The Community Reinvestment Act brings capital to low-income borrowers, as well as to low-income neighborhoods. The CRA's original intent was to counter the impacts of redlining, a practice where lenders withdrew from lending to entire sections of their service areas. Redlining was oddly enough a creation of the government's Home Owners Loan Corporation. A bureaucrat outlined suitable areas for government-backed lending. Areas marked in red were considered not suitable. The CRA encouraged lenders (banks and thrifts exclusively) to extend credit, but it held off from instructing those lenders on how to implement that mission. The "affirmative obligation" within CRA left it up to the bankers to make their own decisions. The CRA gauged the locations for investment through a two-staged process. The two stages consisted of attributing a geographic characterization to deposits, and then to assigning a geographic attribution to certain types of business activity. The business activity took place in "assessment areas." In essence, it created a coupling between the location of deposits and the location of qualifying activities. Put another way, if a bank or thrift held a deposit in a metropolitan area, then the CRA obliged that lender to extend credit and services to LMI borrowers or to borrowers in LMI areas in that same assessment area. The CRA gauged the work of banks for three aspects - lending, investments, and services. Some 30 years later, the CRA has been updated but it continues to face challenges in keeping up with the modernization of the financial system. Here are a few of the law's current conundrums: Non-bank lenders have more market share: Banks and thrifts are given CRA obligation, but many of the biggest players in the mortgage market are independent mortgage companies (mortgageeit, ownit, First Franklin, etc.) Another set of mortgage lenders are subsidiaries of familiar brand name bank holding companies. Those bank holding companies have deposits, but their subsidiaries do non (or they have them in one centralized location), and so they do not have assessment areas. Citifinancial, Countrywide, Washington Mutual, and IndyMac are examples of this non-obligated hybrid. Money flows beyond borders and increasingly has no "place." Banks can hold their deposits whereever they like. Some banks have decided to locate those deposits in just one or two centralized locations. The law dictates that assessment areas are coupled with where deposits are held, and not where they are taken from. New modes of banking, such as mobile banking, will only enhance the trend toward placeless banking. The CRA has no explicit language surrounding race: The HOLC's use of redlining excluded minority neighborhoods from access to capital. The LMI communities that were shut out from capital at the time of the CRA's enactment were largely minority neighborhoods with mostly minority borrowers. The law's language opted to utilize income as the determinant for obligated activities. Community groups want the language clarified to recognize this implied purpose, but for now, people with lending concerns that focus on the exclusion of minorities must rely upon the Fair Lending Act. Mortgage products have innovated beyond the scope of regulation. The CRA has traditionally been enforced through a combination of regulators and community input. The latter utilize data from the Home Mortgage Disclosure Act to monitor lending practices of local banks. That data has been enhanced several times. Its last major revision, with the passage of FIRREA in the early 90s, set off a wave of dialogue and lending agreements. The data worked. Now, however, subprime lending has created a new dynamic. There is no way to distinguish between a fixed rate 30 year loan and an interest-only loan with a balloon payment. The data does not reveal the odd and potentially destablizing presence of innovations in underwriting like the stated-income loan. Nor are there provisions to identify the presence of bad terms like pre-payment penalties or yield-spread premiums. It's increasingly not about quantity of lending, but about quality: The foreclosure crisis evidences the problems when too many people get bad loans. Properties in affected neighborhoods subsequently witness declines in home prices. There is a spillover effect, too. A foreclosure to your neighbor's home leads to a distressed sale. The ensuing price, generally lower, drops comps on surrounding homes. Yet the CRA gives points to lenders who make any loans to qualifying borrowers, regardless of the quality of the credit.
Here are my comments to the Federal Reserve in response to its Q & A on possible revisions to CRA examinations. This Q & A was offered by the Fed, the FDIC, and the OCC. To be sure, it is not a proposal to make dramatic changes to the law. Doing that would require legislation. But it does put forward the possiblity that CRA might change its examination procedures to add sensitivity to technological innovation. The regulators believe that advancements in technology can enhance access to banking services. I would tend to agree. Services like remote deposit, P2P and P2B, and new data analytics hold the ability to extend banking to new communities.