In the mid-1970s, community activists learned that it was no coincidence that housing in many innercity areas that were undergoing a change in their ethnic makeup was deteriorating. They learned it was common practice for lending executives at major commercial banks and savings institutions to literally draw red lines around inner-city areas where they would refuse to make loans.
The practice became known as redlining, and while it was defended by banks, it was an outrage to activists and one very important U.S. senator. Thanks to the focused leadership of Sen. William Proxmire (D-Wis.), the former chair of the Senate Banking Committee, the Community Reinvestment Act (CRA) was passed despite the unified opposition of just about every banker in America.
The idea was simple: Banks would need to serve the credit needs of all the people in their service areas, that is, the areas from which they accepted deposits, and could not deny credit just because of someone’s address.
It took some time for federal banking regulatory agencies to figure out how to hold banks accountable for compliance with CRA, and for community groups to learn how to use the law to push banks to be proactive in meeting local credit needs.
Thirty years later, the CRA has been the driving force behind a massive infusion of capital into community development and affordable housing. It has come under attack from the Republican side of the aisle in the Senate in the years since Proxmire retired, but it has survived and now enjoys bipartisan support.
The big questions about CRA now have more to do with whether to expand it, as opposed to whether it is still needed. Experts convened by AFFORDABLE HOUSING FINANCE to discuss the impact of the law generally agreed it should be expanded to include financial services firms that are not currently covered. First on the list of targets for CRA-type requirements: credit unions and insurance companies.
For affordable housing developers who entered the field in the 1980s or later, it may not be obvious how important CRA has been. Banks have learned that community development lending and equity investing in affordable housing are safe and profitable. But as our panel of experts points out in the following roundtable discussion, CRA is still as important today as it was 30 years ago.
Q How important has CRA been to affordable housing in general, and the ability to raise equity and obtain debt for the tax credit program in particular? Some people say CRA enforcement has been drastically weakened. What’s your view of how CRA is being enforced, and what should change in that regard?
Cooper: While it’s true that CRA is primarily a debt program, it is also a major driver of investment in low-income housing tax credits (LIHTCs). We are very active in sponsoring funds providing LIHTC and New Markets Tax Credit (NMTC) equity opportunities. Regulators are looking at these closely. We have been offering statespecific tax credit partnerships for 10 years. In the past, banks got CRA credit for their entire investment in such funds regardless of where individual projects were located. Now, federal bank examiners that enforce CRA are saying they will only give CRA credit for projects that are in a bank’s retail banking service area [or footprint]. In other words, if we had a fund with 10 properties, and one was in San Diego County, a bank in San Diego might only get CRA credit for one-tenth of its investment in the overall fund. It’s very difficult for smaller banks to find appropriate investments right in their service area, first, and second, they often don’t have the capacity to underwrite those deals, and so they have to rely on firms like ours. If regulators require a direct footprint match, it eliminates an opportunity to get CRA credit. Our argument is that by definition a state fund is targeted. An institution should get 100 percent regardless of where properties are located. This is a disincentive for banks to invest.
Ludwig: Because this has not been central to the administration’s focus, you find a lack of evenness. It’s heavily dependent on examiners and how they [score various bank activities in terms of CRA compliance]. Some very good programs don’t get CRA credit, but on the other hand, [some] activities that get a pass should not.
Kennedy: CRA enforcement requires very well qualified examiners. Very few people from the industry have been recruited to be examiners. Examiners turn to a book of regulations, and if it’s not expressly listed [as CRA activity], they turn it down. [This kind of] discounting is a real problem. There is a lot of bean counting going on and rigid adherence to text that doesn’t acknowledge how fluid the business is.
Fisher: I agree that regulators have been much less focused in the last six to seven years. Among community investment advocates, there have been concerns for a long time on grade inflation. Almost no institution gets less than [a] “satisfactory” rating on their CRA performance. No community group would tell you that banks are doing that well. Consolidation made it difficult for regulators to keep up. Financial institutions are moving resources to unregulated parts of their empires.
Ludwig: There is good news and bad news. The bad news for some is that with the current financial crisis we are seeing a disappearance of the mortgage banking industry as it’s been known for the last 35 or 40 years. To some degree, there will be at least for a time, a [move to bring] back mortgage lending activity into the regulated marketplace, which heavily bears on CRA evaluations. I also expect there will be legislation that will regulate to a greater degree the non-regulated financial firms due to the current [subprime lending] debacle.
Seidman: If you think about the basic premise of CRA as being fair and equitable services to all communities, then the question of the extent to which entities’ adherence to principles of consumer protection laws is taken into account in CRA evaluations and grading, I think is relevant. [Also, there is the question of whether to] extend CRA to other institutions that are doing the same things as the banks. Both of those are big issues. The former, the regulators have done some of already. The latter is clearly going to be considered in the next couple of years.
