Time for a Re-Write

by Timothy A. Schenk KBA Assistant General Counsel tschenk@kybanks.com

The Community Reinvestment Act: Time for a Complete Re-Write

When the Community Reinvestment Act (CRA) was enacted in 1977, Senator William Proxmire, who authored the CRA legislation, testified, “By redlining let me make it clear what I am talking about. I am talking about the fact that banks and savings and loans will take their deposits from a community and instead of reinvesting them in that community, they will actually or figuratively draw a red line on a map around the areas of their city, sometimes in the inner city, sometimes in the older neighborhoods, sometimes ethnic and sometimes black, but often encompassing a great area of their neighborhood.”

The CRA statute requires the federal banking agencies to ‘‘assess the institution’s record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of such institution.’’ Upon completing this assessment, the statute requires the agencies to ‘‘prepare a written evaluation of the institution’s record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods.’’ In addition, the statute requires making portions of these written evaluations, referred to by the agencies as performance evaluations, available to the public. The statute further provides that each agency must consider a bank’s CRA performance ‘‘in its evaluation of an application for a deposit facility by such institution.”

All of that made sense in 1977; but the lending landscape has changed.

The Consumer Financial Protection Bureau estimates that the market for small business financing products totaled $1.4 trillion in outstanding balances in 2019. The Bureau estimates that small business financing by depository institutions makes up just over half of small business financing by private institutions. In 2020 and 2021, COVID-19 emergency lending programs added a further $1 trillion to this value, bringing the overall size of the small business financing market up to $2.4 trillion.” “$190 billion in outstanding balances for private term loans and lines of credit was extended by various non-depository institutions, namely commercial finance companies, fintechs, and non-depository CDFIs.

Using NCUA Call Report data for December 2019, the Bureau estimates that credit unions account for a total of about $55 billion in outstanding credit to members for commercial purposes.

Statistical figures show that more than half of all mortgages are originated by non-depository lenders.

There is now internet banking, fintechs, expanded credit union membership and services, private lenders and alternative financing; none of which existed in 1977. ulation. The number of banks in the U.S. has declined from over 18,000 in 1986 to under 5,200 today. The number of branches declined by 14 percent from 2009 to 2020. Simply put, a lot has changed since 1977. Banks are no longer the primary lender as they were in 1977. However, they are still the only lender subject to the Community Reinvestment Act. While the world has adapted to various new markets for lending and deposits since 1977, Congress and regulators have failed to make the same adaptations. It is time for Congress and federal agencies to realize that what made sense in 1977 no longer makes sense in its limited scope in 2022.

If Congress and federal regulatory agencies are truly concerned about depository and lending activities in low- and moderate-income neighborhoods, they must start subjecting credit unions and other forms of non-bank lenders to the Community Reinvestment Act. Otherwise, the data submitted by banks captures only a small portion of true lending and depository activities in low- and moderate-income neighborhoods, providing stakeholders with an inaccurate depiction of what is truly happening in those communities.

Last year the Consumer Financial Protection Bureau proposed to “add a new subpart B to Regulation B to implement the requirements of section 1071” that would create a “database that would enable stakeholders to better identify business and community development needs and opportunities for small businesses, including women-owned and minority-owned small businesses”. The Consumer Financial Protection Bureau identified the need for changes to Regulation B that many non-bank lenders did not have to report their lending data and that “data are not standardized across agencies and cannot be easily compared.” Summarily, the Consumer Financial Protection Bureau identified the need for a large populace of non-reporting entities to start reporting data to better understand whether low- and moderate-income neighborhoods were truly being served.

If the Community Reinvestment Act is going to meet its intended purpose, it must adapt to the modern era and require non-banking entities to be subject to the same rules as banks. Without such changes, stakeholders will continue to be merely guessing as to whether low- and moderate-income neighborhoods are truly being served.

Senator William Proxmire understood banking. He was a student clerk and executive trainee at JP Morgan Chase, Chair of the Committee on Banking and was outspoken on various banking regulatory nominations when candidates lacked experience in economic or monetary affairs. It is time for regulators and Congress to take action on Senator Proximire’s words to make the Community Reinvestment Act all-inclusive as it was originally intended and prevent all lenders from taking “their deposits from a community” and investing them in higher income communities.