EXCERPT - Ending Redlining through a Community Centered Reform of the Community Reinvestment Act
Written by Josh Silver
Where you live often determines your life chances, and lending discrimination places residents of communities of color at significant disadvantages. Recent research by Raj Chetty reveals that “All else equal, low-income boys who grow up in such areas (areas with lower income) earn about 35 percent less on average than otherwise similar low-income children who grow up in the best areas for mobility. For girls, the gap is closer to 25 percent.” The research found that neighborhoods with large populations of lower income and African American residents in some of the largest cities such as Chicago, Atlanta, and Milwaukee in our country have some of the “worst odds.”[i]
Tragically, these outcomes did not happen by chance. They are the product of systemic discrimination. Racism drove the development of housing segregation and separation of the races, immigrants, and religious minorities into distinct neighborhoods. White neighborhoods had the advantages of superior schools, health care, and job opportunities while people of color were cornered into neighborhoods lacking these opportunities. Initially, jurisdictions such as Baltimore passed laws that prohibited African Americans from purchasing homes in desirable neighborhoods. After the Supreme Court struck down these laws, real estate and other powerful economic brokers developed racial covenants that prohibited Whites from selling to African Americans, Jews, and other immigrant populations deemed to present destabilizing influences on neighborhoods.
The Supreme Court in Shelley v. Kraemer invalidated judicial enforcement of racial covenants.[ii] However, these instruments were not the only devices used to perpetuate segregation. In the 1930s, reflective of the racism in our country, the Roosevelt administration further developed the practice of redlining. Its Great Depression recovery efforts included programs to rescue homeowners from the brink of foreclosures and to create government back-stops for home lending that facilitated the rise of the White middle class. Federal agencies developed maps of urban neighborhoods across the country advising lending institutions where to lend and what neighborhoods to avoid.[iii] Tragically, the maps deemed African American neighborhoods the riskiest and as a result few loans were made in these neighborhoods in the ensuing decades.[iv] Without access to private lending and capital, most of these neighborhoods withered economically and imperiled residents’ health and quality of life.[v] Lending discrimination was one of the multiple causes of neighborhood declines; other contributors were discriminatory real estate practices, discrimination in labor markets, and inferior schools. As a result of all these forces, Whites entered the middle class while discrimination shut the doors to opportunity for too many African Americans during the twentieth century.
If the public and private sectors created disadvantage based on place, could a law effectively require federal agencies to enforce a mandate that lending institutions engage community residents and reinvest in redlined neighborhoods? Can efforts to reinvest in neighborhoods succeed in improving the lives of victims of discrimination? Can the victims of discrimination be empowered to be part of reinvestment strategies and programs in their communities? This book is aimed at providing some answers and recommending ways to improve the Community Reinvestment Act (CRA), the main law intended to eradicate redlining.
Neighborhood activists led by Gale Cincotta and National People’s Action (NPA) in Chicago sought to combat discrimination that contributed to segregation and economically devasted communities. They worked with Senator William Proxmire to pass a data disclosure law in 1975 called the Home Mortgage Disclosure Act (HMDA) that they used to document redlining and bank refusal to lend in communities of color and White ethnic neighborhoods becoming more segregated in Chicago. Citing data driven evidence of redlining, Proxmire then seized the opportunities presented by new Democratic majorities in the House and Senate to pass CRA in 1977.[vi]
Consistent with the grassroots advocacy motivating its passage, CRA is one of the relatively few federal laws that is grounded in a democratic philosophy. It involves community residents in remediating discrimination and disinvestment by requiring banks to respond to credit needs. Under CRA, federal agencies assess and rate banks’ records of meeting community credit needs and then consider banks’ CRA performance when deciding whether to approve bank mergers.[vii] Federal agencies solicit the input of the public when conducting CRA exams and considering merger applications. The law’s premise is that democratic participation and input will help make the economy more equitable and efficient as banks utilize the expertise and first-hand knowledge of community residents regarding needs and opportunities in their neighborhoods. Labor law is a close analogy to CRA. Just like CRA, labor law creates a role for labor unions and workers to have input into working conditions and production processes in industries across America.
Fighting discrimination provides opportunities for wealth building that not only benefits victims of discrimination but also the national economy. The American dream of homeownership or small business ownership could not be realized by creditworthy residents of neighborhoods unfairly rejected for loans due to their skin color or where they lived. If CRA eliminated or at least reduced discrimination based on place, would increases in bank lending promote wealth building opportunities on a wide scale? If so, could the nation’s economic success be boosted if significant segments of neighborhoods that were economically depressed become vibrant and offer quality life chances for their residents?
As CRA turns 50 in 2027, stakeholders need to consider improvements so that its vital objectives can be better realized. This book provides an overview of CRA and describes how federal bank agencies (the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency) rate banks’ lending, investments, and services in low- and moderate-income (LMI) communities and take these ratings into account when considering bank requests to merge or open new branches. Federal agency bank CRA exams are available to the public. The public is encouraged to comment on bank performance when agencies are completing exams or considering merger applications.
