The Community Reinvestment Act and Promoting Responsible Lending to Lower Income Communities and Communities of Color

August 13, 2009

Author: Barbara van Kerkhove

A report released this past spring by a multi-state collaboration of regional research, policy, and advocacy organizations[1], including Empire Justice Center, underlines the critical role that the Community Reinvestment Act (CRA) plays in promoting safe, affordable lending to lower-income borrowers and communities. It also points out how the expansion of CRA would promote responsible lending to even more borrowers and communities.

Why is CRA important? The federal Community Reinvestment Act, passed in 1977 and strengthened in 1995, affirmatively obligates banks to serve the communities from which they take deposits, including low and moderate income communities, consistent with safe and sound lending practices. Whether or not banks are meeting their CRA obligations is determined by federal and state regulators during periodic CRA exams and during a merger or acquisition. Communities have the opportunity to comment on how well banks have met the needs of the community during these exams or the merger process.

Empire Justice Center convenes a 30-organization coalition in Rochester that monitors and comments on how well the area’s top banks have met their CRA obligations. Since 2002, the Greater Rochester Community Reinvestment Coalition (GRCRC) has commented on dozens of CRA exams, mergers/acquisitions and regulatory changes. Empire Justice Center’s analysis of mortgage and small business lending data provide the backbone of the coalition’s comments.

Through our analysis and our long-time representation of clients at risk of foreclosure, Empire Justice Center has seen the rise of abusive subprime loans and exotic mortgages that have fueled the predatory lending and foreclosure crises legal services advocates have been trying to address these past several years. Intuitively, Empire Justice Center and other advocates from across the country knew that CRA’s affirmative obligation to serve low and moderate income communities was not the cause of the foreclosure crisis. Still, pundits and politicians were looking for scapegoats on which to blame the crisis, and CRA was one.

Therefore, for this year’s mortgage lending analysis, our Paying More for the American Dream collaborative chose to test our intuition about CRA and the foreclosure crisis. The report, Paying More for the American Dream III: Promoting Responsible Lending to Lower-Income Communities and Communities of Color, examines the impact of CRA in seven metropolitan areas: Chicago; New York City; Los Angeles; Rochester, NY; Boston; Charlotte, and Cleveland.

The report’s key findings include:

• In low- and moderate-income communities, depositories with CRA obligations originated a far smaller share of higher-cost loans than lenders not subject to CRA.
• CRA currently imposes no explicit obligation to serve communities of color. So, while lenders covered by CRA were less likely to make higher-cost loans in communities of color than lenders not covered by CRA, banks with CRA obligations still made a disproportionate share of their higher-cost loans in communities of color. In the Rochester area, loans made by lenders covered by CRA were 2.5 times more likely to be higher cost in communities of color than in other communities.
• Lenders not covered by CRA made the vast majority of higher-cost loans in the seven metropolitan areas examined. In all of the metropolitan areas examined, lenders covered by CRA had a much larger  presence in the overall lending market than in the higher-cost lending market. In the Rochester area, lenders covered by CRA captured 50 percent of the total lending market, while obtaining only 33 percent of the higher cost lending market.
• CRA typically applies to banks in the areas where a bank has a branch presence (the banks’ “assessment areas”).  In all seven cities, CRA-regulated lenders acting outside their assessment areas originated a higher percentage of higher-cost loans than CRA-regulated lenders acting inside their assessment areas. Twenty-seven percent of the loans originated by banks without CRA obligations in the Rochester area were higher-cost, compared to only 14 percent of the loans made by depositories with CRA assessment areas in the Rochester MSA.

To summarize, our analysis indicates that the Community Reinvestment Act has been effective in ensuring access to fairly priced credit for low- and moderate-income borrowers and communities as lenders covered by the CRA are far less likely to make higher-cost loans than lenders not covered by the CRA.

However, our findings also shed some light on weaknesses in CRA. One key weakness is that CRA does not currently examine an institution’s lending based on race or ethnicity of borrowers or communities, even though a substantial proportion of the lending in communities of color is higher-cost. Another key weakness is that CRA is too limited in the institutions it covers. First, banks   generally only have CRA obligations in areas where they have “brick and mortar” deposit-taking branches. Second, banks often have the option when to include affiliates in their CRA evaluations. Third, independent mortgage companies, credit unions and other financial services companies never fall under the purview of CRA.

The collaborative’s recommendations to strengthen and expand CRA include:

• Expand CRA to also cover borrowers and communities of color. Black and Latino borrowers and communities have long seen disproportionately high shares of subprime lending when compared to white borrowers and communities. Extending CRA coverage to consider borrower and community race and ethnicity will be a significant step in reducing these disparities.
• Modify how CRA assessment areas are defined to reflect the true areas where banks conduct business since many banks now lend nationwide, not just from their brick-and-mortar branches.
• Expand CRA to cover all institutions making mortgages, including all bank affiliates and independent mortgage companies.  Substantial shares of higher-cost loans have been originated by the largely unregulated independent mortgage companies and bank affiliates. This higher-cost lending not covered by CRA has harmed borrowers, and destabilized low- and moderate-income communities and communities of color.

In March, legislation was introduced in the U.S. House of Representatives to strengthen and expand CRA. The Community Reinvestment Modernization Act (H.R. 1479) includes the above recommendations and more. Information on this legislation and current cosponsors can be found at: http://tinyurl.com/kpmvpz, entitled: Campaign to Modernize CRA.)

The collaborative’s full report can be found at: http://www.empirejustice.org/publications/reports/paying-more-for-the-american.html

Footnote    

1  Collaboration. The Paying More for the American Dream series is a collaborative effort of the California Reinvestment Coalition, Community Reinvestment Association of North Carolina, Empire Justice Center, Massachusetts Affordable Housing Alliance, Neighborhood Economic Development   Advocacy Project, Ohio Fair Lending Coalition, and Woodstock Institute. This is the collaboration’s third annual report examining systematic inequalities in the housing finance system and their impact on lower-income neighborhoods and communities of color. The first report, released in March 2007, examined disparities in mortgage pricing by several of the country’s largest mortgage lenders that offered both prime and subprime loans.  The second report, released in March 2008 looked at the geographic lending patterns of a set of defunct subprime lenders whose loans largely fueled the foreclosure wave that is currently devastating communities across the country and found that these loans were highly concentrated in minority and lower-income communities.