January 2001
The Community Reinvestment Act (CRA) and the
nation’s fair lending laws have leveraged a tremendous increase in
affordable home lending for minority and low- and moderate-income
communities. Our nation, however, has now reached a crossroads. Increases
in lending for underserved neighborhoods slowed down in the late 1990’s
after a dramatic surge earlier in the decade. At the same time, predatory
lending threatens the progress in reinvestment by dispossessing homeowners
of their wealth through foreclosures and other exploitative practices. The
Community Reinvestment Act and the nation’s fair lending laws must be
strengthened in order to enhance our progress in revitalizing formerly
redlined communities.
This briefing paper reviews the need for a
CRA Modernization Bill, improved home and small business data disclosure,
combating CRA grade inflation, stopping predatory lending, and fixing
provisions of the Gramm-Leach-Bliley Act that weaken CRA.
From 1990 to 1999, the percentage of home mortgage loans received by
low- and moderate-income borrowers increased from 18 percent to 30
percent. Most of the surge, however, occurred between 1990 and 1995 when
the share of loans received by these borrowers increased 8 percentage
points from 18 to 26 percent. The share then increased only 4 percentage
points from 1995 to 1999. A similar trend of a slowdown in the latter
1990’s is observed when considering lending to minorities.1
NCRC believes that regulatory reforms combined with an increase of
public participation in the CRA process played a significant role in the
spike of lending to working class borrowers in the first half of the
decade. The federal banking agencies made CRA ratings public in 1990. They
then improved the rigor of CRA exams by focusing on objective measures
such as the number and percentage of loans, investments, and branches
reaching low- and moderate-income communities.2 These reforms
helped increase the participation of members of Congress from both
parties, local public officials, churches, community leaders, and other
concerned citizens in the CRA process. For example, when banks applied to
regulatory agencies for permission to merge, community groups, public
officials, and banks often engaged in extensive dialogues to figure out
how the newly merged institutions would maintain and/or increase their
lending to underserved populations. As a result of these dialogues, banks
and community groups have negotiated more than $1 trillion dollars of CRA
agreements since the passage of CRA in 1977. CRA agreements are promises
to a make a certain number of loans and investments in low- and
moderate-income communities in specified time periods.3
Research conducted by the Federal Reserve Board and the Department of
Treasury confirm that the CRA public participation process and CRA
agreements have indeed bolstered home mortgage lending to underserved
populations.4
A revolution in the financial
marketplace, spurred by the Gramm-Leach-Bliley Act (GLB Act) of 1999, is
slowing down the progress in CRA-related lending activities. Under the GLB
Act, securities firms, banks, and insurance companies can now merge with
fewer restrictions. CRA, however, only applies to the banks in these new
financial conglomerates. At the same time, insurance agents, mortgage
company affiliates, and other non-traditional lenders in these
conglomerates will not be covered by CRA although they will be making
loans, investments, and providing other banking services. This will
further reduce CRA-related lending if CRA is not updated to take into
account the changes in the financial industry.
The CRA
Modernization Act of 2000, H.R. 4893, provides the needed CRA update. In
addition to applying CRA-like requirements to insurance companies and
securities firms, H.R. 4893 applies the current CRA law to all lending
affiliates of the new financial holding companies authorized under
Gramm-Leach-Bliley. This not only includes mortgage companies, but also
insurance firms and other affiliates of holding companies that will be
offering loans and basic banking products in the post financial
-modernization world.
The ability of members of Congress, Mayors, faith-based and other
community leaders to make detailed assessments of financial institutions’
lending records is critically important toward improving capital flows to
underserved communities. Data analysis enables banks and community groups
to identify credit needs and missed market opportunities. Needed
improvements in data disclosure include enhancing the Home Mortgage
Disclosure Act (HMDA) data, improving the CRA small business data, and
implementing a data disclosure requirement for insurance
companies.
