The Community Reinvestment Act

A Law That Works

By Jim Campen

This article is from the November/December 1997 issue of Dollars and Sense: The Magazine of Economic Justice available at http://www.dollarsandsense.org

This article is from the November/December 1997 issue of Dollars & Sense magazine.

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At an American Bankers Association convention in the early 1980s, bank consultant Ken Thomas was surprised to hear howls of laughter emerge from one of the meeting rooms. He stepped in to find the speaker ending his presentation with a flourish, pointing to the initial letters of the words projected behind him. "In conclusion," he shouted above the laughter and applause, "you can have your Community Reinvestment Act Programs, you can have your Community Reinvestment Act Policies, you can have your Community Reinvestment Act Personnel. But—as you can see—it's all just.... CRAP!"

The bankers' laughter may have been justified at the time, as the Reagan administration and its bank regulators ignored the law that a nationwide grassroots movement of community activists had successfully pushed Congress to enact in 1977. But as the Community Reinvestment Act (CRA) marks its twentieth anniversary this year, no one is laughing at it anymore.

In fact, the CRA is one of the most remarkable success stories of the 1990s. Under strong pressure from a second wave of grassroots activism that began ten years ago, many banks have recognized the potential for profitable business in neighborhoods that they had written off without a second thought not so long ago. Mortgage loans to minority and low-income homebuyers have soared. Hundreds of local partnerships among banks, community-based organizations and government agencies have resulted in tens of thousands of new units of affordable housing.

The CRA has acquired broad and deep support, due to the difference that it has made in hundreds of communities throughout the United States. This support paid off in 1996 when the CRA emerged intact from a determined attempt by congressional Republicans, following their 1994 electoral victory, to gut the law .

In spite of this legislative success and its many accomplishments, the future of the CRA remains uncertain. Its opponents may have lost a battle, but they have not given up the war, and the need for vigilant defense of the CRA will remain. Moreover, the dramatic ongoing transformation of the banking industry poses new challenges to successful implementation of the CRA.

A Collection of Laws

In fact, the CRA is the centerpiece of several laws that have worked together to increase flows of credit to borrowers and neighborhoods that banks have traditionally neglected. The CRA itself simply says that banks are obliged to serve the credit needs of all the communities where they are located. It requires regulators to examine each bank's record of doing so and to take this record into account when deciding whether or not to approve applications for new branches or mergers with other banks. (Throughout this article, the term "banks" refers to Savings & Loans and other thrift institutions as well as to commercial banks.)

The movement that won passage of the CRA in 1977 was primarily concerned about "redlining" of inner-city neighborhoods by lenders. The term refers to some bankers' practice of actually drawing red lines on maps to indicate areas off-limits for lending. Banks were using deposits collected in these neighborhoods to make loans in the suburbs. Gale Cincotta, of the Chicago-based National People's Action, was probably the most prominent of the many community leaders throughout the country who demanded that this disinvestment be replaced by reinvestment of the community's own money back into the community.

Two years earlier, in 1975, the community reinvestment movement had won passage of the Home Mortgage Disclosure Act (HMDA), which requires each bank to report annually on the number and dollar amount of mortgage loans made in every neighborhood in every metropolitan area. This disclosure made it possible to monitor where banks were and were not making mortgage loans.

Because the driving concern of the community reinvestment movement was saving neighborhoods, both the CRA and HMDA were focused on geographic communities. A separate set of "fair lending laws" prohibits discrimination against individual borrowers on the basis of race, national origin, sex, age and other characteristics. The two most important of these laws, both legacies of the civil rights movement, are the Fair Housing Act of 1968, which prohibits discrimination in the home purchase and home rental process (including lending), and the Equal Credit Opportunity Act of 1974, which outlaws discrimination in all types of lending.

The Awakening

Until about ten years ago, the government agencies charged with enforcing these laws all but ignored them. U.S. Senate Banking Committee hearings in 1988, for example, revealed that even after a rebuke from the General Accounting Office for inadequate CRA examinations, bank regulators actually reduced the total hours devoted to CRA exams by 68% between 1981 and 1984. Moreover, only nine out of over 50,000 bank applications submitted since the passage of the CRA had been denied on the grounds of inadequate CRA performance. HMDA data were of notoriously poor quality and were frequently inaccessible to community groups. And the 1980s ended with the bank regulators having acted on only one case of lending discrimination during the entire life of the fair lending laws. As Mildred Brown, president of the national grassroots organization ACORN, told the senators, "Banks are breaking the law and the regulators are their accomplices."

Two initiatives by community activists during the second half of the 1980s turned the CRA into an effective anti-discrimination tool. First, activists recognized that the emergence of interstate banking provided a new leverage point, as bank holding companies sought regulatory approval for their expansion plans. Community groups challenged these proposals on the grounds of weak performance in meeting community credit needs. Confronted with the resulting uncertainty and delay, most banks responded by negotiating "CRA agreements" that committed them to expand their lending programs in return for withdrawal of the challenges.

