The Community Investment Act continually fails in its efforts to ensure that banks extend mortgage lending in low income neighborhoods. It’s time for another approach.
PUBLIC CITIZEN
APRIL 22, 2022
A Community Reinvestment Act that Meets the Climate Moment
By Anne Perrault and Aasha Rajani
Excerpts:
Financial regulators in the coming weeks will embark on a broad inter-agency update of the rules for implementing the CRA, modernizing the rules and redefining the types of lending and investment that qualify for CRA credit. The last notable update to the CRA occurred in 1995, and much has changed in the 25 years since then—including threats posed by climate change that are further exacerbating existing inequities. Revisions must respond appropriately to these changes.
CRA Requirements and Implementing Rules Were Intended to Respond to Inequities
When President Jimmy Carter signed the CRA into law in 1977, it was passed in the context of decades-long policies that deprived majority-Black neighborhoods of credit and led to systematic disinvestment in communities of color. The government-backed practice of “redlining” low-income and majority-minority areas, purportedly based on risks to lenders, had significant racialized domino effects on homeownership, wealth, and community resilience that persist today. The relative inability of Black families to secure home loans left a significant homeownership gap between Black and white families – 43.1% compared to 74.4% – and, in turn, left Black families with less personal wealth. Disinvestment in redlined communities contributed to disrepair in housing and other infrastructure, increased exposure to health hazards and pollution, and decreased access to healthy food, green spaces, reliable transportation, and good schools.
A series of government interventions to address redlining policies began in 1968 with the Fair Housing Act, which outlawed discrimination in the sale, rent, and financing of housing. In 1977, the CRA aimed to encourage federally insured financial institutions (a category that includes most banks and credit unions) to meet the credit and lending needs of the local communities where the institutions were chartered. It obligated banks to serve their communities.
The law requires federal banking regulators to assess the extent to which financial institutions are meeting the credit needs of the “entire community”.
The CRA Has Not Met Its Potential, and Key Assumptions Have Been Upended.
Although lending to LMI families has increased since the CRA was enacted, it’s not clear how much of this increase is due to the CRA or to other factors – including better ways to predict and price borrower risk. More clear is that Black and other communities of color continue to face severe barriers accessing credit and other financial services.
Several key assumptions underlying the CRA and its implementing rules have been upended in the past decades, including the lay of the banking and credit-access landscape, the effectiveness of current approaches to delineating assessment areas and allocating credits, and the utility of the existing rating system.
This framework was clearly designed under the assumption that banks serve communities via branches. But banks are reducing the number of bank branches, and even going branchless, in response to technological innovations and online banking. As a result, an increasing number of areas lack physical bank branches to meet the credit needs of the local population. According to the Brookings Institute, from 2010 to 2019 the number of banks in majority-black neighborhoods decreased 14.6%, and majority Black census tracts are now less likely to have a bank branch than non-majority Black neighborhoods.
Even where branches exist, the current approaches to creating assessment areas around those branches and allocating points for activities often fail to ensure that Low and Moderate Income community needs – and particularly those of racial minorities – are met. Too often, loans in LMI areas go to high-income individuals who do not otherwise need CRA-related benefits. A study in Washington DC found that two-thirds of the mortgage loans eligible for the CRA in the District went to higher-income borrowers living in low-income areas.
Principles That Promote Outcomes for LMI Communities and Communities of Color Should Guide Revisions.
An optimal route to ensuring that mitigation, resilience, and adaptation measures are effective for LMI communities is to incorporate requirements for greater bank engagement with these communities – including through increased measurable outreach to communities and greater attention to and credit for Community Benefits Agreements (CBAs). Through the process of creating such agreements, banks can become more aware of community needs and benefits, and communities can become better informed of available opportunities and create more robust resilience and adaptation plans.
Conclusion
Forty years ago, the CRA was a welcome attempt to address financial inequities that had been created by discriminatory practices. It hasn’t, however, lived up to its potential. And climate change is leaving LMI communities with even greater need for, and challenges to, accessing credit. To ensure that LMI communities – particularly communities of color – secure the credit they need, financial regulators updating CRA rules should revisit old assumptions and respond to the urgent realities of climate change.
Comment:
“The relative inability of Black families to secure home loans left a significant homeownership gap between Black and white families… Disinvestment in redlined communities contributed to disrepair in housing and other infrastructure, increased exposure to health hazards and pollution, and decreased access to healthy food, green spaces, reliable transportation, and good schools.”
And furthermore – Disinvestment leads to neighborhood decline, which in turn leads to depressed property values. Low property values place homeowners in a poor position to accumulate equity, often needed to finance another home when household circumstances change.
The evidence now shows that some banks are skirting around CRA policy goals by pulling out of majority-black neighborhoods. Privately-owned banks oblige their shareholders who generally seek short-term profits as their highest priority.
The Community Reinvestment Act has been in effect since 1977, and still fails to meet its goals. The law requires federal banking regulators to assess the extent to which financial institutions are meeting the credit needs of the “entire community” – including low- and moderate-income neighborhoods. So what do public officials intend to do? Financial regulators in the coming weeks will embark on a broad inter-agency update of the rules for implementing the CRA. But will this actually solve a seemingly intractable problem which has been ongoing for nearly 45 years?
Rather than repeating over and over attempts to enforce the CRA regulations, let’s try a new approach.
It’s about time to move away from dependence on private for-profit lenders. What is needed is a public source of low-interest loan funding for low and moderate-income homeowners.
Politicians and citizens around the U.S. have been calling for the creation of state-owned public banks that would keep money in the state and invest in sustainable development. Public banking is distinguished from private banking in that its mandate begins with the public’s interest. Because a State Bank does not have private shareholders, it can accept modest profits, and can act as a stabilizing mechanism for local financial institutions and for the financial system as a whole. The Bank of North Dakota is a national model whose mission is to provide a public benefit and service.
The public banking movement is active in Oregon, as new legislation is being prepared for the upcoming session. One bill establishes the Housing Opportunity Fund established in the State Treasury to partner with local financial institutions such as credit unions and local community banks. The HOF is in a position to help implement ventures such as community land trusts and individual owners for construction of accessory dwellings.
Tom Gihring, Research Director
Common Ground OR-WA
