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CRA: At the intersection of geography and race

This week, NHC submitted its comments on a Notice of Proposed Rulemaking issued by the Federal Reserve Board of Governors (FRB), Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), and U.S. Treasury Department, as well as a broad range of stakeholders. The NPR is a product of over five years of work that seeks to successfully modernize the CRA to account for the wide range of changes in the financial economy that have occurred since the last effort to modernize the regulations in 1995.

CRA has exceeded the expectations of its authors and early advocates, building a nationwide infrastructure of banking officers dedicated to community development in underserved areas. And CRA is empowering hundreds of major national organizations committed to investing in America’s low- and moderate-income people and communities.

The NPR goes a long way towards addressing all of these objectives. It is responsive to the interests of both industry groups and advocacy organizations. The new proposal generally meets NHC’s benchmarks for improving consistency and clarity while better serving the people and communities that need it the most. The NPR also creates an opportunity for the final CRA rule to redress the key driver of economic disinvestment in LMI communities – racially motivated redlining.

CRA stands at the intersection of geography and race. When enacted in 1977, the CRA responded to concerns over disinvestment in low-income communities and the persistent impact of “redlining,” the practice of avoiding investment in minority neighborhoods codified by the Home Owners’ Loan Corporation (HOLC) in 1933 and the Federal Housing Administration in 1934, and practiced by many financial institutions during much of the 20th century. While the Fair Housing Act of 1968 prohibited redlining and other forms of housing discrimination, these practices proved difficult to reverse.

CRA’s current regulations address race only peripherally, insofar as evidence of racial discrimination can lower a bank’s CRA rating. CRA’s establishment of a “continuing and affirmative obligation” by banks to serve their entire communities goes far beyond a fair lending mandate to do no harm. While CRA does examine service to LMI people and communities, “LMI” and “minority” are far from the same: nearly two-thirds of LMI households are White, while nearly 40 percent of Black households and more than half of Hispanic households are not LMI. These middle-income areas are particularly important in narrowing the significant homeownership gaps that directly result from the legacy of redlining.

NHC recommends that the CRA regulation develop a process for collecting and reporting baseline data on investment and lending to people of all races, as delineated in by Home Mortgage Disclosure Act (HMDA). Much like the first report of HMDA data in 1976 led to the introduction of the CRA in 1977, this data may inform future efforts to improve racial equity. This same data reporting should be used in assessing performance and establishing performance context in CRA evaluations as well. Material decreases in performance by race should be a factor in determining a “Needs to Improve” rating, and material increases should be an important part of earning an “Outstanding” rating.

Some have expressed concerns that directly addressing race in the CRA rule could risk violating the Fair Housing Act or the Equal Credit Opportunity Act. These concerns have been taken seriously in the NPR and as a result, a direct requirement for lending to specific racial or ethnic groups has been avoided. However, the fact remains that the legacy of federally required discrimination in lending is deep and persistent. This was true in 1977 and is just as true today.

The new CRA rule can effectively address this issue while balancing a strict reading of the Fair Housing Act and Equal Credit Opportunity Act (ECOA) by providing significant weight for a bank’s use of Special Purpose Credit Programs (SPCPs) under ECOA and lending to “socially disadvantaged” groups, as defined by the Small Business Administration’s 8a program.

SPCPs are lending products designed to target an economically disadvantaged group of people. SPCPs are explicitly permitted by ECOA, which prohibits discrimination in credit based on race or national origin, among other factors. However, ECOA also states that it does not constitute discrimination for a for-profit organization to refuse to extend credit offered under an SPCP in order “to meet special social needs” or for a nonprofit to administer a “credit assistance program” for its members or an “economically disadvantaged class of persons.”

Congress ensured that these programs permit consideration of prohibited bases such as race, national origin, or sex to increase access for people denied it in the past. This is especially important because the privileges of government-subsidized mortgages were made widely available only to White borrowers. These benefits have had a detrimental multigenerational impact.

Lenders can choose to create an SPCP targeted by race or ethnicity and by geography based on majority-minority, greatest disparities, and greatest need. The determination of whether to base a program on individual characteristics or geographic characteristics depends in part on the data demonstrating the need for the program. In the case of SPCPs based on individual characteristics, the lender needs to decide if the SPCP will be open to all borrowers of color or limited to some subset (e.g., Black borrowers only, Black and Hispanic borrowers, etc.; or majority-Black, majority-Black and/or Hispanic, etc. census tracts). If comparable disparities exist for borrowers in different groups, a lender might include all such groups in the program.

In addition to demographic eligibility, other eligibility criteria might be included to ensure responsible lending and identify a group of borrowers most likely to benefit from the SPCP. Wealth and income disparities exist within protected classes, and access to credit can vary based on credit score and other borrower characteristics. Several lenders and nonprofits have already launched SPCPs, and many more are expected to do so thanks to recent guidance from the U.S. Department of Housing and Urban Development (HUD) and the Consumer Financial Protection Bureau (CFPB).

NHC believes that it is crucial that CRA incorporates SPCPs in bank evaluations. In combination with the adoption of SPCPs by Fannie Mae and Freddie Mac under the direction of the Federal Housing Finance Agency (FHFA), we expect that this will make a significant contribution to improving CRA’s ability to address its foundational issue of reversing the impact of redlining.

Some may express a concern that certain recommendations in this letter are not tough enough on banks. We believe a better way to measure the rule’s effectiveness is its impact. A new final rule must meet two thresholds of success. It must improve lending, investment and activities for low- and moderate-income communities and the LMI people who live in them. But it must also be sustainable so the new approach can withstand the test of time and the inevitable swings in the political pendulum. This was certainly the case for the OCC when it pursued a highly partisan rule during the Trump administration, only to have it repealed by the Biden administration less than two years later.

Only a non-partisan CRA ensures long-term success. If the regulation fails to meet this standard, embracing well-intentioned but essentially partisan priorities, we will be forced into a process of updating CRA through a multiyear regulatory rewrite or even risk repeal of the CRA statute altogether. Some may dismiss these concerns. But, given the current makeup of the Supreme Court and the real possibility that the upcoming elections may shift power in the White House and Congress, we must have a final CRA rule that has broad support

NHC is nonpartisan and has worked well with both parties, but there is no question that many, maybe most, Republicans will oppose a controversial CRA regulation. It is equally likely that a nonpartisan CRA regulation will have enough bipartisan support to last well beyond the inevitable swings of the political pendulum. We have a historic opportunity to write a new CRA regulation built to last and serve 21st Century communities.

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