Grzywinski: We should keep in mind that the original purpose of CRA was to release the energy of the banking system to benefit low-income people and communities. The initial focus was on loans, but we also know that the banking system is able to provide deposit services, and I think that as we go forward, we should concentrate on what are those unique services that banks and other regulated depositories can provide. If we are going to see the demise of the mortgage banking business as we know it, if it would return responsibility for the longterm viability of credit to those that originate the credit—that would seem to me to be a good thing.
Q Are you suggesting that securitization and the globalization of mortgage banking have peaked, and we will come back to the old-fashioned idea of local banks making loans to local people and keeping loans in their portfolios?
Kumrow: I don’t see that trend ending. And by that trend, I meant cutting up and retrenching mortgages as income products. That trend is going to continue. It is not a bad trend. It has helped loosen credit quite a bit, and perhaps credit has gotten too loose, and there might be a retrenchment in that. But treating mortgages as an income stream that can be separated outaccording to risk, that’s a good thing.
In terms of impact on CRA, as long as you continue to tie the taking of deposits from a community to the obligation to meet the credit needs of the community, which I see as the basis of CRA, there shouldn’t be a problem, because those funds that are represented by insured deposits are always going to be huge, and that will be a huge source of capital to meet the needs of the communities that are creating those deposits
Seidman: This is all a matter of degree. There will probably be some retrenchment in the short run—how long that will remain, we’ll see. Whether that means that we go back to a portfolio model, I suspect not, but we may go back to a lot more responsibility remaining with the originator, notwithstanding a sale.
On the deposit issue, more and more institutions are taking more and more deposits from far-flung places that are not consistent with the geography of their home offices or their branches. I think that is one of the inherent structural CRA issues we are going to have to deal with if we look to modernize the statue and certainly if we look to extend it beyond deposit-taking institutions.
Q Someone said money has flowed out of regulated banks into unregulated subsidiaries, and in particular, to mortgage banking subsidiaries that are not covered by CRA. Now it’s been suggested that we are seeing a reversal in that trend. What’s your view?
Ludwig: There has been a flood of these activities back into the banks themselves. Nobody in their right mind would say the capital markets are dead in the mortgage area, or that slicing and dicing of mortgage loans is over. … But we will see a more bank-like interface for that product. It doesn’t mean loans won’t go to the capital markets, but that they are more likely to go through a banking operation that is regulated than before.
I am not saying that we don’t need CRA-like requirements for non-banks—I feel quite the contrary is true. We really ought to have broad CRA requirements of all financial institutions.
Willis: [In regard to talk of] expanding CRA, it’s all in the details. What banks do and what others will do depends on exactly what you require. It’s nice to talk at a very high level … but it is the specifics that really matter, exactly what you get CRA credit for. That is what drives the ratings, not some big theoretical goal.
Q What report card do you want to give the Bush administration on CRA enforcement?
Kennedy: It’s tough to do that because we have had a revolving door of regulators of very different types. At the beginning of the administration, we had primarily former presidents of small institutions who had bad experiences at their own banks during exams. It was important to educate them.
We now have a majority of regulators who get it, who understand because of prior experience how important CRA is. We have come a long way in the last six years.
Grzywinski: The gold standard is the kind of work that Gene [Ludwig] did while he was comptroller of the currency, and what Ellen [Seidman] did when she was director of the Office of Thrift Supervision. So one has to ask the question about both early and current regulators in the Bush administration [and] how they compare to that performance.
It seems the grade for people early in Bush administration was that they were AWOL. … There was relatively little interest. That seems to be changing, or at least they are less AWOL, if that is possible.
Seidman: I think it’s changing for the better. I do think there’s ground to make up. In an attempt to make up that ground, you are getting some of this issue we discussed about expanding the rulebook, but then examining totally according to the rulebook.
So the list of things that count has definitely increased, but the question of what happens when something is not on the list becomes much more difficult.
Q What should Congress do to improve CRA and further its goals?
Fisher: I think the question [Rep.] Barney Frank (D-Mass.) is raising about whether the Federal Reserve will exercise its authority to look over the whole holding company’s [involvement in subprime lending] is something a number of us have been hoping for.
There was under Gene and Ellen more creativity in trying to respond, and look at what’s really happening in neighborhoods. That’s what CRA is about, neighborhoods, and really finding ways that banks can do more. I think many banks are gaming the system at this point. I would hope there would be more focus on community development as well.
Cooper:We sat down with three members of Congress [recently and] shared some of our concerns and observations as it relates to examiners and inconsistencies between agencies.
