The Trump administration has not been shy about dramatic deregulation efforts. The more than 50 such initiatives tracked by a Brookings Institution project have included rollbacks of coal plant emissions and state waivers related to the Affordable Care Act. This makes it hard to understand why the administration is being so timid about reforming the Community Reinvestment Act (CRA), whose regulations distort the credit decisions of every bank in the country, enable advocacy groups to make financial demands on banks seeking to expand and, worst of all, can hurt the low-income communities and households the law purports to help.
The administration, to date, has done little beyond hinting at making bank compliance easier. It has not raised the key question: Why do we need such a law at all?
The CRA, enacted in 1977, sets out to correct what’s said to be a fundamental problem with the U.S. banking system. As one of its leading defenders, the National Community Reinvestment Coalition (NCRC), puts it: The law is a key to a “just economy” and is still needed because “low- and moderate-income communities, communities of color and other underserved communities face discrimination and other barriers to accessing banking, housing and business development despite federal and state laws.”
That’s what the theory of the CRA always has been — that banking, unless mandated otherwise, would systematically deny credit to low-income households and poorer communities.
If that were ever true, it’s hard to believe that such so-called “redlining” would persist in today’s era, in which banks, once protected from competition, now are under pressure both from their peers and a host of new competitors, such as national private mortgage companies and online fintech firms, which can reach consumers without any branch network at all. As the Office of the Comptroller of the Currency (OCC), a bank regulator, has put it: “Over the past two decades, the financial services industry has undergone transformative changes, including the removal of bank interstate branching restrictions and the expanded role of technology.”
In other words, there’s no obvious reason to believe that deserving loan applicants who meet sound underwriting criteria should be turned down.
But that hasn’t prevented the persistence of an elaborate CRA enforcement apparatus at the OCC, as well as other bank regulators such as the Fed, the FDIC and the Treasury Department. Banks must demonstrate they are making the right kind of loans, both commercial and residential, to low-income households and neighborhoods, in order to get positive CRA ratings — without which proposed mergers and acquisitions are held hostage. They are rewarded for lending, not for results.
Groups such as the NCRC have become kingmakers. To satisfy their demands when seeking regulatory approvals — and thus receive coveted good CRA ratings — major banks agree to “community benefit agreements.” These are said, by the NCRC, to have “increased lending in redlined and underserved neighborhoods.” The magnitude of such agreements, which have all the attributes of a protection-against-protest racket, are eye-popping: the NCRC reports that since 2016, no less than $84 billion has been arranged in such agreements. Its own role in such agreements is not specified, but the NCRC reported $8 million in grant income for 2016, along with $3 million in federal contracts for financial counseling programs.
The Trump administration’s approach to CRA reform has not gone much beyond the technical: changing the definition of a bank’s “assessment area” in which its CRA record is judged. By expanding that report card beyond the neighborhoods served by its branches, banks presumably may get a better score more easily. Advocates such as NCRC have been keen to the fact that this may decrease their leverage — and oppose the change. But in its rhetoric, the administration has acquiesced to the core misconception of the CRA — that its pressure is necessary for banks to serve creditworthy but low-income communities and households.
The key question, says the OCC, is “how to revise the CRA regulations to encourage more local and nationwide community and economic development — and thus promote economic opportunity — by encouraging banks to lend more to LMI [low- and moderate-income] areas, small businesses, and other communities in need of financial services.”
The administration has accepted the assumption that CRA-induced lending indeed is a benefit. But just the opposite is more likely. When banks are under pressure to make loans based on the color or ZIP code of the borrower, sound underwriting is only one of several criteria. Thus, the possibility that CRA-inspired lending played some role in the financial crisis can’t be ruled out. The Obama administration, a defender of the law, concluded in 2009 that “only a small portion of subprime loan originations are related to the CRA.” That’s not the same as there not being a problem for the areas in which they were made.
Bad CRA-inspired loans, to be sure, can be a problem for the financial system, especially when they become part of collateralized debt obligations. But even more important is what they can do to harm or hold back the individuals and communities they purport to serve. Lending to neighborhoods because they’re poor is a good way to keep bad neighborhoods bad. Neighborhoods that have declined can rebound only when their investment fundamentals are sound. That requires safe streets and reliable public services — good schools and clean parks.
So, too, if individuals whose credit scores may not support their loans nonetheless get credit, potential delinquencies and foreclosures will harm both their own financial futures and the communities where they live. There’s nothing worse for the household making its mortgage payments than a foreclosed home next door. Keep in mind that good CRA scores are predicated on how much lending a bank reports, not on how well those loans perform.
Neither communities nor households are reliably helped by government-dictated credit allocation. Saving and prudence remain the best route to personal credit; neighborhood quality-of-life fundamentals are the best way to revive neighborhoods.
At the very least, the OCC and other regulators, including Treasury, FDIC and the Fed, should insist on bank reporting about the performance of all CRA-eligible loans. But a law that supports advocacy groups and encourages unsound lending needs repeal, not reform.
This piece originally appeared at The Hill
Howard Husock is vice president for policy research and publications at the Manhattan Institute.
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