The second initiative was the use of HMDA data to document dramatic disparities between the amount of mortgage lending in minority and white neighborhoods. Most significantly, "The Color of Money," a May 1988 Atlanta Journal-Constitution series, showed that in 1986 banks made 5.4 times as many mortgage loans per 1,000 homes in Atlanta's white neighborhoods as in comparable black neighborhoods. The Pulitzer Prize-winning series sparked investigations that generated similar findings, and publicity, in several other cities, and led to the Senate hearings later that year that highlighted the bank regulators' indefensible neglect of their responsibilities.

In 1989, the CRA and HMDA were strengthened by important amendments that increased public disclosure and accountability for both banks and regulators. Starting the next year, each bank's CRA performance rating became publicly available, along with a written report by its regulator. Furthermore, starting with 1990 applications, HMDA data were expanded to contain information on each application received, including the applicant's race and income and whether the application was approved or denied. When they were released in the fall of 1991, the expanded HMDA data showed that the mortgage denial rate for blacks was more than twice that for whites. Bankers argued that the higher denial rate for blacks might simply reflect their weaker credit histories, smaller down payments and other factors not included in HMDA data.

But just one year later the Federal Reserve Bank of Boston announced the results of a study that proved the bankers wrong. Using statistical methods that separated out the effects of all other known factors, the study found that racial discrimination was a major reason why blacks and Hispanics were denied mortgage loans more frequently than whites (see "Lending Insights," D&S, Jan/Feb 1994). The Fruits of CRA

As publicity and pressure mounted, the laws enacted in the mid-1970s finally began to produce dramatic benefits. Once the spotlight began to shine on mortgage lending patterns, and the Justice Department reached some high-profile settlements in lending discrimination cases, loans to blacks and Hispanics soared. Between 1991 and 1995, while conventional home-purchase loans to whites increased by two-thirds, loans to blacks tripled (from 45,000 to 138,000 a year) and those to Hispanics more than doubled. During the same period, loans in predominantly minority neighborhoods rose by 137%, while loans in areas where the population was almost all white grew by just 37%.

Meanwhile, all of the mega-mergers that have recently transformed the banking industry were vulnerable to CRA challenges. In order to ensure regulatory approval, in each case banks have negotiated agreements with the community to provide more low-income loans. By mid-1997, according to Comptroller of the Currency Eugene Ludwig (the principal regulator of the nation's largest banks), these CRA Agreements had produced total commitments (some extending ten years into the future) for over $215 billion of increased loans and investments in underserved areas.

Fighting to Survive

While some banks recognized that the increased pressures had pushed them to make what turned out to be profitable loans, most resented the growing scrutiny of their performance and called for rollback of the CRA. When the Republicans gained control of Congress after the 1994 elections, bank lobbyists convinced them to make the Community Reinvestment Act a prime target. The prospects for survival of a meaningful CRA looked bleak as the confident Republicans, led by senators Richard Shelby (Alabama) and Connie Mack (Florida) and Florida Representative Bill McCollum, offered a series of innocuous-sounding "reforms."

A "small-bank exemption" for banks of less than $100 million in assets, coupled with a "self-certification" provision that would have allowed banks with up to $250 million to evaluate their own CRA performance, would have eliminated CRA oversight for 88% of all banks. And a "safe harbors" provision would have prohibited challenges to proposed mergers of banks with a CRA rating of "satisfactory" or better—at a time when more than 95% of all banks, including all of the biggest ones, had such ratings. Any difference between amending the CRA in these ways and repealing it outright would have been purely cosmetic.

The banks' Republican allies offered three arguments to support their position, none of which could withstand serious scrutiny. First, they claimed that the CRA imposed a massive regulatory burden on small banks. While grossly exaggerated in any case, this claim was rendered obsolete by an overhaul of CRA regulations in early 1995. The revised regulations replaced an excessive emphasis on process and paperwork with a focus on actual performance, and drastically streamlined the process for banks with less than $250 million in assets.

Second, CRA opponents claimed that it requires risky loans that could undermine a bank's profitability and threaten its survival. Actually, the reverse is closer to the truth. The 1980s were marked by massive speculative lending to wealthy real estate developers and get-rich-quick schemers that resulted in the failure of more than two thousand banks and S&Ls. Yet not a single bank failure has been caused by making too many bad loans to disadvantaged borrowers.

Recently, Federal Reserve Board researchers found "no evidence of lower profitability" at banks that specialize in mortgage lending to lower-income borrowers and neighborhoods and, in a nationwide survey by the Kansas City Fed, 98% of banks reported that their CRA lending was profitable. A recent investigation by the Comptroller of the Currency found that affordable home loans had "the same level of losses" as standard mortgages.

Overall, the look-the-other-way attitude toward CRA enforcement of the 1980s was accompanied by a steady fall in bank profit rates, while the increasingly serious enforcement of the CRA in the 1990s has coincided with five straight years of record bank profits.

The third argument raised against CRA—that it was ineffective and all of the efforts to enforce it in the 1990s had accomplished little—was contradicted not just by statistics but by massive support from cities and towns around the country attesting to how much had, in fact, been accomplished. One open letter to Congress was signed by over 2,000 community-based organizations and more than 200 mayors.

