Key reforms have been an outcome of social protest in the past. Increased lending under the Community Reinvestment Act (CRA) may be one of the responses to address structural racial inequality after the protests following the death of George Floyd.
Photograph by Stephen Maturen/Getty ImagesIncreased lending under the Community Reinvestment Act (CRA) may be one of the responses to address structural racial inequality after the protests following the death of George Floyd in police custody, analysts say.
Key reforms have been an outcome of social protest in the past. Already, legislation regarding sweeping changes in police practices is being crafted. After the Rodney King protests in Los Angeles in 1992, the government launched major investigations into discriminatory mortgage lending.
New reforms could address the huge racial wealth gap in the U.S. “Strengthening regulations about access to credit for people of color is low-hanging fruit,” says Camille Busette, director of the Brookings Institution’s Race, Prosperity, and Inclusion Initiative.
One critical focus could be strengthening the CRA so that financial institutions make more loans to communities that need them. The CRA, passed in 1977, was originally designed to address redlining, a racially discriminatory practice of refusing credit in low-income neighborhoods. Three agencies—the Federal Deposit Insurance Corp., the Federal Reserve, and the Office of the Comptroller of the Currency, which is part of the U.S. Treasury Dept.—examine banks for CRA compliance. The OCC supervises national banks, while the FDIC or the Fed supervise state-chartered banks.
There isn’t a penalty for a poor CRA rating, but regulators take it into consideration when a financial institution applies for a merger or for opening a new branch.
While race issues catalyzed the CRA, a San Francisco Fed blog post in 2018 noted that “the regulation itself was written to be ‘race-neutral’ and the modern application of the law looks only through the lens of income.”
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Recently, there has also been interagency disagreement in interpreting and enforcing the act. The OCC, one of the regulators, will start implementing its own rule in October that, among other things, stresses the dollar volume of loans, not the number of loans. That will diminish low-income housing investment by banks, critics say.
Unusually, neither the Fed nor the FDIC adopted the rule, which created the situation of financial institutions being held to different standards.
“There’s a chance you’ll have minority borrowers and low- to moderate-income borrowers not being able to access credit in an equitable way,” says Andy Kaufman, who manages the $2.5 billion Community Reinvestment Act Qualified Investment Fund (CRATX).
However, Ron Homer, chief strategist for impact investing at RBC Global Asset Management, which manages Access Capital Community Investment I (ACCSX), says that many banks regulated by the OCC are also part of bank-holding companies regulated by the Fed and the FDIC and will find it simpler to find investments that follow both.
As momentum piles up to address income inequality in the wake of the protests, banks might look for opportunities to do CRA lending, experts say.
Already, regulators say banks addressing the needs of low- and moderate-income communities during the coronavirus crisis, including extending payment due dates, will receive CRA credit.
“If the advocacy that we see today is sustained, then regulators and banks will have to pay more attention to some of these projects [beyond] affordable housing,” says Homer. State and local governments can also design programs that attract private capital.
Kaufman thinks banks may “increase donations or grants to help fund programs around diversity, racism and police brutality.”
Busette, of the Brookings Institution, says regulators and legislators may start collecting more information on access to credit, and “strengthening and broadening regulations” regarding data that’s reported.
She expects more support for community development financial institutions, including banks, loan funds, and venture capital funds, that finance nonconforming customers, startups, housing, social and cultural institutions and their work to revitalize neighborhoods. Loans and investments in CDFIs are a qualified CRA activity.
Meanwhile, online and payday lenders who operate in “banking deserts” could receive scrutiny from state regulators first, and then, if there is a change in power in November, efforts for more regulation “might get some traction in Congress,” says Busette. “With the constellation of events in 2020, I could see that being opened.”
Legislators might also look at how the wealth gap is driven by lack of access to jobs with benefits such as retirement plans and paid sick leave, says Busette. Even the Affordable Care Act, which has been attacked by the Republican administration, could be strengthened if power changes hands in November.
Much depends on what happens in the November election. One vocal critic of the OCC’s new rule for the CRA: Congresswoman Maxine Waters (D-CA), who chairs the House Financial Services Committee and called the OCC rule changes “outrageous.” Waters’ office didn’t respond to a request for an interview. If Democrats end up running the Senate too, “you could have new leadership improving CRA, ensuring minorities have access to capital and finding ways to ensure biases are removed and enhancing lending going forward,” says Kaufman of CRA Qualified.
Ideally, all agencies would agree on how to interpret and evaluate compliance of the law, then modernize measuring how much lending, bank capital and service actually supports low and moderate income communities. “At the end of the day, I would like to ensure that the low to moderate income borrower has the ability to own a home and create wealth via home equity,” Kaufman says.
Write to Leslie P. Norton at leslie.norton@barrons.com
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