Recently the Federal Reserve Board proposed improvements
to the HMDA data that include the reporting of the Annual Percentage Rate
(APR), refinements to the definition of refinance and home improvement
loans, and the inclusion of home equity loans in HMDA data. These proposed
reforms are overdue. In particular, the APR is vital because it will
enable regulators and members of the general public to determine which
lenders are offering unreasonably high interest-rate loans to minorities
and low- and moderate-income borrowers and which lending institutions are
making a high number of affordably priced loans to these populations. The
APR would aid fair lending enforcement and consumer searches for
affordable lenders.
Under CRA, banks and thrifts are required to
report the census tract location of their small business loans, but not
the gender or race of small business borrowers. Lending institutions and
community groups have analyzed small business lending by neighborhood to
identify unfulfilled credit needs and design affordable lending programs.
It is not possible, however, to use the current small business data in
determining where minority-owned and women-owned businesses are
experiencing difficulties in accessing credit. Research indicates that the
lack of data on the characteristics of small business owners has resulted
in less progress in lending to small businesses than homeowners in
underserved communities.5 The Federal Reserve Board proposed
the voluntary data collection of race and gender information under its
Regulation B, but has not yet acted on its proposal. Rep. Jim McGovern
will soon introduce a bill mandating the reporting of race and gender of
small business borrowers as well as making other improvements to the small
business data.
A few states, like Massachusetts, have HMDA (Home
Mortgage Disclosure Act)-like laws applied to insurance companies. We
should increase the number of these state laws as well as mandating
insurance data disclosure on a federal level. As part of the CRA
Modernization Act, insurance companies would be required to disclose data
on their home insurance policies by race, gender, income, and census tract
location of the policyholders. Using this new data, HUD would conduct
CRA-like exams measuring the amount of insurance policies offered to
traditionally underserved populations.
- Combating CRA Grade Inflation
The GLB Act placed a greater value on the actual CRA rating of
financial institutions. The "have and maintain" provision of the law
requires banks to achieve at least Satisfactory CRA ratings if they wish
to merge with insurance companies and securities firms. Yet, this
provision means little as long as 100 percent of large banks and 98
percent of small banks continue to get passing grades. In contrast, 10
percent of the banks failed their CRA exams in 1992. It is no coincidence
that the increase in lending to low- and moderate-income borrowers slowed
down in the late 1990’s as almost all banks started passing their CRA
exams. While many banks have improved their CRA performance, it is not
true that only 2 percent of banks have failing CRA performance. Even
moving the inflated ratings down by 2 to 3 percentage points could have a
major impact on the motivation of banks to make loans and investments in
low- and moderate-income communities.
In addition, CRA exams now
include "Low Satisfactory" ratings for below average but not failing CRA
performance. NCRC believes that banks with Low Satisfactory and failing
ratings on their overall rating or their rating in any assessment area
must be required to submit an affirmative plan indicating how it would
improve its performance over the next two years. The regulatory agencies
must be required to receive public comment on these plans and then
approve, require re-submission of the plans, or approve the plans with
amendments.
We must step up our efforts to identify and eradicate predatory
lending. Horror stories abound of senior citizens, minority, and low- and
moderate-income families losing their homes and wealth due to unfair and
deceptive tactics. NCRC has called for swift and strong Federal
legislative and regulatory action to combat the growing incidence of
predatory lending nationwide, testifying before the House Banking
Committee and participating on the HUD/Treasury Task Force on Predatory
Lending.
Research conducted by NCRC, as well as a number of others,
clearly shows that the share of the mortgage market held by subprime
lenders in minority neighborhoods throughout the country is significantly
higher than the share of the mortgage market held by subprime lenders in
white neighborhoods, even when controlling for income. With evidence
indicating that a growing number of subprime lenders are engaging in
predatory practices, this does not bode well for the economic health of
these communities or their residents. NCRC strongly supports the efforts
of Representatives Schakowsky and LaFalce, as well as Senators Schumer and
Sarbanes, to enact anti-predatory lending legislation. Among other things,
anti-predatory lending bills sponsored by these Members of Congress outlaw
deceptive practices and improve HMDA data by including loan terms and
conditions.