The swell of grassroots support overwhelmed pressure from industry lobbyists and produced unanimous opposition by congressional Democrats to every proposal that would have weakened CRA. In addition, the Clinton administration never wavered from an early pledge to veto any bill containing such provisions. (Of course, since supporting the CRA required virtually no budgetary resources, it was easier for Clinton to take a strong stance.) When the dust of battle finally cleared at the end of 1996, the CRA emerged intact.

Challenges Ahead

With this important victory behind it, the community reinvestment movement now faces several important challenges and opportunities—in addition to the need for continuing vigilance against future legislative attacks on the CRA:

Aiding small businesses and rural households. A major increase in lending to small and minority-owned businesses is needed to support the economic development essential to healthy communities. Because HMDA data played such a central role in generating pressure to remedy the glaring disparities in mortgage lending, activists eagerly anticipate analyzing the data on lending to small businesses that will become available in late 1997 (as mandated by the 1995 revisions to the CRA regulations).

Similarly, community groups in rural areas are looking forward to analyzing this year's HMDA data, which will for the first time include data on mortgage lending outside of metropolitan areas. Both rural and urban groups want to maintain access to banking services by halting wholesale branch closures in lower-income areas—such as the 140 mostly rural branches that KeyCorp announced it will close or the hundreds of branches that Wells Fargo abandoned after its 1996 merger with First Interstate.

Extending CRA-type obligations to other financial institutions. As banks and other kinds of financial firms enter more and more into each other's businesses, it makes little sense to continue exempting these other firms from responsibilities to serve lower-income and minority communities.

Study after study has demonstrated that mortgage companies devote far smaller shares of their total loans to disadvantaged borrowers and neighborhoods than banks do. Mortgage companies, who now make the majority of mortgage loans, benefit enormously from being able to sell their loans to the government-sponsored enterprises Fannie Mae and Freddie Mac. In order to retain this benefit, the companies should be required to provide for community credit needs.

Regulation of insurance companies takes place at the state level, where the companies benefit from taxpayer-supported guarantee funds that make their policies more attractive to customers. In Massachusetts, community organizations won passage of a law in 1996 that requires property insurers to disclose—HMDA-style—the geographic distribution of their homeowner policies. Activists are now campaigning to require that life insurance companies invest part of their assets in ways that benefit the lower-income and minority neighborhoods where many of their policy-holders live.

Dealing with the growing dominance of mega-banks. With virtually all restrictions on interstate banking phased out by mid-1997, the rapid consolidation among large U.S. banks will accelerate. Giant banking companies such as NationsBank, KeyCorp, BankAmerica, Wells Fargo and Norwest will continue to expand their geographic scope, homogenize their operations, and centralize their decision-making power.

Although some of the megabanks have excellent overall records of CRA performance, their corporation-wide programs do not match the needs of every city and town. As decision-making authority migrates from local offices to regional or even national headquarters, "it is becoming harder and harder to get the big banks to deal with the specifics of local situations—even though responsiveness to the particular needs of local communities is exactly what CRA is all about," notes Debby Goldberg of the Center for Community Change's Neighborhood Revitalization Project.

Monitoring discriminatory interest rates on loans. As enforcement of the fair lending laws has increased in the last few years (for example, the Comptroller of the Currency made 23 referrals to HUD and the Department of Justice from 1993 to 1996, compared to just one referral in the preceding quarter-century), most cases have involved racial discrimination either in marketing practices or decisions to deny applications. Recently, however, attention has shifted to the fact that companies charge some borrowers more than others. One exploitative technique—a specialty of the Fleet Financial Group, which has been caught at it more than once—is for a megabank to steer vulnerable loan applicants, who are disproportionately black and Hispanic, to a related finance company where fees and interest rates are higher.

Another method is to use supposedly independent mortgage brokers to negotiate individualized loan terms with vulnerable (often elderly, female and/or minority) borrowers. This arrangement allows the brokers to impose higher interest rates and larger hidden fees of up to 12% of the loan amount into the monthly payments. Such actions cost Long Beach (California) Mortgage Company (formerly Long Beach Bank) a $4 million settlement with the Justice Department when they were caught red-handed. Earlier, Long Beach had received awards for making many loans to minority borrowers—underlining the need to consider loan pricing as well as the number of loans when evaluating a lender's performance.

Holding the bank regulators accountable. As Rochelle Nawrocki of National People's Action observes, "If our history has taught us anything, it's that only we make CRA work—not bankers, regulators, or Congress." Regulators will enforce the law only when under strong pressure to do so. Currently, CRA activists realize the need to scrutinize how regulators implement the revised CRA examination procedures for big banks that took effect in mid-1997; to question whether the fact that almost one-third of banks examined last year were rated "outstanding" reflects lowered standards; and to ensure that regulatory changes adopted as part of continuing deregulation of banking don't undermine the CRA.

Unless the bank regulators as well as banks are continually held accountable for their actions, the fact that the CRA remains the law of the land may again make no more difference than it did during the Reagan years.

Jim Campen teaches economics at the University of Massachusetts-Boston. He was a member of the Dollars & Sense collective from 1974 to 1982.