The Community Reinvestment Act, a fundamental U.S. civil rights law aimed at countering racial discrimination in lending, has long been in need of an update to keep pace with an evolving financial industry. After an inauspicious start, regulators finally appear to be on the right track. The Biden administration must do what it can to ensure that they follow through.
Finance has played a central role in creating and perpetuating America’s deep racial divisions. For much of the 20th century, the government denied Black families the subsidized mortgages that helped create affluent suburbs and the White middle class. Official maps actually marked predominantly Black (and typically poor) neighborhoods in red, designating them as hazardous for lending. This “redlining” then took on many forms, entrenching disadvantage, depriving communities of investment, and abetting all manner of predation, up to and including the subprime auto financing and payday lending of today.
Adopted in 1977, the CRA seeks to mitigate such inequities, by coaxing banks to better serve all the people in the places where they operate. Examiners designate geographic assessment areas and grade banks’ performance, giving credit for activities such as lending to lower-income borrowers, investing in affordable housing, and providing financial education. A failing grade can scuttle plans for mergers and expansions. The goal is not to spur irresponsible lending, but to encourage profitable business that otherwise might not happen.
Since the CRA’s last major update in 1995, some glaring issues have emerged. Online banking has rendered assessment areas based solely on physical locations obsolete. The statute doesn’t cover the non-bank lenders, such as Quicken Loans, that account for a growing share of credit. Inconsistency among examiners can be a problem: When, for example, banks don’t know in advance what investments will count toward community development, they invest less. Data are lacking: Examiners’ public reports don’t provide enough detail to understand how banks are performing in individual communities.
Officials have long been aware of the shortcomings. But last year, the outgoing Trump-appointed Comptroller of the Currency, Joseph Otting, rushed through a reform that would have done more to undermine the CRA than fix the problems. Commendably, the other two regulators responsible for enforcing the statute — the Federal Reserve and the Federal Deposit Insurance Corp. — never signed on to the final version. And now the Fed has taken the lead on a different overhaul that all three say they’ll work together to complete.
The Fed’s approach is a vast improvement over its predecessor. It’s much more explicit about the civil-rights mission of the CRA. It foresees assessment areas that account for the broader reach of national and Internet banks, while still requiring institutions to serve local communities. It employs more quantitative metrics and clarifies what’s needed to achieve a passing grade, without necessarily lowering the bar. It contemplates gathering better data, for example on the amount, purpose and geography of community development investments.
That said, getting a desirable CRA reform to the finish line will take political will, from the Biden administration and Congress. For one, regulators will need legislation to extend the CRA to non-bank lenders such as credit unions and mortgage-finance companies. Beyond that, the Office of the Comptroller of the Currency still lacks a confirmed leader. Somebody who sees the CRA as essential and works well with the Fed could invigorate the process.
The CRA alone cannot repair the damage done by racial discrimination in finance, but it can help ensure that the practice doesn’t persist. Getting this right is well worth the effort.