With banks no longer dominant in consumer lending or personal wealth holdings, the anti-redlining law should be strengthened to cover the entire financial sector and ensure lower-income borrowers and communities of color have access to credit and capital.
The 1977 Community Reinvestment Act (CRA), which was designed to stop racist redlining practices in lending, should be strengthened and expanded to cover the entire financial sector, not just banks, a new white paper argues. The publication coincided with CRA’s 44th “birthday” on October 12, the original effective date of the law.
The paper, from the National Community Reinvestment Coalition (NCRC), found that banks no longer dominate personal wealth holdings, mortgage lending or consumer lending, and other players in the financial sector that benefit from government support to minimize their risks, like nonbank mortgage lenders and securities firms, should have similar requirements to serve and reinvest capital in the communities where they do business.
If the act’s duty to serve all communities isn’t extended beyond banks, its influence will fade. Extending it to the entire financial sector would be an important step to close enduring and deep socio-economic and racial gaps in wealth and homeownership.
“A failure by Congress and the regulatory agencies to broaden CRA’s reach and to make it more robust will only exacerbate inequalities, including racial disparities that drag on overall economic growth and wellbeing,” said NCRC President and CEO Jesse Van Tol. “It is long past time for the entire financial services industry to be regulated by CRA or a similar duty to serve.”
Among the paper’s findings:
- Bank deposits have continued to decline as a percentage of household assets, and have been replaced by various securities holdings. However, the securities industry is not regulated by CRA, and consequently, there is no means to ensure that they are serving LMI communities and communities of color. Moreover, since the industry relies on government support to operate, they should be obligated to support the government mandate to reinvest in communities. CRA exams that focus on community development (CD) should also be mandatory to ensure that the investments are actually benefiting LMI communities.
- Bank financing of consumer debt has stabilized at around 40% of the market, down from 57% in 1977. Still, the traditional banking sector continues to play a large part in consumer lending, especially in the area of revolving credit such as credit cards. CRA exams should be more common and rigorous in this space to ensure that loans are made to be affordable and sustainable and serve as the first choice in a market shared with predatory payday lenders.
- Mortgage lending is now dominated by nonbank mortgage lenders, not banks. In 2019, nonbank lenders captured 54% of the conventional market share. Mortgage companies are currently performing modestly better than banks in serving LMI communities, but without CRA regulations there is no guarantee that this performance continues. CRA compliance will provide the added benefit of making sure all mortgage companies are lending responsibly and that companies that have fallen behind in providing financial services to underserved communities are pushed to meet the standard.
- Government-sponsored enterprises (GSE) such as Fannie Mae and Freddie Mac hold 47.9% of mortgage debt, compared to 22.1% held by banks. The GSEs are already subject to CRA-like obligations but those policies, and the metrics used to monitor compliance, could be strengthened. Currently, GSE’s goals to meet their affordable housing obligations are set at a national level, whereas community needs vary on a state, metropolitan and rural level. The paper recommends changes so that GSEs’ performance can be evaluated across states, metropolitan areas and rural counties.
“The financial sector, like the economy itself, has changed dramatically since CRA took effect in 1977, and banks, as massive as they are, no longer dominate the availability of credit and capital,” said Josh Silver, a senior policy analyst at NCRC and co-author of the paper. “The other institutions that provide credit, capital and financial services essential for personal and community wealth building all benefit from government programs and investments to minimize their risks, and they should also have a duty to serve and reinvest in the communities where they do business.”
To read the full report: https://ncrc.org/making-cra-relevant-for-a-changing-financial-services-industry/