Ever tried to buy a home in the United States on a low or moderate income (LMI)?
Families in this bracket – who are primarily from minority communities – have long been inhibited by discrimination that makes it difficult for them to achieve their home-owning dreams. And this despite the passage of federal legislation designed to combat such discrimination over the last few decades – in particular, the Community Reinvestment Act (CRA).
The CRA Then…
Let’s rewind to 1977. Jimmy Carter is in the early stages of his presidency. The Community Reinvestment Act was passed with the chief aim of combating Redlining, a disturbing practice which is preventing minority LMI families predominantly from buying their own homes.
Redlining is systematically denying residents access to mortgages, loans, insurance, and other financial services, based solely on the repayment default history of the area in which they live. Banks are point blank refusing to lend to people from LMI areas, deeming them high-risk. No consideration was being given to an individual’s actual creditworthiness. And it’s becoming clear that the practice is disproportionately affecting minority races and ethnicities.
So the CRA was introduced to create a framework for banks that directs them to cease preventing LMI communities from receiving financing for homeownership, encouraging the banks to lend to these communities.
The CRA Now…
Back in 1977, the legislation indeed represented a step in the right direction, helping more people own their own homes by improving access to credit. But now in 2019, with the legislation is beginning to show its age, many experts think it’s time to take root and branch review of the situation and make changes.
That’s precisely the challenge that Congress and the private sector are facing right now, the ultimate goal being to reduce incidences of housing discrimination further. So what is it about the CRA that is falling short of expectations? Here we take a detailed look at the nature of the law to see how the situation can be improved.
Who Enforces CRA Legislation?
Since its inception, responsibility for the enforcement of the legislation and the overseeing of banking activity related to it has fallen upon the shoulders of a trio of federal regulatory agencies:
- The Federal Reserve Board
- The Federal Deposit Insurance Corporation (FDIC)
- The Office Of The Controller Of The Currency
These bodies assess the performance of banks in terms of their response to an entire community’s credit requirements, not just LMI neighborhoods.
According to the Congressional Research Service, banks are awarded points when they lend to LMI communities, points which lead to banks being given an overall rating by these enforcement agencies. These ratings are used to assess whether any new initiatives proposed by each bank, such as a merger or the opening of a new branch, should receive approval.
After Minor Reforms, The CRA Now Needs Radical Change
CRA legislation has evolved since its inception in 1977, with subsequent administrations recognizing its shortcomings during the 1990s and 2000s. It is true that the CRA remains a generally positive force for encouraging banks to support LMI communities.
However, it is becoming clear to many in government agencies and the housing sector that much more can be done to encourage banks to support people in these communities further. Such is the strength of the desire to see improvements made; many federal agencies are acting to ensure comprehensive reform of the CRA legislation happens sooner rather than later.
A six-month long assessment by the US Department of the Treasury in 2018 resulted in a series of recommendations for the reform of the CRA being published in April. This has led to Congress and the three regulatory agencies who take responsibility for CRA to recommend change too.
Furthermore, the House Subcommittee on Consumer Protection and Financial Institutions held a hearing (also in April) to assess the extent of the impact that the CRA has had on the issue of Redlining.
Regrettably, it concluded that Redlining was still an authentic and prevalent problem in LMI neighborhoods.
Indeed, a report carried out by Reveal discovered that more than 60 metropolitan areas of the US were suffering as a result of Redlining. This even though a massive 98 percent of banks were being graded as ‘Satisfactory’ or ‘Outstanding’ by that trio of CRA enforcers.
Unsurprisingly, faced with such overwhelming evidence, the consensus among parties from both the public and private sectors was that immediate change to the CRA was needed.
How To Modernize The CRA
There are many stakeholders and parties with vested interests who have ideas and opinions on how the legislation should be reformed. Currently, three areas of focus for change are emerging:
- Increasing the housing supply
- Combating the practice of predatory lending
- Altering the definition of assessment areas
Let’s briefly deal with each:
More Affordable Housing
House prices are being steadily driven up due to lack of available properties. A National Association Of Realtors report concluded that as a result of the 2008 financial crisis, up to 4 million single-family homes had not been built, a fact that continues to inflate the price of housing, detrimentally affecting the chances of LMI households entering the property market. Ways that a reformed CRA can address this shortfall include recognizing efforts to expand and support the housing supply for LMI households.
Less Predatory Lending
Reformists want more lenders to be subject to CRA regulations, and for regulators to be more proactive in their battle against predatory lending practices. One conclusion that is drawn states that the CRA should play an active role in promoting the importance of financial literacy across LMI and other vulnerable communities. This is seen as an effective way to combat the questionable practices of payday lenders and other unscrupulous providers of financial services. Banks must offer additional resources to help communities improve their financial health. Rewards-based financial education can be a meaningful approach to improving LMI communities.
Changing The Assessment Definitions
Currently, CRA guidelines state that geographic areas define assessment areas that the banks serve. However, the growth of financial technology has clouded the definition of these service areas. It’s now possible for banks to digitally help multiple locations without having a physical branch in that area. This lack of a physical presence is allowing banks to operate without complying with CRA regulations, thereby limiting the effectiveness of the legislation and the financial opportunities that are being afforded to LMI communities. The conclusion drawn is that assessment areas need to move with the times and be redefined to include not only areas where a bank has a physical location, but also in LMI communities where the bank only has a digital presence, or where it accepts deposits and does substantial business.
The CRA Going Forward
Many other ways that the CRA can be reformed for the greater good have been suggested, all of which promote the need for the CRA to meet its initial goal set way back in 1977 – to help more families access to credit and enjoy home ownership.
A strong belief that is shared by everyone who wishes to see reform is that any changes need to happen urgently to address a situation that continues to discriminate against LMI communities in the US.
Banks With Satisfactory CRA Scores
Even though online banking and other forms of technology have made increasing access to banking services easier, many banks still fail to provide services to LMI communities adequately. The CRA even offers satisfactory grades to these banks. The following is a list of banks that received these grades and those that Guidation will endeavor to work with to improve the communities where they operate.