Redlining Revisited: Why the Community Reinvestment Act Needs to Do More to End Lending Discrimination
Ensuring the law achieves its purpose will require extensive reforms
By Sarah Friedmann
Discrimination against low and middle-income (LMI) home buyers – something which disproportionally affects minority communities — has long been a problem in the United States. Over the past few decades, federal legislation, including the Community Reinvestment Act (CRA), has been passed to help put a stop to discriminatory practices that inhibit LMI families from becoming homeowners. While the CRA has done a great deal to improve access to credit and make homeownership a reality for more people, there is significant room for improvement to the decades-old legislation. As Congress and the private sector explore the best ways to change the CRA to further reduce housing discrimination, it’s helpful to take a closer look at the tenets of the legislation and examine its effects and shortcomings.
Taking a Stand Against Redlining
The Community Reinvestment Act was passed during President Jimmy Carter’s administration in 1977. The legislation was primarily intended to combat the practice of redlining, which significantly inhibited (predominately minority) LMI families from becoming homeowners and achieving other socioeconomic milestones. As Investopedia described, “redlining” is defined as follows:
Redlining is an unethical practice that puts services (financial and otherwise) out of reach for residents of certain areas based on race or ethnicity. It can be seen in the systematic denial of mortgages, insurance, loans and other financial services based on location (and that area's default history) rather than an individual's qualifications and creditworthiness.
The Federal Reserve noted on its website that redlining was rampant prior to the passage of the CRA, as many banks refused to offer lending and other financial services to LMI neighborhoods because they deemed them high-risk investments. Therefore, the CRA was passed to establish lending practices for banks that encouraged them to lend to these communities. The legislation says that banks must “serve the convenience and needs of the communities in which they are chartered to do business” and avoid engaging in discriminatory lending practices that can block LMI communities from acquiring financing to pursue homeownership and other endeavors.
Holding Banks Accountable
The CRA is enforced through federal regulatory agencies — the Office of the Comptroller of the Currency, the Federal Reserve Board, and the Federal Deposit Insurance Corporation (FDIC) – whose role is to oversee banks. These agencies use established assessment criteria, which have evolved over time, to determine how well banks are responding to community credit needs. Specifically, the legislation requires regulatory agencies to evaluate a bank’s “record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of such institution,” within a given assessment area — or geographic location in which a bank’s operations are conducted. According to the Congressional Research Service, banks receive points for engaging in CRA-qualifying activities, like lending to LMI communities, in their assessment areas and are issued CRA performance ratings by the regulatory agencies based on these points. As a means of enforcement, these agencies then factor in banks’ CRA performance ratings when determining whether to approve new bank initiatives, like new branches, mergers, or acquisitions.
An Urgent Need for Improvement
The CRA has undergone several rounds of changes since 1977, including various regulatory and legislative reforms throughout the 1990s and 2000s that addressed guidance and implementation shortcomings. While the CRA has generally encouraged banks to expand services in LMI communities, many housing advocates and government agencies think it could do much more to advance this initiative.
Over the past year, several federal agencies have taken steps to initiate comprehensive CRA reform. In 2018, the U.S. Department of the Treasury conducted a six-month assessment to develop agency recommendations about how to improve the CRA, which resulted in a memorandum of recommendations for CRA modernization that was published on April 3, 2018. Now, Congress, along with the three federal regulatory agencies responsible for implementing the CRA, are similarly making recommendations for CRA changes. Last year, the Office of the Comptroller of the Currency sent out an advanced notice of proposed rulemaking (ANPR) and sought comment on various aspects of CRA reform from public and private sector entities. The Federal Reserve Board and the FDIC are also expected to consider rule changes to the CRA in the near future.
On April 9, the House Subcommittee on Consumer Protection and Financial Institutions held a hearing to assess the impact of the CRA on discrimination and redlining. The hearing memo emphasized that there is broad consensus in both the private and public sectors that the CRA needs to be reformed and modernized. As the memo noted, these reforms are particularly imperative because redlining is still very much a problem. A 2018 investigative report conducted by Reveal found that “more than 60 metro areas continue to exhibit modern day redlining, despite the fact that 98 percent of banks pass their [CRA] exams by receiving a satisfactory or outstanding grade under CRA,” journalist Aaron Glantz shared during his subcommittee testimony.
