As concerned citizens and practitioners in the affordable housing and community development fields, we now have a clear choice regarding the direction of the Community Reinvestment Act (CRA). Senator Elizabeth Warren and the Office of the Comptroller of the Currency (OCC) (under the leadership of Comptroller Joseph Otting) have each offered contrasting visions for the future of CRA.
The Senator’s American Housing and Economic Mobility Act (S. 3503) contains a section called the Community Reinvestment Reform Act of 2018. The Community Reinvestment Reform Act is a broad expansion of CRA to non-bank lending institutions, and strengthens CRA as applied to banks. In contrast, the OCC has started a process of reviewing and reforming the CRA regulations that, if not altered, will weaken them and reduce lending and bank services in low- and moderate-income communities. The OCC has not yet proposed specific changes to CRA regulation but has issued an Advance Notice of Proposed Rulemaking (ANPR) that introduces concepts for changing CRA.
In 1977, Senator William Proxmire (D-WI) and other Congressional leaders passed CRA as a response to redlining, or the systematic discrimination by lending institutions against predominantly Black neighborhoods. CRA enacted an affirmative and continuing obligation on banks to serve the credit and banking needs of low- and moderate-income communities. This obligation is enforced through the CRA examination process in which federal agency staff conducts CRA exams and rates banks based on their lending, investment, and services to low- and moderate-income borrowers and communities.
CRA has been quite beneficial for housing and economic development, not only for underserved communities, but the nation as a whole. Since 1996, banks have made almost $2 trillion in small business and community development loans in low- and moderate-income communities; and this is just a subset of CRA activity. In addition, economists at the Federal Reserve of Philadelphia estimate that home purchase lending declines by about 20 percent in low- and moderate-income census tracts when these tracts lose CRA eligibility.
CRA is effective because it relies on public accountability and input. Examiners rate banks and examiners consider public comments in their evaluations. Also, CRA performance influences whether and how fast bank merger applications are approved or shelved (denials are rare but sometimes a poor CRA performing bank will withdraw its application).
Removing levers of accountability reduces CRA’s effectiveness. Also, if CRA is not updated to take into account the changes in banking with more non-bank competitors and more internet banking, then CRA’s motivational force will also wane. The run-down here makes it clear which vision of CRA will help communities and which one will disempower communities:
Broader Coverage of Lenders
Senator Warren’s bill applies CRA to independent mortgage companies and mainstream credit unions. Mortgage companies have issued the majority of home loans in recent years so an absence of CRA coverage is a large and looming issue. Also, independent mortgage companies were among the most abusive lenders in the years before the financial crisis because they lacked a mandate to serve low- and moderate-income populations in a manner consistent with safety and soundness. While credit unions were not abusive lenders before the crisis, NCRC found that they issued fewer loans to people of color and modest income borrowers than banks. We attributed this to a lack of CRA coverage. In fact, credit unions based in Massachusetts comply with a state level CRA and these credit unions had a better record serving lower income borrowers than federally-chartered credit unions that lacked CRA. Massachusetts’ CRA also covers mortgage companies, which establishes an important precedent for the feasibility of a federal CRA law encompassing these lenders.
The OCC lacks the authority to apply CRA to non-bank institutions but the OCC could expand CRA’s reach to mortgage company affiliates of banks. The current CRA regulation allows banks to include their affiliates on exams at their option. This invites manipulation as banks will keep mortgage company affiliates that are not making safe and sound loans off their exam but include them when the affiliates are behaving. NCRC has favored mandatory inclusion of affiliates and the Senator’s bill adopts this position. The OCC’s ANPR is silent on the issue of affiliates.
Making CRA Ratings More Rigorous
Over the last several years, 98 percent of banks have passed their CRA exams. Despite this high pass rate, CRA has been effective partly because banks can still score poorly in some of their service areas, providing them with incentives to improve performance. However, if grade inflation was not as pervasive as it is, CRA would be even more effective. The Senator’s bill introduces a fifth rating as a means of addressing grade inflation.