We must also guard against "reform" attempts that
weaken existing consumer protections against fraud and abuse. Segments of
the lending industry are now promoting changes to the Truth in Lending Act
and the Real Estate Settlement Procedures Act that they claim will
simplify disclosures of loan terms and conditions. In reality, their
proposals would reduce consumer protections without providing any
additional information.
- Remove Harmful Provisions of the Gramm-Leach-Bliley
Act
Restore Previous CRA Small Bank Exam Cycle: The GLB Act reduces the
frequency of CRA exams from every two to every four or five years for most
urban and rural small banks with assets under $250 million. This seriously
limits CRA's oversight of 8,600 small banks or 80 percent of all banks and
thrifts. Small banks will become adept at gaming the CRA process. They
will relax their CRA lending in underserved communities for four years,
and then hustle to make loans the last year before a 'twice in a decade'
CRA exam. In the year 2000, 1,614 banks underwent CRA exams. This is a
reduction of more than 50 percent from the 3,544 CRA exams in 1999. The
reduction is due to the lengthening of CRA exams for small
banks.6
The small bank exam cycle must be restored to
once every two years, considering that CRA has opened up new markets for
small banks and is not a burden to them. The federal banking agencies have
estimated that complying with CRA data collection entails 10 hours of work
each year for small banks.7 Small banks themselves have
commented on the ease of their CRA exams, which were already streamlined
in 1995.
In addition, a bill should mandate that fair lending
exams also occur once every two years. Although the federal agencies have
conducted these exams once every two years for several years, the Office
of the Comptroller of the Currency just adopted a less frequent
timetable.
CRA Sunshine Provision: The Act requires the annual
disclosure of CRA agreements to federal banking agencies. CRA agreements
and pledges are promises made by banks to provide a specified amount of
loans and investments to minority and working class communities in future
time periods. The Act requires banks and any community groups that are
parties to CRA agreements to disclose information about the loans,
investments, and grants made under the agreements.
While no one
can argue with the concept of sunshine, the provisions in the statute
provide no real sunshine and are aimed instead at chilling the First
Amendment rights of advocates. By requiring special reporting requirements
only of those groups that comment on applications and the CRA records of
banks, this new law provides a disincentive for religious leaders,
community groups, and others to participate in the CRA process. Congress
should either repeal the sunshine provision or make it much less
cumbersome and invasive. Disclosure requirements could be simplified, for
example, by codifying that disclosure of tax forms such as the 990
suffices. Instead of basing disclosure on speech, disclosure should be
based on an objective standard such as a CRA agreement pledging to
increase lending and investing by a specified percent (five percent or
more) in low- and moderate-income census tracts in all of a bank’s
markets.
1 NCRC has conducted
national-level analysis of HMDA data from 1993 through
1999.
2 The federal banking agencies implemented new CRA
regulations in spring of 1995 (Federal Register, May 4, 1995, Vol. 60,
Number 86, pages 22155-22223). The new CRA exams started in 1996 and 1997
for small and large banks, respectively.
3 A NCRC
publication, CRA Commitments, provides a database of CRA agreements as
well as describing innovative CRA loan and investment programs contained
in CRA agreements. This publication is updated annually.
4
Raphael Bostic and Brian Surette, "Have the Doors Opened Wider? Trends in
Homeownership Rates by Race and Income," Working Paper, April 2000,
Federal Reserve System. Department of Treasury, "The Community
Reinvestment Act After Financial Modernization: A Final Report," January
2001.
5 David G. Blanchflower, Philip B. Levine, and David
J. Zimmerman, Discrimination in the Small Business Credit Market, Working
Paper 6840, National Bureau of Economic Research, December
1998.
6 Inside Mortgage Compliance, January 15,
2001.
7 See Federal Register, May 28, 1999 (Volume 64,
Number 103), pages 29083-29086.
The National
Community Reinvestment Coalition (NCRC) is the nation's CRA and fair
lending trade association of more than 800 community organizations and
local public agencies dedicated to increasing access to capital and credit
for traditionally underserved urban and rural communities.
