House Financial Service Subcommittee Hearing on the Community Reinvestment Act

House Financial Services Subcommittee on Consumer Protection and Financial Institutions

“The Community Reinvestment Act: Assessing the Law’s Impact on Discrimination and Redlining”

Tuesday, April 9, 2019

Key Topics & Takeaways

  • FinTech: Asked about fintech innovation and how it applies to CRA modernization, Odom noted that some fintech innovations create the “false promise” of transforming the environment. He said that even where technology adoption is at a high level, some services will still require face to face interactions.
  • CRA Exams: Mitchell said to improve exam consistency, there needs to be more training as well as a database of projects that qualify for CRA. Roberts added that agencies should have examiners specialized in CRA.
  • Modernization of the CRA: Asked how the CRA could be modernized, Baradaran said the CRA should focus on outcomes and infusing wealth and capital into communities. Roberts said there should be more clarity and transparency for how metrics are applied, and also explained that rural communities should receive more consideration. Van Tol said that more guidance, feedback, and training for examiners is important.

Witness

Opening Statements

Rep. Gregory Meeks (D-N.Y.), Chairman, House Financial Services Subcommittee on Consumer Protection and Financial Institutions

In his opening statement, Meeks said banking, finance, housing, and access to capital are “key pillars” of breaking the cycles of poverty and exclusion. Meeks said the legacy of redlining and discrimination should not be downplayed, and that while the Community Reinvestment Act (CRA) has contributed to addressing discrimination in lending, “shocking” patterns of discrimination still exist that deny people the chance to own homes. Meeks noted there is a call to modernize the CRA, including addressing the growth of nonbank lenders not covered under the CRA, ensuring banks and lenders continue to meet their obligations to the unbanked and underbanked, and other complex issues. Meeks discussed the Advanced Notice of Proposed Rulemaking (ANPR) announced by the Office of the Comptroller of the Currency (OCC) noting that the agency received more than 1,500 comment letters, many calling on the OCC to protect the integrity of the CRA. Meeks urged the OCC, Federal Reserve, and Federal Deposit Insurance Corporation (FDIC) to work in concert on CRA modernization and consider carefully the original intent of the legislation.

Rep. Blaine Luetkemeyer (R-Mo.), Ranking Member, House Financial Services Subcommittee on Consumer Protection and Financial Institutions

In his opening statement, Luetkemeyer said it is important to discuss how banks meet the needs of their local communities, that banks should not deny loans based on the community a person lives in, and that too many Americans are unbanked or underbanked. Luetkemeyer said that while the intent of the CRA is noble, today it is an overly burdensome requirement for financial institutions with little clarity on how to comply. Luetkemeyer said the banking industry has gone through major changes thanks to evolving technology and that the CRA should be brought into the 21st century to align with the realities of the banking industry today.

Rep. Maxine Waters (D-Calif.), Chairwoman, House Financial Services Committee

In her opening statement, Waters called the CRA a “law of immense importance” and one of the most “impactful” civil rights laws. Waters said redlining remains pervasive in 60 metro areas and the CRA must be strengthened to ensure communities are fully and fairly served and that it is properly administered.

Rep. Patrick McHenry (R-N.C.), Ranking Member, House Financial Services Committee

In his opening statement, McHenry called the CRA an “analog approach to a digital world,” saying a bank’s commitment to a community can no longer be measured by physical branches. McHenry acknowledged there are banking deserts in both rural and urban areas and Congress should do more to ensure equal access to consumer credit. McHenry said Congress must update the CRA to ensure banking is available to people “on their terms” and “through the medium they choose,” and ensure banks are in the best possible positions to serve their communities as they deserve to be served.

Testimony

Jesse Van Tol, Chief Executive Officer, National Community Reinvestment Coalition (NCRC)

In his testimony, Van Tol said the CRA has been effective, though it has not been enough to reverse the effects of redlining and discrimination. Van Tol said that according to the Federal Reserve Bank of Philadelphia, the loss of CRA census track designation leads to a 10 to 20 percent decrease in mortgage lending. Van Tol says the NCRC estimates a $52 billion to $105 billion loss or shift in lending in low- and moderate-income areas nationwide if the CRA were to be significantly weakened or assessment areas transformed. He said banks have done a total of $1 trillion in community development lending since 1996 and the impact is not only by the largest banks, but by smaller banks as well, including in rural America. Van Tol noted that most nonbank lenders trail behind CRA-regulated banks in lending to low- and moderate-income borrowers, and nonbank lending is consistently more costly than bank lending.

Mehrsa Baradaran, Associate Dean for Strategic Initiatives & Robert Cotton Alston Chair in Corporate Law, University of Georgia School of Law

In her testimony, Baradaran said that the underlying theory of the CRA is that banks have a duty to the public because they benefit from government subsidies in the form of FDIC-insured deposits, loans supported by federal guarantees, and investment in mortgage-backed securities backed by the government-sponsored enterprises (GSEs), among others, without which customers would lack the sufficient trust that enables banks to function properly. Baradaran said deregulatory legislation has “transformed” the banking sector and small community banks have “struggled to survive.” Baradaran said Congress must ensure access for all people and the issues the CRA was designed to address have not yet been solved. She added that these issues are too complex for just one law to solve, but a strong CRA should be one step in efforts to address the historical injustice of the racial wealth gap.