The Tenets of Reform
A host of organizations, including those in the housing industry, have weighed in on how the CRA should be modernized. While there are myriad recommendations, they tend to center around three areas of reform: changing the definition of assessment areas, increasing housing supply, and pushing back against predatory lending.
On Nov. 16, 2018, the National Association of REALTORS® (NAR) sent a letter to the Office of the Comptroller of the Currency to offer commentary on CRA reform. In the letter, NAR emphasized that banking technology, including online and mobile banking, has “impacted what lending falls under a CRA assessment area and where banks make their CRA investments.” As NAR described, CRA guidelines generally dictate that an assessment area should be defined by the geographic area that the bank serves. However, financial technology has made defining banking service areas less straightforward. Now, banks actually service many locations in which they have a digital footprint but no physical presence. Under current CRA rules, a lack of physical presence suggests that these banks are not required to comply with CRA regulations in many communities, despite offering services there. This means that the CRA’s effectiveness is increasingly limited, resulting in fewer financing opportunities for LMI communities. Therefore, many organizations have recommended CRA rule changes that account for changing banking technology. In fact, the Treasury Department similarly recommended in its 2018 memorandum that assessment areas are redefined to include “areas where the bank is physically located, but also LMI communities outside of where the bank has its physical footprint, and in areas where the bank accepts deposits and does substantial business.”
Beyond redefining assessment areas, various entities have also stressed that CRA reform needs to focus on increasing the supply of affordable housing. “The current housing market faces historically low levels of inventory, which are driving home prices up at a steady clip,” NAR noted in its November 2018 letter. “The shortage reflects a construction deficit of 3.5 to 4 million single-family homes that have not been built since the [2008 financial] crisis, which also continues to inflate prices.” The organization emphasized that this affordable housing shortage particularly impacts LMI communities and, as a result, recommends that CRA reform should consist of recognition of “community development efforts that expand or support the expansion of housing supply for low and moderate-income households.”
Finally, many CRA reform initiatives have proposed increasing the number of businesses subject to CRA regulations, along with taking a more active stance against predatory lending practices. For example, B. Doyle Mitchell, the CEO of Industrial Bank, said in his April House subcommittee testimony that, in addition to improving access to financial services, the CRA should actively promote “financial literacy and inclusion among LMI populations, as well as unbanked, underbanked, and other vulnerable populations.” As the association pointed out, a financial literacy component of the CRA could help LMI communities avoid the rapacious practices of “payday lenders and other predatory providers.”
NAR also supports “CRA credit for financial counseling and literacy programs” because financial literacy is often linked to better long-term homeownership outcomes in LMI communities. Moreover, CRA reform advocates also support mandating that non-banks, which include both predatory and non-predatory providers that increasingly offer lending to LMI communities, are also subject to CRA regulations. “ … CRA examinations cover only about 30 percent of mortgage lending … More bank, as well as nonbank, lending and investments to home buyers, small businesses and for community development should be examined so that there would be more equitable outcomes for underserved communities around the country,” Jesse Van Tol, the CEO of the National Community Reinvestment Coalition, writes to the Daily Beast. “More lenders should have an obligation to serve underserved communities in the way banks do.” Notably, NAR noted that it supports “policies providing targeted reforms for appropriately sized community banks” that allow them to meet their CRA requirements but that do not present overly bureaucratic requirements for small businesses.
These represent just some of the many ways that various agencies and organizations have suggested reforming the CRA. While reform proposals are quite extensive and wide-ranging, they generally share two fundamental characteristics: a desire to ensure that the CRA is more effective at achieving its intended purpose of helping more LMI families access credit and become homeowners – and a recognition that urgent action needs to be taken to successfully address this issue.