On this, the OCC is silent again. The agency may not be able to change ratings because the current ratings are established by CRA statute. However, the reviewing agencies have adopted a point scale of one to 24 that is supposed to accompany ratings. The range of 1 to 24 makes no sense and should be replaced by a range of 1 to 100, which is more intuitive. Further, the points must be made public; currently points earned are not public. This way, even if 98 percent of banks still pass, the banks with passing grades but lower points would be identified and thus motivated to improve their performance.
Expanding Geographical Coverage of Exams
CRA exams rate banks in geographical areas, usually metropolitan areas and rural counties, where they have branches. While this still works for many banks, some large lenders increasingly make loans through the internet and/or through brokers. Geographical areas on CRA exams need to be expanded to include areas with significant loan volumes where a bank has no branches. The Senator’s bill does this.
In contrast, the OCC recognizes this issue but proposes a fix—a measure called the one ratio—that could further inflate CRA ratings. The one ratio would be the sum of the dollar amount of CRA activities (loans, investments, and services) divided by assets. While the one ratio may simplify compliance for banks, it would diminish the importance of the scrutiny of geographical areas since banks would now be focused on increasing the numerator of the one ratio in order to pass their exams. To make matters worse, the OCC suggests that activities in areas outside of branch networks could be added to the numerator of the ratio, meaning that these areas would not be looking solely at their own activity, and thus unable to determine the extent to which banks are meeting priority needs.
Public input is the heart and soul of CRA. Since the law requires banks to meet local credit needs, a critical element of rating them and determining if their mergers would serve the public interest is for the agencies to solicit and carefully consider the views of the public. Senator Warren’s bill expands opportunities for public input, requiring banks to submit improvement plans for public review and comment when they score poorly on CRA exams. Moreover, when banks score poorly in local areas in addition to an overall poor rating, public hearings would be required in the case of merger applications.
By diminishing the attention paid to local areas, the OCC’s one ratio proposal makes it harder for public comments to influence CRA ratings. In addition, the Comptroller has been quoted in newspaper articles saying that he aims to curtail public input so that community groups cannot “pole vault in and hold [bankers] hostage” during merger applications.
While the ANPR is silent on the issue of public input during mergers, the quotes in the media are perhaps a dog whistle encouraging bankers to pounce on a more generic ANPR question regarding public input under an exam regime focused on the one ratio. Aggressive attempts to minimize public input is a violation of the intent and purpose of CRA, which is to motivate banks to respond to local needs.
Fair Lending Reviews
Before the OCC commenced the ANPR process, the agency diminished the weight of fair lending reviews on a bank’s CRA rating. It issued a memo stating that if examiners discovered violations of fair lending and consumer protection law, these violations would not influence a rating if the violations occurred in a type of lending (such as credit card lending) that was not considered on CRA exams. Senator Warren’s bill reaffirms that violations of law, depending on their severity and extent, will result in downgrades of CRA ratings.
Improved Data: Senator Warren’s bill requires banks to submit enhanced data so that the public and examiners can better scrutinize their performance. The bill requires banks to submit small business, consumer, and community development loan and investment data. The OCC asks about data improvements, but their request appears to be focused on how to make the one ratio operational rather than seeking the broader purpose of determining to what extent banks are serving various credit needs.
What’s Counted: Banks have been advocating for a number of years to broaden the range of activities that count on CRA exams to include activities that benefit middle-income and even upper-income communities. For example, banks have advocated for CRA consideration for basic infrastructure financing such as sewers and hospitals—no matter where they are located. Based on a number of ANPR questions, the OCC seems inclined to broaden what counts.
However, the original purpose of CRA was to combat redlining afflicting low- and moderate-income communities. CRA activities must therefore remain targeted towards low- and moderate-income communities. The Senator’s bill does this by adding a provision that says financing will be penalized if it results in the displacement of low- and moderate-income residents from gentrifying neighborhoods. The bill also directs banks to modify distressed loans in the case of borrowers close to foreclosure.
The choice is clear. We can either support Senator Warren’s bill, which would strengthen CRA and increase lending, or acquiesce to the OCC’s changes and revert back to a lending landscape that resembles the pre-CRA days. Follow this link to comment on the OCC’s ANPR and send the Senator a message saying her bill benefits us all by increasing access to responsible lending and investing in low- and moderate-income communities.
This piece originally appeared in Shelterforce on October 11, 2018.