Our biggest point, which we are trying to stress, is the need to create the environment that encourages investment, lending, and service into these areas, not discourage it. … It discourages banks when examiners discount what the bank is trying to do, and when they nitpick the way things are being conducted.
There seems to be a very strong interest among members to do something. We feel that’s encouraging.
Kumrow: Creating a favorable environment for community investment is not just a matter of tweaking CRA regulations, although that’s important; it’s also a matter of creating the proper environment for investing in affordable housing and community development, and Congress has not done anything on that.
There needs to be a National Housing Trust Fund. The Department of Housing and Urban Development has to make its Housing Assistance Payments on time. Otherwise banks are going to have serious problems doing affordable housing because it won’t be a viable product.
Q Banks have found tax credit investing to be profitable, with a reasonable level of risk. At the same time, we have seen the growth of nonprofit, mission- oriented community development financial institutions. Why do we need CRA if we have thriving nonprofit lenders and banks happy with their housing tax credit investments?
Seidman: We could start with scale. The Community Development Financial Institutions (CDFI) Fund has never been above $110 million in appropriations. Lately, it’s been struggling along at $55 million. That’s nothing compared to a $10 trillion mortgage market.
In terms of profitability of CRA in the banks, it’s meant that some banks have been able to move a significant amount of their CRA business into regular business lines, but it’s also meant that they have looked further and continued their innovations, helped along by CDFIs.
I firmly believe that if you got rid of CRA today it would dry up the CDFI industry pretty quickly. Secondly, the innovation piece, the willingness to go beyond what you’ve done before, would diminish significantly.
Ludwig: I agree with Ellen [Seidman]. First, I would question how profitable that has proven [to be] for banks. When I was at Banker’s Trust, yes, we could squeeze out a profit from our CRA book, but it was distinctly less profitable than the rest of the activities of the institution.
The second thing is the innovation piece. In the CRA programs at institutions, it appears to attract people like Mark [Willis], a whole bunch of folks of talent, who are socially motivated at heart, who are innovative by nature … those people would be washed out of the system.
We don’t need a retrenchment. We need expansion of CRA. Retrenchment would be close to catastrophic for low- and moderate-income neighborhoods.
Andrews: We feel very strongly that if it was not for that regulatory or legislative push that CRA gives, the amount of capital available to us as an organization and hundreds of other CDFIs would literally dry up. What we do is take banking capital into places it could not go otherwise, for a variety of economic reasons. Bank direct investments in projects would also dry up. It’s hugely important to have that regulation and legislation structure.
Willis: What you are hearing demonstrates some of the tensions here. One of the points, about innovation and creativity, is absolutely on point. The other one about profitability is more complicated. Look at the tax credit example: It’s banks that are primary investors. If there were a market return on these investments, you’d expect to see more than just banks investing.
A lot of what we do that qualifies under CRA is done by our standard businesses. I think that is a huge success. Anything we can get mainstream that serves low- and moderate-income communities is great. The key to that is, is it profitable? Does it meet a bank’s hurdle rate? The issue of profitability and what the return should be is something I wish was more candidly out in the open to be talked about, in terms of the direction CRA is going in.
Cooper: I will go out on a limb … and I would suggest that if CRA went away, we would see less affordable housing production— probably 30,000 units less annually.
Banks are making investments and are willing to accept returns because of CRA. If that were to fall out of demand side, pricing of credits would be affected, and production under the program would be reduced. Beyond that, construction loans and permanent loans would dry up. Nonprofits that add services beyond just construction to communities would be hurt.
Q Which would apply to financial institutions in addition to banks, like insurance companies? What would it achieve? How should it be expanded?
Ludwig: You still have a plethora of different institutions in the financial services space. There are historical reasons why CRA was applied to banks. Both because of [their] primacy in market, and because a specific problem—redlining—was being addressed. But now that it has been recognized that it’s such an advantage to at least the low- and moderate-income economy of the United States, there are lots of other potential players, broker-dealers, insurance companies, etc. Banks only make up 25 percent to 30 percent of lending that goes on in the U.S. There is no reason that other financial institutions should not be part of the game.
Grzywinski: If there is a Democratic Congress and a Democratic administration, I think it’s likely we would see movement in expanding CRA to other lenders. Not because Democrats want more regulation, but rather they see the need still exists. Those needs exist among low-income people, and they are not being met adequately by organizations that do not come under CRA.
Seidman: The place to start is lending, but I think it’s important to do it carefully and get this quality issue [incorporated]. If you just look at how many small-dollar loans are made in low-income communities, payday lenders would look really good.
As we think about other essential consumer financial services, such as savings [and] critical insurance products, those would be the next places I would look to think about whether some sort of expansion of the obligation of fair and equitable services to all communities should be established. It doesn’t have to be a CRA clone, but the basic principle definitely goes beyond banks.