Clint Odom, Senior Vice President Policy and Advocacy and Washington Bureau Executive Director, National Urban League

In his testimony, Odom said Congress decided market forces alone could not break down the effects of redlining so the CRA was enacted, though many communities continue to deteriorate today. Odom called the CRA “one of the most important civil rights and economic justice laws of the 20th century,” but said it is now in dire need of reform. Odom explained that the CRA left room for nonbank lenders that provide low quality, high cost products, and suggested that modernizing the CRA should include nonbanks. He also recommended modernizing the CRA service to test to monitor how well banks are serving low- to moderate-income communities and must do more to incentivize banks to offer credit products, as well as developing regulations to encourage majority institutions to invest in minority institutions.

Benson Doyle Mitchell, Jr., President and CEO, Industrial Bank, Representative of National Bankers Association

In his testimony, Mitchell said the purpose of the CRA was to ensure regulated financial institutions demonstrated they served the needs of the communities in which they were chartered to do business, and while the CRA has made great strides to ensure access to credit for low and moderate income communities, systemic economic and social challenges remain. Mitchell said predatory lenders have been allowed to thrive, economic inequality persists, and it is therefore important to get CRA modernization right. Mitchell said modernization must reflect changes in the financial services landscape, and success of reform should be measured by whether it would result in more credit and services delivered to communities, and if it creates unnecessary regulatory burdens. Mitchell expressed concerns about the OCC ANPR, specifically the proposed metric-based single ratio framework, calling it “too simplistic” to suit all banks. Mitchell recommended enhanced interagency CRA training for examiners, the creation of a robust public database of CRA case studies and peer performance data, consistent CRA credit throughout the life of an investment rather than just at the origination of it, and for CRA to help promote financial literacy and inclusion for unbanked and other vulnerable populations.

 

Aaron Glantz, Senior Reporter, Reveal from The Center for Investigative Reporting

In his testimony, Glantz described his organization’s investigation into modern-day redlining, which included the analysis of 31 million mortgage records, encompassing nearly every loan application submitted in the U.S. in 2015 and 2016. Glantz said the research found 61 metro areas in the U.S. where people of color were more likely to be denied a mortgage loan, even when income, loan size, and neighborhoods were the same as white counterparts. Glantz noted that despite this, nearly every bank received a satisfactory grade under the CRA, outlining three loopholes: the gentrification loophole, bank branch loophole, and nonbank loan loophole that have resulted in “persistent” redlining across the country.

Benson F. “Buzz” Roberts, President and CEO, National Association of Affordable Housing Lenders

In his testimony, Roberts said that in 2016, banks made 3.6 million CRA loans of over $419 billion, including 2.7 small business loans and 724,000 mortgage loans. Roberts said the CRA is “completely consistent” with safe and sound lending practices and is sustainable for communities, banks, and borrowers alike. Roberts pointed out that the CRA is now 24 years old and has “fallen far behind” fundamental changes in the banking industry, the needs and opportunities of local communities, and the current practices in affordable housing and community development. Roberts noted that mobile banking and other fintech innovations are helping banks better serve low- and moderate-income communities and a complement to bank branches, and the CRA has not kept pace with this. Roberts said many improvements to the CRA are possible within the current framework.

Question & Answer

Eliminating Loopholes

Meeks asked how to eliminate the loopholes in the CRA. Van Tol agreed that the loopholes are a problem and the CRA needs to apply to more loans and more lenders, as it only currently applies to 30 percent of mortgage loans and only those in assessment areas, and does not apply to nonbank lenders.

OCC ANPR

Meeks asked about the metric-based ratio proposed by the OCC. Van Tol said a single ratio is “problematic” and would drive activity away from local communities to the most profitable, lowest risk activities, calling it “detrimental.”

CDFIs

Meeks asked about Community Development Financial Institutions (CDFIs). Mitchell explained that CRA and CDFI requirements do not always “sync up” and assessment areas can differ. Mitchell recommended that the requirements should be aligned, as should the reporting requirements. Roberts said the CRA examinations should take into account mobile access, as well the proliferation of internet banks that are headquartered in one city, do not have any branches, but serve customers across the country. He also noted that the CDFI Fund is “woefully underfunded.”

FinTech

Reps. Roger Williams (R-Texas), Bill Foster (D-Ill.), Luetkemeyer and McHenry asked various questions about fintech innovation and how it applies to CRA modernization. Odom noted that some fintech innovations create the “false promise” of transforming the environment, explaining that for cell phones to work as a mobile payment device, they still must be backed by a credit card or bank account, and that it can be difficult to fill out long applications on a small cell phone screen. He said that even where technology adoption is at a high level, some services will still require face to face interactions.

Nonbank Lenders

Waters asked about nonbank lenders. Van Tol said the CRA should apply to the whole market, which would bring scrutiny, drive down costs, and encourage nonbank lenders to participate in more CRA activities.

CRA Exams

Reps. Denver Riggleman (R-Va.) and Barry Loudermilk (R-Ga.) asked about CRA examinations and enforcement. Mitchell said to improve exam consistency, there needs to be more training as well as a database of projects that qualify for CRA. Roberts added that agencies should have examiners specialized in CRA.

Modernization of the CRA

Reps. Lacy Clay (D-Mo.), David Kustoff (R-Tenn.) and Williams asked how the CRA could be modernized. Baradaran said there is a lot of regulatory “box checking,” but the CRA should instead focus on outcomes and infusing wealth and capital into communities. Roberts said there should be more clarity and transparency for how metrics are applied, and also explained that rural communities should receive more consideration. Van Tol said that although most banks pass their CRA examinations and therefore know in the aggregate how to pass, they often do not know about individual investments in real time, saying more guidance, feedback, and training for examiners would help this issue.

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