If it ain’t broke, why fix it?
That’s what some people in the housing business are thinking about a “fix” to the consumer-friendly Consumer Reinvestment Act. It’s a change that was rushed out during the pandemic without buy-in from federal banking agencies, by a regulator who couldn’t wait to get out of town.
Enacted in 1977, the CRA has done yeoman’s work over the past several decades in forcing lenders to serve all consumers in their banking footprints, not just the high-income, superior-credit borrowers. The net effect of the law has been to fight redlining — the practice of banks drawing a red line around neighborhoods in which they refuse to lend. Thus, the CRA makes mortgages, car loans and other products more available to a wider array of borrowers.
That’s why many in the business are puzzled as to the reasoning for the changes. Certainly, some of the circumstances don’t pass a sniff test, such as Comptroller of the Currency Joseph Otting’s resignation the day after the final rule was posted, after an abbreviated time to consider public comments.
If this was a boxing match, it likely would be ruled a split decision, since the Federal Deposit Insurance Corporation and the Federal Reserve Board, the other two major federal banking regulators, have not signed off on the final rule.
Rep. Maxine Waters sums up the naysayers’ opinions pretty succinctly: The new regulation “will be harmful for so many communities across the country at a time when they are under severe distress due to the pandemic,” said the California Democrat, who chairs the House Financial Services Committee. “This ill-advised rule badly weakens the implementation of the law and ultimately turns the Community Reinvestment Act into the Community Disinvestment Act. Gutting CRA has been Otting’s priority from Day 1.”
A former banking executive from Iowa, Otting was a Trump appointee. At OneWest Bank, he worked closely with the bank’s founder, Treasury Secretary Steven Mnuchin. The Office of the Comptroller of the Currency supervises nearly 1,400 national banks, federal savings associations and federal branches and agencies of foreign banks operating in the United States.
The House has passed a resolution that would prevent the OCC from making any changes in the law, but it’s doubtful the Senate will pass it. And even if it did, the president has said he will veto it.
“The CRA is an essential law that was put in place to prevent redlining and to require banks to invest and lend responsibly in the communities where they are chartered,” said Waters, who introduced the resolution with another House Democrat, Rep. Gregory Meeks of New York. “It is completely unacceptable for the OCC to use the cover of a pandemic to rush out a rule that will be harmful to communities that are already suffering during this crisis.”
Community groups like the National Community Reinvestment Coalition, the California Reinvestment Coalition and legal oversight group Democracy Forward agree that the administration has been keen on gutting the CRA.
In fact, the three groups have given notice they intend to sue the OCC over it.
“The OCC went against the majority of public comments and introduced new, gaping loopholes into the rules that will allow banks to reduce their focus on lower-income borrowers and communities: the very communities the law was intended to protect,” said NCRC’s Jesse Van Tol.
The agency took just 40 days to post the final rule after receiving more than 7,000 public comment letters on the revision.
During a recent seminar, the nonpartisan Urban Institute summarized what’s wrong with the changes:
• The metric used for assessing CRA compliance neglects community needs.
• There is no anaylsis of the proposed rule’s impact.
• It would result in a loss of public data.
Federal Reserve Board Governor Lael Brainard told another UI meeting that CRA reform should not be rushed, and should rather be the result of a united front among financial regulators.
“Given that reforms to the CRA regulations are likely to set expectations for a few decades, it is more important to get the reforms done right than to do them quickly,” Brainard said. “That requires giving external stakeholders sufficient time and analysis to provide meaningful feedback on a range of options for modernizing the regulations.”
Researchers believe it’s way too soon to downshift the fight against redlining, especially at a time when COVID-19 seems only to have widened racial disparities in housing.
According to UI’s Solomon Greene and Alanna McCargo, African Americans and Latinos have been hardest hit by stay-at-home orders and other public health measures put in place to slow the spread of COVID-19.
Because of a legacy of occupational segregation, the two researchers said, minorities are heavily overrepresented in low-wage jobs and in jobs that can’t transition to remote work. In April, Latino unemployment reached a record high of 18.9% and Black unemployment reached 16.7%.
Disinvesting in neighborhoods can add to the problem by causing real economic disparity, according to Redfin’s Dana Anderson: “Redlining remains a major factor in today’s wealth gap between Black and white families across the country.” Over the last 40 years, according to Redfin’s figures, the typical homeowner in a neighborhood that was redlined for mortgage lending by the federal government has gained 52% less in personal wealth generated by property value increases than one in a greenlined neighborhood.
But redlining hurts the entire community, not just owners of color, says Noel Andres Poyo, director of the National Association of Latino Community Asset Builders, testified during a congressional field hearing.
“When people do not have fair access to mainstream financial products and services, they tend to be less economically productive and experience less economic mobility,” he said. “Redlining and other forms of financial discrimination are market distortions, an insidious form of financial inefficiency, that threaten this nation’s economic future.”
— Freelance writer Mark Fogarty contributed to this column.
Lew Sichelman has been covering real estate for more than 50 years. He is a regular contributor to numerous shelter magazines and housing and housing-finance industry publications. Readers can contact him at firstname.lastname@example.org.
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