The public accountability mechanisms of CRA have encouraged banks to increase their lending and investments in LMI communities. While economists have conducted quantitative studies confirming CRA’s effectiveness, there are fewer analyses that comprehensively review CRA’s practice (the process of CRA exams and merger applications) and whether CRA practice conforms with the legislation’s intent to rectify the economic disenfranchisement of redlined communities. In other words, has CRA practice succeeded in putting communities front and center to stimulate meaningful reinvestment that results in vibrant communities? Has CRA practice empowered community stakeholders to have a significant role in revitalizing their communities? To shed light on how successful CRA practice is, it is necessary to review the legislative and regulatory history of CRA to identify the objectives of Congress and whether the bank agencies have developed a regulation and examination regime that faithfully implements these objectives. The book will also include insights about CRA’s successes and frustrations from interviews with local leaders of community-based organizations and banks.
CRA has a complex mission to measure bank responsiveness to local needs that vary across the country. Banks complain about the regulatory burdens and costs of CRA exams. Community advocates, on the other hand, point out that almost 100 percent of banks pass their CRA exams and that the law therefore has not realized its potential to increase lending and investment in traditionally underserved communities. The challenge for the federal bank agencies is whether they can make CRA exams both more efficient and rigorous.
A pass rate of almost 100 percent would indicate to casual observers that banks are doing great in terms of meeting credit and capital needs.[viii] Neighborhoods across America should be thriving. But we know that this is not the case. Deficiencies in bank lending and investment are not the sole reasons for impoverished and struggling neighborhoods. Discrimination against communities of color and people of color occurs in many sectors including education and at work. A perfect CRA will not therefore completely remedy inequalities and inequities across neighborhoods. However, a better CRA can provide the credit and capital needed to successfully revitalize more neighborhoods.
A better CRA does not seek to fail hundreds of banks and reduce the pass rate to something like 50 percent. Rather, the grading system needs to be more nuanced and identify more banks that are performing at a B- or C level. If a bank is judged as barely passing, it will want to improve its CRA performance by making more loans and investments in traditionally underserved neighborhoods. Banks are quite sensitive to their public reputations so a lackluster CRA rating, even if it is a passing rating, will likely motivate many of them to improve their performance. This book will offer suggestions about how to make the rating system more reflective of variations in performance and therefore be more effective at stimulating bank improvements.
Better CRA evaluations, however, are not a panacea. A more effective CRA also needs to put community voices at the center of CRA. The current CRA regulation requires that CRA examiners consider public comment when they are conducting CRA exams. However, the current CRA exams mostly engage community organizations in a perfunctory manner that does not provide many insights into how banks are meeting needs.
CRA exams will summarize community views and often use boilerplate language to report that a metropolitan area or rural county needs more affordable housing or job creation. However, almost all underserved neighborhoods will need more affordable housing or job creation. CRA examiners could do a better job at probing for specific needs that some examined banks will be meeting but others are not.
For example, some geographical areas might need more housing for an elderly population to age-in place. Adaptations such as improved walkways leading up to the housing or alterations within bathrooms or stairways might be particularly important. Some banks might be better at responding to these needs than others; the better performers should be awarded better scores on subtests in some geographical areas or overall CRA ratings.
In other cases, preventing displacement of people of color and modest income residents in gentrifying areas are major issues in both larger metropolitan areas and smaller cities.[ix] CRA exams currently do an uneven job at identifying these demographic trends, utilizing community concerns about displacement, and assessing banks’ responsiveness to these trends.
When banks apply to acquire or merge with other banks, the CRA statute requires federal bank agencies to consider the CRA records of banks. The agencies review the most recent exams of the banks and consider public comments. They are also required to consider the public benefits of mergers and assess whether these benefits exceed harms such as less competition or branch closures after the mergers.[x]
Community-based organizations seek to avoid the harmful impacts of mergers by negotiating community benefits agreements (CBAs) with banks. CBAs commit banks to specified future levels of loans, investments, and services.[xi] CBAs promote increases in bank reinvestment activity and prevent reduced access to bank lending and services that can occur after mergers when banks re-structure themselves. Recommendations offered by the book will include how to enhance consideration of CBAs as part of merger applications and CRA exams. CBAs have similarities to labor union contracts in empowering economically disenfranchised segments of the population.
Since CRA’s passage in 1977, Congress has not substantially updated the law. It has made additions that the book reviews, but these do not address significant changes in the banking industry. Likewise, the federal bank agencies have made some changes to their regulation implementing the CRA law over the years, but these changes often fell short in keeping up to date with industry transformation. For example, while several banks still make most of their loans through branches, a significant number offer large number of loans through the internet.[xii] At the same time, the numbers of banks have dropped dramatically over the last few decades and the nation has half a dozen banks with more than $1 trillion each in assets.[xiii] CRA requirements must consider the rise of virtual banking and the massive size of the largest banks. As this book was being written, the federal bank agencies updated their CRA regulations in the fall of 2023. The book will provide an early assessment regarding the extent to which the agencies succeeded in tackling the significant changes in the banking industry to improve CRA’s effectiveness in increasing reinvestment.
