In 1977, Congress passed the Community Reinvestment Act, a powerful antidote to racial discrimination in lending. Where banks had divided maps into segregated areas that showed where they would and would not approve mortgages—a notorious practice known as redlining—the new law required them to demonstrate that they serve low-income households wherever they are located.
Forty years on, this regulatory approach—which was designed decades before the era of online banking—is showing its age. Millennial-friendly online-only Ally Bank, for example, doesn’t have any brick-and-mortar locations at all, so regulations predicated on the reach of bank branches don’t make sense for this 21st-century lending platform. The CRA is overdue for an upgrade, and this week, the Trump administration took a long-awaited first step toward revamping the rule.
But while the advance notice of proposed rulemaking, set forth by the Office of the Comptroller of the Currency (an agency under the Treasury Department) has prompted cheers among bankers, the direction that the administration seems to be heading has prompted concerns among civil rights watchdogs. Among the new standards teased by Treasury’s call for input is a numerical target for fair lending compliance—a dollar-value approach that could cement the damaging segregation patterns that the law was designed to upend.
“This is a case where making a better mousetrap doesn’t get around the fact that it’s a mousetrap,” says Jesse Van Tol, CEO for the National Community Reinvestment Coalition.
As it currently stands, the Community Reinvestment Act sets different metrics for fair lending. Any individual bank’s mileage may vary, depending on its size and place in the lending world. The act sets performance standards, but not specific goals. That’s an important distinction: Banks are judged relative to one another in their efforts to ensure that they serve all the members of their communities equally. Small banks, large banks, intermediate small banks, limited-purpose banks, banks that mostly serve the military—they’re all regulated somewhat differently.
The Trump administration wants to go with hard targets that apply across the board. The notice issued by the Comptroller introduces the prospect of a metric-based framework. This measure might be a ratio of the bank’s qualifying fair-lending activity to its size. “For example, a bank with $1 billion in total assets that conducted $100 million of CRA-qualifying activities in the aggregate would achieve a 10-percent ratio, if total assets were used for the denominator,” reads the Comptroller’s notice.
For bankers, a metric-based compliance system would vastly simplify standards for compliance. The proposed change addresses a common complaint among banks: Under the status quo, it can take years for a performance evaluation to say for sure whether a specific loan or investment qualifies toward CRA obligations. A fixed target would be far easier for banks to meet. On the other hand, replacing the relative measure with an absolute score would enable banks to put together high-margin, low-risk investments that meet the bare-minimum standard and no more—to scratch it off the list. “In their minds, this supplies a lot of clarity,” Van Tol says. “The problem with that is, not every community has the same credit needs.”
Buzz Roberts, CEO for the National Association of Affordable Housing Lenders, echoes this concern. A Community Reinvestment Act rating, based on a fixed ratio of qualifying activity to bank size, would treat all banks the same, regardless of how much mortgage lending any specific bank actually does. It would also treat all housing markets the same; in reality, investments from one low-income community to another rarely match up.
“Let’s say you’re in Chicago, and the median home price is something over $200,000. That’s twice the median home price in, say, Toledo,” Roberts says. “If I’m just trying to get to a dollar volume target of lending, I would much rather be lending in Chicago than Toledo. So a bank in Chicago is going to be much more advantaged over a bank in Toledo, and communities in Toledo are going to be more disadvantaged, because it will be harder for them to attract the capital.”
Roberts draws that example out further, to a higher-priced community. “A gentrifying neighborhood in Brooklyn has them both beat, because it might be possible for a bank to make a loan on a condo there, in a low- and moderate-income neighborhood, of half a million dollars,” he says. “That’s a much faster way to get to the magic number.”
There are other factors associated with setting a specific target that cause critics to worry. The magic number for a 2018-level economy won’t work for banks in the face of a 2008-style recession. A target volume set too high might encourage banks to compromise their credit standards with unwise loans. And a numeric value set under Trump is practically an engraved invitation for the next administration to ratchet the figure up or down (or scrap it altogether)—not exactly the certainty craved by bankers.
Roberts nevertheless applauds the administration’s proposal to revise the Community Reinvestment Act rule. The last substantive revision came in 1995, he says, back when interstate banking was new and online banking didn’t exist. “There’s a lot in CRA that’s just not clear,” he says. “I’m confident that if banks had more clarity about what got CRA consideration, they would be lending more.”
The sentiment echoes many in the lending community, including the Consumer Bankers Association. The case for reform rests on one bedrock truth: Banking has fundamentally changed over the last 20 years. Some rural areas aren’t served by any physical bank branches, for example. Ally, the online-only bank, doesn’t get any credit for its lending in Detroit (where its holding company is based); instead, its compliance is measured entirely by its activity in Salt Lake City (where the bank is headquartered).
New financial institutions have found ways to game the fact that they aren’t held to the same standard as traditional banks. For example, of the 1,119 home mortgage loans issued by JPMorgan Chase in the Washington, D.C., metro area in 2015 and 2016, African American homebuyers received just 23 loans. That’s exactly the sort of discrimination that the Community Reinvestment Act was designed to stop. But because Chase doesn’t technically operate any bank branches in the D.C. area, it isn’t obligated to follow the law against redlining.
“We have a once-in-a-generation opportunity to build upon that legacy of community development and make the Community Reinvestment Act work better for everyone,” writes Comptroller Joseph Otting.
The ink on a new Community Reinvestment Act rule is very far from dry. Any practicable rule will likely need the buy-in of both the board of the Federal Reserve and the Federal Deposit Insurance Corporation. Otting’s office is doing it alone for now by asking for input on a new rule. As American Banker reports, these agencies usually act in unison, but occasionally one goes out on a limb with a reform proposal.
A small change to the way that regulators and banks interpret the Community Reinvestment Act could have sweeping effects for low-income communities as well as the broader economy. The National Community Reinvestment Coalition figures that the law has sparked $2 trillion in loans since 1996. But the Trump administration isn’t proposing a tweak. A brand new formula would represent a sea change in the way that banks look at low-income communities and minority borrowers.
Taken together with other federal rules changes, there is reason to worry about the future. The Trump administration appears to be fully revising how the government reads its rules on segregation and discrimination in housing and lending. Down the road from Treasury in D.C., the U.S. Department of Housing and Urban Development has opened up two rules for review: a legal doctrine on implicit forms of discrimination (known as disparate impact) and a policy that requires communities to actively work toward desegregation (known as Affirmatively Furthering Fair Housing).
“It’s trite to say that the devil’s in the details,” Van Tol says. “Here the devil’s in the concept.”