the Future of Change

A recent investigative report that analyzed mortgage lending data from across the United States revealed that in dozens of metropolitan areas, racial discrimination in both mortgage originations and mortgage refinancing applications is still a significant problem across the country, even when the financial profile of the borrowers is the same. One of the reasons analysts have offered for this ongoing problem is that a law from the 1970s, the Community Reinvestment Act (CRA), stating that it was not strong enough to prevent the lending discrimination that still seems evident in many of the nation’s cities. Ironically, this law has also been the target of ire from conservatives, who have claimed that it helped lead to the Financial Crisis of 2008 because it forced banks to lend to prospective customers who could not make worthy borrowers.

So which is it? Was the CRA so strong that it led to risky mortgages? Is it so weak that it fails to prevent mortgage discrimination?  One might argue that both could be true. That it is strong enough to lead to risky mortgages but so weak that it still fails to prevent discrimination.

But whichever your opinion of the CRA, the facts really do not support either of these perspectives.  In reality, the CRA, by its very terms, or lack of terms, does not explicitly prohibit discrimination in lending by race or by any other protected characteristic.  Moreover, it does not cover much of banking activities today, and hardly covered ANY of the riskiest lending at the heart of the mortgage crisis.  Indeed, because of its many exclusions and exceptions baked into the CRA, only six percent of subprime mortgage lending during the height of the subprime was even covered by the law.

The fact of the matter is that the CRA was a product of compromise and consensus, a tradeoff between those who wanted to restrict redlining and those who did not want to regulate banks.  As in many such legislative compromises, the end result probably did not satisfy anyone.  Indeed, the CRA was designed, in theory, to combat redlining (excluding certain neighborhoods from bank activities) and capital exportation (taking deposits from one community and lending them in another).  But by the CRA’s express terms it does not outlaw much of anything, let alone racial discrimination in lending.  At best, banks covered by the law (and there are many financial institutions that are not), are expected to meet the “convenience and needs” of the communities it serves, and cannot exclude low- and moderate-income communities from coverage.  It says nothing about the racial makeup of those communities.  Furthermore, it does not outlaw anything.  All the law says is that federal bank regulators should take into account the record of covered banks in meeting the convenience and needs of those communities when such regulators consider applications by such covered banks to do things that require their regulator’s approval, like to merge with another bank.  One could certainly argue, and many have, that explicit lending discrimination would serve as a reflection of a bank not meeting the credit needs of the communities it serves, but the regulators have to view such discrimination in that way, and there is nothing explicit in the law itself that requires such a view.

What should be evident is that central to a regulatory scheme that ensures banks covered by the CRA are meeting the needs of the communities they are supposed to serve is that federal regulators must enforce the law, to the extent the law has any bite whatsoever.  Unfortunately, studies, to date, have shown that far less than 1% of bank applications have been denied for any reasons over the years, let alone on CRA grounds.  And that history includes times when Republicans and Democrats where in the White House and staffing federal agencies.

Will the present administration enforce the law to the fullest extent possible?  Doubtful.  Thus, it is up to state attorneys general to enforce civil rights laws, and the Supreme Court has found that such actions are lawful and not preempted by federal law and administrative oversight.  Cities, too, can get involved in combating lending discrimination; the Supreme Court recently  ruled that cities have standing to bring lawsuits under the federal Fair Housing Act.  Local governments can also explore ways to invest their municipal funds in public banks or decide, pursuant to local Responsible Banking Ordinances, to only invest such funds with responsible banks. Finally, individuals can do comparison shopping and only decide do their banking with financial institutions that truly meet their needs and those of their communities.

I’ve written a bit about some of these issues. To read more on any of these topics, here are some links:

On the role of the CRA in the Financial Crisis of 2008, read here and here.

On the role of cities in enforcing the Fair Housing Act, read here.

On Responsible Banking Ordinances and other strategies cities can undertake to improve financial institution performance, read here.

On ways to modernize the CRA to fight not just the discrimination of today and the reverse redlining that helped contribute to the Financial Crisis, but to update it to take into account the financial industry of today AND tomorrow, read here.

On how individuals can find a bank that meets customer and consumer needs, read here, and check out the New York Bank Rating Index here.