The recent election also already affected the future of CRA. Since this book went to press, the Trump Administration has announced its intention to rescind the important 2023 update to the CRA regulation. Despite this setback, a CRA infrastructure consisting of departments within banks and nonprofit community organizations has developed over 40 years and produces profitable lending and investment opportunities. This infrastructure has a vested interest in CRA. Some banks have defended CRA when it has been under attack. As a result, administrations that are not sympathetic to CRA have not tried to eliminate it but weaken it via regulatory revisions. CRA will always remain contested ground but so far, enough stakeholders have combined to defend and promote CRA, ensuring its survival and opportunities for it to be strengthened at a future time. I am cautiously optimistic that CRA will not only weather storms but will eventually come out stronger. Hopefully, the recommendations in this book will help guide needed reforms to CRA when the opportunity is favorable to make it a community-centered, inclusive, and more successful reinvestment effort.
The genius of CRA is that on the surface its requirement is simple: banks must serve all communities, including and especially the redlined ones. Yet behind this surface simplicity is a profound quest for repair, transparency, and empowerment of disenfranchised communities. For our restorative quest to succeed, communities must be invited to participate in reinvestment initiatives and engaged with respect and humility. Several banks in the process are transformed into institutions that remain profit seeking but take a more holistic view of their success in that they will ultimately only prosper if they help pull up their communities and do so in responsible and safe and sound manners. This ethos needs to be spread throughout our society and institutions. Serving all communities fairly and equitability in an accountable manner and in a way that empowers communities will make our country a more hospitable, harmonious, and prosperous place.
FOOTNOTES:
[i] David Leonhardt, Amanda Cox, and Claire Cain Miller, “An Atlas of Upward Mobility Shows Paths Out of Poverty,” New York Times, May 4, 2015, https://www.nytimes.com/2015/05/04/upshot/an-atlas-of-upward-mobility-shows-paths-out-of-poverty.html?searchResultPosition=1
[ii] Shelley v. Kraemer, 334 U.S. 1 (1948), https://supreme.justia.com/cases/federal/us/334/1/
[iii] Dan Immergluck, Credit to the Community: Community Reinvestment and Fair Lending Policy in the United States (Armonk: M.E. Sharpe, 2004) 93-95.
[iv] Immergluck, 93-95.
[v] Sebastian Linde, Rebekah J. Walker, Jennifer A. Campbell, and Leonard E. Egede, “Historic Residential Redlining and Present-Day Social Determinants of Health, Home Evictions, and Food Insecurity within US Neighborhoods,” Journal of Internal General Medicine 38(15) (November 2023) https://www.ncbi.nlm.nih.gov/pmc/articles/PMC10255945/
[vi] Rebecca Marchiel, After Redlining: The Urban Reinvestment Movement in the Era of Financial Deregulation (Chicago: The University of Chicago Press, 2020) 114-119, 135-145.
[vii] Community Reinvestment Act (CRA), Code of Federal Regulations (CFR), Title 12, Chapter 30, § 2903(a), 1433, https://www.govinfo.gov/content/pkg/USCODE-2013-title12/pdf/USCODE-2013-title12-chap30.pdf
[viii] Author’s calculations using the CRA ratings database available via the Federal Financial Institutions Examination Council (FFIEC) website at https://www.ffiec.gov/craratings/default.aspx
[ix] Jason Richardson, Bruce Mitchell, Jad Edlebi, Gentrification and Disinvestment 2020, (Washington, D.C., NCRC 2020), https://ncrc.org/gentrification20/; Bill Bradley, “Small-Town America Is Facing Big-City Problems,” Next City February 29, 2016, https://nextcity.org/features/traverse-city-small-cities-growth-planning.
[x] Federal Deposit Insurance Corporation, “FDIC Seeks Public Comment on Proposed Revisions to its Statement of Policy on Bank Merger Transactions,” PR-17-2024, March 21, 2024, https://www.fdic.gov/news/press-releases/2024/pr24017.html; FDIC webpage section regarding the Federal Deposit Insurance Act, specifically Section 18(c)(5)(B) via https://www.fdic.gov/regulations/laws/rules/1000-2000.html
[xi] National Community Reinvestment Coalition, “Community Benefit Agreements: How Banks Ensure They Meet Local Needs,” https://ncrc.org/cba/
[xii] Urban Institute, Housing Finance Policy Center, “Bank lending outside CRA assessment areas,” (PowerPoint presentation, National Association of Affordable Housing Lenders webinar series, Washington DC, January 26, 2022) 5, https://naahl.org/wp-content/uploads/2022/01/Urban-CRA_Project-CRA-Assessment-Areas-v12.pdf
[xiii] National Information Center, “Large Holding Companies,” https://www.ffiec.gov/npw/Institution/TopHoldings and FDIC, “BankFind Suite: Find Annual Historical Bank Data,” https://banks.data.fdic.gov/bankfind-suite/historical