank of the Internet June 2016 CRA exam,  https://www.occ.gov/static/cra/craeval/nov16/716456.pdf
  15. Section 802 (b) of CRA says, “It is the purpose of this title to require each appropriate Federal financial supervisory agency to use its authority when examining financial institutions, to encourage such institutions to help meet the credit needs of the local communities in which they are chartered consistent with the safe and sound operation of such institutions.” See https://www.fdic.gov/regulations/laws/rules/6000-1500.html#6000hac802
  16. Elizabeth Laderman and Carolina Reid, Federal Reserve Bank of San Francisco, “CRA Lending during the Subprime Meltdown” in Revisiting the CRA: Perspectives on the Future of the Community Reinvestment Act, a Joint Publication of the Federal Reserve Banks of Boston and San Francisco, February 2009, p. 122.
  17. Neil Bhutta and Daniel Ringo, Assessing the Community Reinvestment Act’s Role in the Financial Crisis, Feds Notes, May 2015, https://www.federalreserve.gov/econresdata/notes/feds-notes/2015/assessing-the-community-reinvestment-acts-role-in-the-financial-crisis-20150526.html
  18. Governor Randall S. Kroszner, The CRA and Recent Mortgage Crisis, speech delivered at the Confronting Concentrated Poverty Forum, Board of Governors of the Federal Reserve System, December 2008, https://www.federalreserve.gov/newsevents/speech/kroszner20081203a.htm
  19. Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States, The Financial Crisis Inquiry Report, http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_full.pdf
  20. Remarks to The New America Foundation conference: “Did Low-income Homeownership Go Too Far?,” December 2008, https://www.fdic.gov/news/news/speeches/archives/2008/chairman/spdec1708.html and Written Testimony of Comptroller of the Currency John C. Dugan & Appendix C: Impact of the Community Reinvestment Act on Losses Incurred by National Banks, April 2010, https://www.occ.gov/news-issuances/news-releases/2010/nr-occ-2010-39.html
  21. CRA Promotes Safe! And Affordable Lending: An NCRC Refutation of Another Baseless Attack on CRA, https://ncrc.org/wp-content/uploads/2013/01/cra_promotes_safe_and_affordable_lending.pdf and Carolina Reid, Debunking the CRA Myth Again, January 2013, https://communitycapital.unc.edu/research/debunking-the-cra-myth-again/
  22. FDIC Statement of Policy on Bank Merger Transactions, See Introduction, https://www.fdic.gov/regulations/laws/rules/5000-1200.html
  23. Zuluaga, p. 8
  24. Ibid.
  25. The Performance and Profitability of CRA-Related Lending: Report by the Board of Governors of the Federal Reserve System, submitted to the Congress pursuant to section 713 of the Gramm-Leach-Bliley Act of 1999, July 17, 2000, http://www.federalreserve.gov/boarddocs/surveys/craloansurvey/cratext.pdf, p. 66.
  26. Ibid, pp. 69 and 70.
  27. Josh Silver, Seunghoon Oh, Annelise Osterberg, Jaclyn Tules,  The Financial Benefits of Homeownership: An Evaluation of a Nonprofit Development Model, Manna, May 2014, http://www.mannadc.org/reports-2/
  28. Zuluaga, p. 6.
  29. Banking Committee Hearings, pp. 6-7 (providing the text of the draft CRA bill).
  30. Banking Committee Hearings, p. 2.
  31. CRA examination procedure allows favorable consideration of community development activity in statewide and regional areas provided assessment area needs have been met. See Community Reinvestment Act; Interagency Questions and Answers Regarding Community Reinvestment, see Q&A related to §_.12(h)—6:, p. 48529, Federal Register / Vol. 81, No. 142 / Monday, July 25, 2016.
  32. Zuluaga, p. 6.
  33. See the CRA regulation regarding community development, §25.12: Definitions, available via https://www.ffiec.gov/cra/regulation.htm
  34. NCRC comment letter regarding OCC ANPR, November 2018, https://ncrc.org/ncrc-comments-regarding-advance-notice-of-proposed-rulemaking-docket-id-occ-2018-0008-reforming-the-community-reinvestment-act-regulatory-framework/#CRA_Exams_Must_Consider_Consumer_Lending_and_Ensure_it_is_Affordable_and_Complies_with_Consumer_Protection_Law
  35. Zuluaga, p. 8.
  36. 12 U.S. Code §?1831r–1. Notice of branch closure, https://www.law.cornell.edu/uscode/text/12/1831r-1
  37. Zuluaga, p. 13.
  38. Ibid.
  39. Hoai-Luu Q. Nguyen, Do Bank Branches Still Matter? The Effect of Closings on Local Economic Outcomes, December 2014, http://economics.mit.edu/files/10143 and Yichen Xuy, University of Delaware, The Importance of Brick-and-Mortar Bank Offices for Lending: Evidence from Small Business and Home Mortgage Lending, 1999-2015https://drive.google.com/file/d/17BHqJppQd70PprkI261IyvpBeYfBns0z/view
  40. Board of Governors of the Federal Reserve System, Semiannual Report on Banking Applications Activity: January 1–June 30, 2018,  https://www.federalreserve.gov/publications/2018-september-semiannual-report-on-banking-applications-activity.htm
  41. Zuluaga, pp. 8-9.
  42. The Performance and Profitability of CRA-Related Lending: Report by the Board of Governors of the Federal Reserve System, submitted to the Congress pursuant to section 713 of the Gramm-Leach-Bliley Act of 1999, July 17, 2000, http://www.federalreserve.gov/boarddocs/surveys/craloansurvey/cratext.pdf, pp. 48-50.
  43. Diego Zuluaga, How a 40-year-old federal law is speeding gentrification,  in Politico, July 2019, https://www.politico.com/agenda/story/2019/07/24/gentrification-credit-discrimination-000937
  44. Jason Richardson, Bruce Mitchell, and Juan Franco, Shifting Neighborhoods: Gentrification and cultural displacement in American cities, March 2019, https://ncrc.org/gentrification/
  45. Office of the Comptroller of the Currency (OCC), Federal Reserve System (FRS), Federal Deposit Insurance Corporation (FDIC), Community Reinvestment Act; Interagency Questions and Answers Regarding Community Reinvestment, Federal Register, Volume 81, No. 142, Monday, July 25, 2016, p. 48538, available via https://www.gpo.gov/fdsys/pkg/FR-2016-07-25/pdf/2016-16693.pdf
  46. NCRC comments on the OCC’s ANPR, https://ncrc.org/ncrc-comments-regarding-advance-notice-of-proposed-rulemaking-docket-id-occ-2018-0008-reforming-the-community-reinvestment-act-regulatory-framework/#Core_Retail_Lending_Evaluations_Must_Remain_on_CRA_Exams
  47. Zuluaga, p.12.
  48. Zuluaga, p. 11.
  49. FDIC, Brick and Mortar Banking Remains Prevalent in an Increasingly Virtual World FDIC Quarterly, 2015, Volume 9, No. 1, https://www.fdic.gov/bank/analytical/quarterly/2015-vol9-1/fdic-4q2014-v9n1-brickandmortar.pdf, p. 2.
  50. Zuluaga, p. 18.