On September 15, 2022, Maxine Waters (D-Cal), chair of the House Committee on Financial Services, introduced legislation that would significantly revise the Community Reinvestment Act (CRA) through several new requirements.
The old CRA and why it’s time to go:
Congress passed the CRA in 1977, but the law has not kept up with changes in the banking system, requiring reform to continue rooting out discrimination and closing the racial wealth and homeownership gaps within the financial system. The CRA itself focused on the provision of credit to low-and moderate-income communities rather than on discrimination by race, sex, or other personal characteristics. It has served as a catalyst for inducing banks to enter underserved markets that they might otherwise have ignored, stimulating new market-based, profit-driven economic activity in lower-income neighborhoods. Although the objectives of the 1977 CRA are ambitious and broad, its net effects on lower-income neighborhoods are difficult to measure with precision. Recent pressure to reform the CRA reflects the ongoing changes in financial markets that evolved from a few of the following issues:
First, the concept of the “local” community is increasingly vague as many institutions are not identifiable with a particular community anymore but are national in scope, and non-traditional avenues that interact with customers (such as the Internet) avoid the brick-and-mortar segmentation of the “local” community altogether.
Another consideration for reform is that access to credit in lower-income communities is much greater today than when the CRA was first enacted. Greater access has resulted in real advantages, such as an increase in homeownership rates; However, recent issues in the mortgage market demonstrate that the CRA’s basic assumption—that more lending equals better outcomes for local communities—may not always be accurate. In identifying “good” lending from “poor” lending, greater weight is needed in CRA evaluations to assess variables such as whether an institution offers services in addition to lending such as counseling and financial education.
What the CRA revision entails:
If enacted, House Resolution 8833, “Making Communities Stronger Though the Community Reinvestment Act” would represent these significant revisions to the CRA in more than a decade: new data-gathering requirements; expansion of the types of legal violations that could affect CRA ratings; mandatory advisory committees in each market where the bank is located; and additional requirements to receive community service and charity work credit.
In particular, the bill has a core focus on addressing redlining (the practice of lenders providing equal access to credit due to the racial or ethnic composition of an area). The bill states that every two years it will require appropriate federal financial supervisory to complete an “interagency statistical study” to identify counties that experience ongoing discrimination/racial disparity in accessing credit. It will also require more transparency in data reporting, assess performance in “small-dollar”, first-lien small home mortgage lending, and consider partnerships with non-depositary lenders.
Looking ahead and other considerations
The likelihood that the bill becomes law is uncertain: If Democrats retain control of the House of Representatives, the bill may continue as a major legislative priority for the Financial Services Committee. Should the Republicans gain control of the houses of Congress post-midterm election, however, it is unlikely that the bill will pass.