Loopholes in CRA are Costly for Communities

The Community Reinvestment Act (CRA) is a giant sleeper. It is a relatively unknown law that has leveraged hundreds of billions of dollars of loans and investments in low- and moderate-income communities since its passage in 1977. Yet, despite this success, CRA has unrealized potential and could be much more effective.

The essence of CRA is public accountability. Congress passed CRA in response to “redlining,” which was the discriminatory practice of banks’ literally drawing red lines around minority and modest income neighborhoods and telling their loan officers not to lend in those neighborhoods though branches received deposits from community residents. Redlining and the drying up of credit contributed to neighborhood disinvestment and decay.

Under CRA, banks are required to meet the credit needs of communities, particularly low- and moderate-income communities, in a safe and sound manner. Federal agencies enforce CRA by conducting CRA exams which assign ratings to banks depending on their level of loans, investments, and services offered to low- and moderate-income borrowers and communities. In addition, any member of the public can comment about banks’ performance to the agencies as they are conducting CRA exams.

CRA examiners use publicly available data to assess bank home and small business lending in low- and moderate-income communities. Members of the public can also use this data in their comments. When CRA examiners and members of the public can consider a common core of facts and data, the public accountability of banks increase. The heightened level of scrutiny has increased lending in modest income communities.

A Harvard University study demonstrates that without CRA, home purchase lending to low- and moderate-income borrowers and communities would have decreased by 336,000 loans from 1993 through 2000.  The study also reveals that banks’ lending to low- and moderate-income borrowers is higher in geographical areas where federal agencies grade banks on CRA exams than in localities where banks lend but are not subject to CRA exams.

In addition, using publicly available data on small business lending, I have found that banks made more than 19 million small business loans worth $764 billion in low- and moderate-income communities since 1996.

As impressive as the benefits are, the full potential is not realized. One major problem is “assessment areas” or geographical areas on CRA exams. Since CRA was passed in 1977 and the regulations were last updated in 1995, CRA examines banks in geographical areas where banks have branches. Today, however, a considerable amount of lending occurs beyond bank branches in geographical areas where banks use loan officers or extend loans through the internet. CRA has not caught up to this and thus, a substantial amount of lending by big banks is not even scrutinized by CRA exams. Recall that Harvard found lending higher in modest income communities covered by CRA exams. Thus, incomplete coverage is quite costly in terms of lower loan levels. This is human nature. A bank, composed of human beings, will perform not as well in areas where it is not examined.

Another significant problem are CRA “lite” exams. Some banks like credit card banks are designated as “limited purpose” banks that do not have full CRA exams that include a review of lending to consumers and businesses. Instead, the exam looks at community development loans and investments that finance new affordable housing or economic developments, which is useful but incomplete. These lite CRA exams cause low- and moderate-income communities to miss out on millions if not billions of dollars of loans. I recently looked at a CRA exam of a large credit card lender and was astonished that none of its more than 1 million of small business credit card loans were scrutinized by the exam.

Lite CRA exams are also trouble for community organizations looking for grants to fund activities like homeownership counseling or looking for investors for Low Income Housing Tax Credits. Some credit card banks only have one “branch” or headquarter’s office. Therefore, their assessment area is only the city that contains their one branch. Many of their grants and investments are concentrated in their headquarter city. Banks are allowed to venture outside of their assessment area for making grants or investments but usually are confined to a regional area around their headquarter city. But does this make sense in the case of large lenders that make a large amount of loans throughout the country? The large credit card bank in this case made only about 6,000 loans in its headquarter city and its 1 million small business credit card loans were distributed throughout the country, and not concentrated in any one region. If a community-based organization makes a good case about a pressing credit need in a city that receives a considerable number of credit card loans, shouldn’t that community group stand a fair chance of receiving financing for a community development project?

So what is to be done about the loopholes? When I was at the National Community Reinvestment Coalition (NCRC), we regularly raised these issues with the federal agencies and Congress. Judging by recent conversations at the NCRC annual conference, the appetite among the agencies and Congress is lacking to change CRA in a way that will realize its full potential.

One reaction is to give up but this would be short changing the communities we are seeking to empower. The other reaction is to keep using CRA, to continually comment on CRA exams, dialogue with lenders, and dialogue with sympathetic members of Congress and staff of the federal agencies. You never know when an incremental change in an examination practice or a bank’s program will be beneficial. Also, you can raise issues of compliance with consumer protection and fair lending law with the federal agencies. The credit card bank in this case was downgraded on its exam because it engaged in illegal and deceptive credit card practices.

And finally remember, CRA has been quite beneficial and the chances it will remain beneficial only increase when we all use its public accountability mechanisms to hold both banks and regulators honest.

Josh Silver is the Development Manager at Manna, Inc. Prior to his time at Manna, Josh served as the vice president of research & policy at NCRC. Josh is an avid District sports fan and loves spending time with his daughter.

 

 

 

 

 

 

 

 

 

 

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