Community Reinvestment Act at Risk: What’s at Stake?

March 5, 2020; Shelterforce

As Miriam Axel-Lute notes in Shelterforce, “The Community Reinvestment Act, or CRA, is so much a part of the landscape of community development that when it is not under threat we almost take its pivotal role for granted. Activists fighting against bank redlining got the landmark legislation passed in 1977.” The historic gains of over 40 years ago, however, are now under considerable threat.

Last month in NPQ, Debby Warren detailed the threat that changes proposed by two of three leading federal regulators of banks, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation (FDIC) pose to community developers.

The stakes are high. As Rick Cohen noted in NPQ in 2008, when the Community Reinvestment Action (CRA) was also under attack, “It is worth remembering that the enactment of the Community Reinvestment Act (and its data-gathering legislative companion, the Home Mortgage Disclosure Act) is one of the nonprofit sector’s biggest advocacy triumphs.”

When passed in 1977, CRA established in law an “affirmative obligation“ for banks to make their financial services, loans, and credit available to low- and moderate-income residents, especially in communities of color.

But how is this affirmative obligation implemented? Well, as Axel-Lute explains,

There’s a need for organizations that specialize, for example, in developing affordable housing, lending to and supporting small businesses, doing homeownership counseling with first-time homebuyers, and helping households and communities of color overcome the legacy of being offered only second-class, exploitative financial products. That need is fulfilled by the community development world.

According to the National Community Reinvestment Coalition (NCRC), the 25 largest banks alone generate about $35.6 billion per year in community development loans, equity investments, and grants.

Noel Poyo, executive director of the National Association of Latino Community Asset Builders, notes in congressional testimony that CRA is a “fundamental pillar of the multi-billion dollar community development sector.”

As Axel-Lute observes, “Nearly every community development project has some participation from at least one CRA-regulated bank.”

Under present rules, CRA assessments include a separate investment test in addition to lending. “The most efficient, easiest, [most] impactful ways to meet the investment test are LIHTC (Low-Income Housing Tax Credit) and NMTC (New Markets Tax Credit),” Priscilla Almodovar, CEO of Enterprise Community Partners, tells Axel-Lute.

As Axel-Lute elaborates, community development intermediaries Enterprise and Local Initiatives Support Corporation (LISC) often serve as go-betweens banks seeking to fulfill this part of their CRA mandate with community development groups. Would the banks would still make the same investments without the CRA rules? Maybe. But banks often say otherwise.

“Every bigger bank we meet with, their CRA needs are always part of the discussion,” notes Jessica Andors, executive director of Lawrence CommunityWorks Inc. in Lawrence, Massachusetts. If for some reason, such as being in a geography that is not in a bank’s service area, a project is not CRA-eligible, bank interest often disappears, Andors explains to Axel-Lute.

NPQ often writes too about community development financial institutions or CDFIs. As Axel-Lute points out, CDFI loan funds that are members of the Opportunity Finance Network currently receive about 50 percent of their lending capital from CRA-regulated financial institutions.

As NPQ noted last month, there are a number of changes proposed. But the biggest change is to convert what are currently a set of context-dependent qualitative and quantitative tests into a single ratio: “total CRA-eligible dollars over total deposits.”

As Axel-Lute explains, “This ratio would be calculated for a bank’s whole business and for each of its assessment areas—but only 50 percent of assessment areas would have to hit the minimum benchmark for the bank as a whole to pass, a clear invitation to return to redlining. In addition, some investments in infrastructure and sports stadiums in low- and moderate-income communities would now qualify for CRA credit without any requirement that they primarily benefit low- and moderate-income residents. And the role of community voices in the assessment process would be practically gone.” (More details are available here.)

Going to a single number has other costs—encouraging large investments rather than supporting smaller projects, for example. The CRA qualitative tests, Almodovar explains to Axel-Lute, encourage banks to develop expertise and act thoughtfully, with large banks developing “community development groups with subject matter experts.” If you don’t have to meet any qualitative standards, well, that “takes away the incentive for those [community development] groups to have standing internally.”

As Axel-Lute acknowledges, the CRA is not perfect and could use updating. “It hasn’t shifted to represent online banking customer bases, or new kinds of financial institutions. It leaves out areas that are already suffering from being underbanked.” But while the changes proposed by the regulators would make modest improvements in some areas, these are swamped by the detrimental impact of the main thrust of the changes.

If your nonprofit wishes to weigh in, there is still time to do so. The original deadline of March 9^th for comments has been extended until April 8^th. A hashtag #TreasureCRA has also been set up by advocates seeking to defend the CRA.—Steve Dubb