[Fair and equitable services is not in CRA], but I’m suggesting it’s actually the old mission in new terms that might be applicable more broadly.
Q Regarding consolidation, we’ve seen merger after merger. Is the glass half full or half empty? The mergers result in large community development lending agreements but create larger institutions that are less in touch with local needs, so do they help or hurt community lending, and will this trend continue?
Ludwig: The trend has not run its course. We will see our largest banks right now—Citibank has about $2 trillion [in assets]—we will see that double or triple in the next several years. For the largest institutions— I’m not saying necessarily Citibank, Bank of America, Chase, who knows, but at least in the foreseeable future, it will still be an environment in which the big fish will eat little fish. There has been a historically rapid generation of little fish over the last couple of years, but that will slow down for the next couple of years to close to a stop. Net, the banking industry is consolidating, so it won’t be a banking industry of 9,000; maybe it will be 4,000.
Q What does that mean for community lending and investment? Seidman: The dollars may stay; the dollars may grow. What you lose when you lose an important local community bank is an important figure in the community who cares about the low-income and community development issues at all, [who] can be a real leader, and can lead other businesspeople. [Local banks] can cause their institution to provide products, services, and investments that are particularly needed in that community, that don’t have to be homogenized for a regional or national institution. Those are the things we are in danger of losing as the number of true community banks diminishes.
Fisher: Consolidation has meant that banks like Bank of America, even as large as they were, were taken over by institutions, made larger, managed from other parts of the country, [and] are not as responsive to neighborhood needs—even statewide needs.
Q What about the big CRA agreements? Do they compensate for the loss of local orientation?
Fisher: Community commitments that are negotiated with the community add to it. But many of the commitments are unilaterally issued by financial institutions, and are so vague that no one can say ‘this didn’t happen.’ And once you get words on paper, you have to make sure it happens.
Kennedy: That’s why “examination” issues are so important. Whether it’s having the right rules and examining by those rules, or having regulators who are sensible enough to know that—particularly when a past pattern [exists] of disapproving activity— it’s important to get out there and say we want to give incentives to do small-dollar loans or work out mortgage problems.
[We need to make sure examiners] get everything on the chart that should be on the chart [of items that count toward CRA compliance]. We have got to get rules and examinations consistent and updated.
We’ve been consistent for seven years in trying to get regulators to see they actually discourage multifamily permanent loans. They are not on the charts. We need to get community development lending actively recognized as important to the community.
Q What’s your quick advice to groups that want to use CRA to persuade their local bankers to do more work in low-income areas?
Kennedy: We have to do a better job of publicizing the good CRA has done. On Capitol Hill, there are fewer than a dozen members of Congress who understand CRA’s role in their communities. You’ve got to tell the story. You’ve got to hold the groundbreaking.
Alabama is a great case study. The housing finance agency had all these tax credits and could not get permanent financing, so they got banks together to form a lending consortium.
Grzywinski: Instead of the onus being put on community groups, it would be the bankers who should take the initiative to improve quality—to apply the same kind of imagination of providing banking services to underserved populations that they have been able to apply in areas of product development with strong profit potential.
The banking industry is highly leveraged, and it is able to do that due largely to having government support and regulation behind it. I don’t think to serve low-income people effectively it has to be subsidized. I think there are opportunities where services can be provided.
The entire idea behind CRA was to release the energy of the nation’s banking systems. It’s not just about investments; it’s how banks extend credit and provide deposit services for the people who need them. [Rather than enact new mandates], we have to create a better system of incentives for banks to do that.
Flatley: I see part of the value of CRA as building relationships to solve problems. Community groups have gotten more knowledgeable about what’s practical and what works. There are undoubtedly challenges ahead, and the value of relationships is the real long-term value of CRA.
Fisher: CRA gave us the opportunity to sit down with banks. There is tremendous flexibility based on the creativity and openness of the regulating agencies, the bank, and community organizations.
- Nancy Andrews, president and executive director, Low Income Investment Fund
- Will Cooper Jr., president and CEO, WNC & Associates
- Alan Fisher, executive director, California Reinvestment Coalition
- Joseph Flatley, president, Massachusetts Housing Investment Corp.
- Ron Grzywinski, chairman, ShoreBank
- Judith Kennedy, president and CEO, National Association of Affordable Housing Lenders
- Rick Kumrow, general counsel, Community Preservation Corp.
- Gene Ludwig, CEO, Promontory Financial Group
- Ellen Seidman, executive vice president of National Policy and Partnership Development, ShoreBank
- Mark Willis, vice president, Community Development Group, JPMorgan Chase