Reduce lending in low-income neighborhoods? Incredibly, the government has a plan that could help banks do that

Like the nation as a whole, America’s banks have a dark history of discrimination against minorities, immigrants and poor people who live in poor neighborhoods.

That is, it should be history.

But it isn’t. Unequal access to mortgage and small business loans is still a problem. In many communities across the nation, loan denial rates for blacks and Hispanics are far higher than for whites with similar incomes.

Recent tests with “mystery shoppers” in a handful of cities documented one way this discrimination happens. Put simply: Bank employees treated white customers better than black and Hispanic customers with similar or better qualifications.

Along with discrimination, various market failures have led to credit deserts and underserved urban and rural communities.

The Community Reinvestment Act (CRA), passed in 1977, wasn’t designed to end racism. But it was designed to expand access to bank loans in lower-income neighborhoods. It was enacted to end redlining – a term given to the explicit discrimination that, starting at least in the 1930s, was routine in local banking and housing markets. CRA required banks to make loans to qualified borrowers in every neighborhood where banks take deposits, including low- and moderate-income neighborhoods.

One key to CRA working, however, was not that banks earned CRA credit nationwide, but that banks had a CRA obligation locally, where they took deposits. All banks serving a particular area have the same obligation to serve low-income borrowers and neighborhoods in that area. Federal regulators scrutinize whether banks exclude some neighborhoods from loans, investments and bank branches. To be clear, CRA does not establish specific quotas for banks to lend or invest, but whatever business they do must be equitable and fair and also safe and sound.

What CRA has meant is that banks have made the effort to understand lower-income communities. They have developed affordable loan products and services, worked more closely with community stakeholders and nonprofits that serve these markets, and developed lending and investing vehicles for affordable housing, renovation of commercial corridors and neighborhood revitalization efforts. Though profitable, this work may not be the most profitable in a bank’s portfolio and it may require more bank effort to execute. 

Last month, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) unveiled a plan to rewrite how banks comply with the CRA. The proposed bank rule changes are so flawed in so many ways it’s hard to know where to begin. Overall, the proposal will have the effect of granting the nation’s largest banks higher CRA ratings for doing less activities targeted at lower-income home buyers, small businesses, and neighborhoods. As FDIC Board Member Martin J. Gruenberg noted in his opposition, it dilutes the law by giving far more credit for “what banks already do in the ordinary course of business.”

The new rules would give banks CRA credit for road and bridge projects, sport stadium jumbotrons and other upgrades, luxury housing in Opportunity Zones, high-cost consumer lending, and importantly, more “pro-rata” credit for bank activities that only partially benefit lower-income communities across the country. The changes will undoubtedly mean fewer micro-loans for small businesses and small farmers, fewer small mortgages in high need and rural communities, less reason to commit bank capital to finance affordable rental housing units or complex deals to revitalize a historic district or rehabilitate a neighborhood in the midst of a turnaround.

Along with enduring discrepancies in who has access to the best education, health care, jobs and corporate leadership, the persistence of inequality in banking is yet another reminder that America’s history of racism and segregation has yet to be excised from “modern” life. Routine banking services, including deposits and lending, can now take place through smartphone apps. But lack of access to affordable credit on reasonable terms is central to the persistence of poverty. It’s an obstacle to upward mobility for anyone who isn’t born into wealth, and it remains at the core of the profound wealth divide between whites and people of color.

That obviously undercuts the idea of the American Dream. Home ownership and entrepreneurship, the essential tools for families to accumulate wealth and pass it on to the next generation, is still out of reach for too many people.

But apparently inequality in America isn’t quite bad enough for two government agencies that oversee the nation’s banks. Although bankers and community advocates urged regulators to issue new CRA rules to reflect changes in how people access modern banking services, and to make the rules clearer for everyone, instead the agencies came up with confusion and loopholes. In place of modernization, the FDIC and OCC came up with a plan to turn the clock back with a callous invitation for banks to behave badly and get away with it.

There’s also cruel irony in the timing of the proposal. The largest U.S. banks earned record profits in 2018 – more than $120 billion, following corporate tax reform that greatly benefited them. Jamie Dimon, head of the nation’s largest bank, JPMorgan Chase & Co., last year led the Business Roundtable to “redefine the purpose of a corporation” to be better corporate citizens. I applaud that sentiment, but fear it will be undercut by the OCC and FDIC CRA reforms.

Although 98 percent of banks already pass their CRA exams, the proposed rules would make it even easier to achieve an Oustanding CRA rating – and even easier for banks to cherry-pick where they do business, reduce their lending to lower-income borrowers in lower-income neighborhoods and turn their backs on potentially millions of people whose deposits are the foundation of the banking business.

This proposal has fractured the long-standing consensus among regulators on how to carry out the CRA. A third agency that regulates banks, the Federal Reserve, has begun to outline a more promising alternative that remains truer to the law’s purpose.

There is no doubt that these changes would diminish the effectiveness of a law that was desperately needed when it was enacted and which remains essential to ensure banks meet the credit needs of all communities where they take deposits, not just the wealthy ones.

The federal bank regulators had an opportunity to modernize CRA in a way that would be helpful to banks and to low- and moderate-income families in underserved communities. Instead, they tried to do a favor for the banking industry. From what I hear, banks have their own concerns with the proposal. One thing is clear: the government ignored the harm all but certain to come if the new rules are finalized without substantial changes.

That’s wrong, entirely counter to the purpose of CRA — and people who think so should speak up and urge the FDIC and OCC to rethink their proposal. Americans expect better from the banks where they deposit their money and they deserve better from a government that’s supposed to look out for the interests of everyone.

To learn more about how to submit a comment to the agencies, visit: www.ncrc.org/treasureCRA

Jesse Van Tol is CEO of National Community Reinvestment Coalition.