The Community Reinvestment Act Continues to Meet the Credit Needs of Our Communities

February 1, 2008

Author: Barbara van Kerkhove

In January, Empire Justice Center and the Greater Rochester Community Reinvestment Coalition hosted an all day forum celebrating 30 years of the federal Community Reinvestment Act (CRA).  The forum, entitled “Happy Birthday CRA: Celebrating the Past, Planning for the Future,” featured panel presentations, discussions and a lunchtime keynote address by Diane E. Thompson, an attorney with 14 years experience representing low income homeowners.

“CRA taught banks that money could be made on loans to red-lined census tracts.  Unfortunately, what we have seen in the last ten years is a replacement of good, performing CRA loans with toxic subprime products, destined to fail.  We need more than ever a commitment by mainstream lenders to make performing loans to all communities and not to consign certain segments of our community--the elderly, the poor, and African Americans and Latinos--to overpriced, risky products,” noted Ms. Thompson.

In addition to celebrating its achievements, the panels focused on how to modernize CRA as well as how CRA might address the current mortgage meltdown.  Following is a summary of panelist and audience suggestions, as well as other ideas from community advocates, for improving CRA to better meet the credit needs of today’s communities.

Increase the Breadth of Community Reinvestment Obligations

How might CRA be expanded so that more financial institutions are required to meet the needs of the communities in which they do business?  Panelists at this forum discussed several options.  Many of these ideas come from how Massachusetts has expanded CRA, as described by Tom Callahan, the executive director of the Massachusetts Affordable Housing Alliance (MAHA).

Expand CRA to cover credit unions.  Credit unions today are a billion dollar business.  However, except for state-chartered credit unions in Massachusetts and Connecticut, no credit unions have community reinvestment obligations .  Applying CRA obligations to credit unions is certainly important to Rochester, where ESL Federal Credit Union is consistently one of the top mortgage lenders in the area.  While some advocates would like all credit unions to be subject to CRA obligations and others opt for covering only larger credit unions, with assets over a certain threshold, this part of our financial services industry should be brought in the fold of CRA.

Expand CRA to cover all mortgage lenders.  The majority of mortgage lending today is done by mortgage lenders other than CRA-regulated institutions in their assessment areas.  This means that a majority of loans were made with no CRA obligations in mind.  Massachusetts passed legislation in November requiring all mortgage lenders making 50 or more mortgage loans in Massachusetts each year to be subjected to full state examinations and to be rated on how well each company is meeting the mortgage credit needs of the Commonwealth.

Require insurance companies to reinvestment in our communities.  Many communities find it difficult to access affordable, quality property insurance.  However, the property and casualty insurance industry is a multi-billion dollar business with no obligations to reinvest in the communities from which they take insurance premiums.  In 1996, Massachusetts passed a law requiring Home Mortgage Disclosure Act (HMDA) disclosures on where property insurers do business and creating CRA-like financial incentives for insurers to write more policies in underserved neighborhoods .

Strengthen Bank Community Reinvestment Obligations

In addition to expanding CRA to financial institutions other than bank depositories, panelists, particularly Hubert VanTol of Rural Opportunities, Inc. and Diane Thompson, discussed how the community reinvestment obligations of banks could be strengthened.  These changes are not necessarily limited to banks.  They could be applied to other financial institutions as well.

Require that affiliates be part of CRA.  Currently banks can choose whether or not affiliates are included in their CRA exams.  This means that if affiliates would negatively impact a bank’s CRA exam rating, a bank could choose not to have affiliates included for that exam.  Optional affiliate inclusion also encourages less responsible lending and services to be shifted to affiliates, while CRA-related lending and services remain with the regulated institution.  To address this the federal CRA Modernization Act of 2007 proposes requiring all nonbank affiliates of bank holding companies that engage in lending or offer banking products or services be subject to CRA in the same manner as regulated financial institutions.

Change assessment areas to reflect where banks actually do business.  Today banks do significant amounts business in communities where they have no branches.  So, while they may capture a significant portion of such an area’s lending market, they have virtually no obligations to serve the credit and investment needs of that community.  As noted by Hubert VanTol, this negatively affects the lending and services available to rural communities, many of which are lower income areas.  The CRA Modernization Act proposes that, in addition to CRA obligations in metropolitan areas and states where they have branches, banks also would have CRA obligations in any community where they have 0.5 percent or more of the lending market.

Expand CRA obligations to include communities of color.  In her panel presentation, Diane Thompson noted that the 1977 Community Reinvestment Act was a response to the redlining of minority communities.  The final legislation, however, only obliged banks to address the credit needs of low- and moderate-income communities.  While low-moderate income communities often overlap minority communities, there is ample evidence to suggest that the credit needs of minority communities today are not being addressed by responsible, risk-based loan products.  The CRA Modernization Act adds “neighborhoods of different racial characteristics” in addition to low- and moderate-income neighborhoods as areas in which financial institutions would have community reinvestment obligations.

Use CRA to Address the Current Mortgage Meltdown

Many of the above improvements to the Community Reinvestment Act would be likely to reduce aggressive lending practices that have led to the current mortgage meltdown, particularly bringing all mortgage lenders under the purview of CRA, requiring the inclusion of affiliates in CRA exams and expanding CRA to minority communities.  Below are some additional ways to strengthen CRA to encourage regulated institutions to make only responsible loans and to help homeowners at risk of foreclosure.

Give CRA credit to institutions that work with at-risk borrowers and reduce foreclosures.  As reviewed by Diane Thompson in her presentations, the response to the foreclosure crisis by financial institutions and policymakers has been inadequate.  Due to the “toxicity” of many of the subprime loans made over that past few years, borrowers are in default or foreclosure earlier than ever or before their adjustable rate mortgages (ARMs) reset to the higher rate.  These borrowers will not be helped by the current bailout proposals.  Therefore, regulators need to use banks’ community reinvestment obligations to encourage them to work with these at-risk borrowers.  Banks should be examined for, and given CRA credit when, they work with their borrowers in default and foreclosure—including doing loan modifications and work-outs and when they reduce foreclosure rates, particularly in low-moderate income and minority communities.  In addition, banks should be given CRA credit when they do not allow foreclosed properties to languish in “legal limbo,” for example, when banks sell, at a deep discount, bank-owned foreclosed properties to not-for-profit developers for rehabilitation.

Reduce CRA ratings for abusive lending practices.  Currently, predatory or abusive lending practices have little negative impact on a bank’s CRA rating, while such practices certainly do not meet the credit needs of the community.  The CRA Modernization Act would require that regulators reduce CRA exam ratings for any institution or affiliate found engaging in predatory, abusive or discriminatory lending.

Expand disclosure requirements.  Regulators and the public need to more information on the type of lending that occurs in different communities.  CRA’s related data disclosure legislation, the Home Mortgage Disclosure Act (HMDA), while expanded in 2004, includes little information neither on borrowers’ ability to pay nor about the nontraditional mortgage products that have come into existence over the past few years.  This lack of information is why the response to the foreclosure crisis has been so slow and inadequate to date.  HMDA needs to be amended to require information on the specific type of loan product, loan pricing, origination fees, financing of lump sum insurance premium payments, balloon payments, prepayment penalties, loan-to-value ratios, debt-to-income ratios, housing payment-to-income ratios, and credit score information.  Much of this is included in the CRA Modernization Act.

These ideas for modernizing CRA, and its supporting laws, will help ensure that needed financial services, loans and investments flow to all traditionally underserved communities.
The day’s panels and presentations were videotaped by the Western New York Law Center for future viewing.  To view the forum, go to their online resource center at: http://onlineresources.wnylc.net/online_training.asp.