Burden or Benefit? Community Reinvestment Act Changes Coming
The U.S. Treasury Department plans to overhaul the Community Reinvestment Act of 1977 (CRA). Although lenders have been vocal about relaxing the CRA requirements, some have lauded its benefits. In the end, the Trump Administration will have a large say in how that plays out.
CRA’s original goal was to eradicate redlining by holding a lender accountable and making them report on where and to whom they were lending money through a complex grading system implemented by the Department of Treasury. If Treasury rated a lender poorly, the lender would lose its ability to take part in a merger and face restrictions on other lending activities meant to increase its overall lending capacity.
The hope was to prevent a federally regulated financial institution from denying or increasing the cost of banking to residents of racially-defined neighborhoods (a practice known as redlining) and to encourage efforts to meet the credit needs of everyone, including residents of low- and moderate-income communities.
Changes from the Trump Administration
In the Trump era of deregulation, Treasury seeks to re-construct the CRA’s efforts, stating, in part, that “… the CRA statute is in need of modernization, regulatory oversight must be harmonized, and greater clarity in remediating deficiencies is called for,” according to a June 2017 report to President Trump.
Treasury Secretary Steven Mnuchin said one of the main reasons for this overhaul is to prevent lenders from spending money and resources to comply with CRA obligations and to re-route these expenditures to help individuals who need loans and credit. The other reason cited is the unintended consequence of the CRA’s focus on lenders providing a large number of loans to low-income residents, which may encourage predatory lenders to take advantage of poor people under the guise of “compliance” with the CRA.
These reasons led to Treasury’s preliminary decision last October to reassess the CRA evaluation process, which made it harder for examiners to downgrade lenders for discriminatory practices. Before any final changes are made, however, Treasury expects to comprehensively assess how the CRA could be improved to achieve these goals, which will include soliciting input from individual consumer advocates and other stakeholders.
However, consumer advocate groups are already voicing their opinions on this matter. Some groups believe the CRA should be expanded further to help low-income communities because they still continue to experience redlining. Further, these groups point out that the CRA’s implementation and evaluation processes have incentivized lenders to make substantial investments in these communities. Their concern is that without this incentive, lenders may pull back their efforts to lend to, for example, high-risk borrowers and affordable housing developers. An additional concern is that lenders may close branches in these communities if there is no requirement to have them there.
Despite generally favoring looser CRA requirements, lenders do see the benefits of the CRA as well:
- CRA investments in low-income communities have allowed for greater enhancement of government guaranteed-loan programs.
- CRA programs allow lenders to offer low-interest rate loans to high-risk borrowers because they are insured by the government in cases of loan defaults.
Some lenders also have expressed another concern that the proposed changes could redefine the types of loans that could qualify under the CRA, possibly expanding them to include small business loans and infrastructure loans, while diluting the number of community development loans that cover affordable housing.
Everyone seems to agree the CRA framework should be better aligned to serve and improve banking activities for low-income residents and financing affordable housing in underserved communities. Lenders, consumer advocate groups, and borrowers should stay tuned to see the extent and impact of changes to the CRA, which are set to be announced sometime in mid-2018.