How We Can Fix the CRA and Actually Address Discrimination in Banking and Homeownership
By Dennis Kelleher
In January of this year, City National Bank (CNB) of Los Angeles agreed to pay $31 million to settle allegations of lending discrimination by the Department of Justice (DOJ). It was the largest redlining settlement in the history of the DOJ. In its complaint, the DOJ alleged that the Bank, from the years of 2017-2020, had actively discouraged residents of predominantly Black and Hispanic neighborhoods from applying for home loans. Shockingly, in the midst of this alleged discrimination, CNB continued to receive “Satisfactory” Community Reinvestment Act ratings through its most recent examination in 2019.
Originally passed in 1977, the Community Reinvestment Act (CRA) was intended to improve access to credit for communities that had traditionally been underserved or outright denied access to banking services. After decades of redlining that had perpetuated the racial wealth gap and had closed off homeownership to so many, the CRA was supposed to ensure low-and moderate-income (LMI) communities finally got their fair share of credit. However, the home ownership rate for Americans with the lowest income is no greater today than when the CRA was passed into law 45 years ago. Despite this, the banking regulators keep showering the banks with near-perfect CRA scores year-after-year, as was the case with CNB. You can see this disturbing trend in Figure 1.
Yes, there are lots of reasons for stagnating or declining homeownership rates among LMI Americans and, yes, there’s even an argument that it could have been worse without the CRA, but near-perfect bank scores year-after-year-after year! At a minimum, this result requires some fundamental questions be raised and a deep analysis be undertaken to determine what in fact are the drivers of these trends and what role, if any, the banking agencies implementation of the CRA contributed to this.
Rather than that, however, in June 2022, the federal banking agencies introduced a proposal intended to update and improve the CRA. Astonishingly, what was missing from the Fed, FDIC and OCC’s 679-page proposal was any analysis of the historic data reflected in the chart above or how the proposed rule would operate against the Fed’s historic CRA data. Instead, it provided, at best, cursory justifications, with no real data at all.
While it was an enormous, time-consuming, multi-month undertaking, we here at Better Markets did do a detailed statistical analysis using the Fed’s data, and one thing became certain: the new proposal will not likely achieve the stated goals, and will not even detect textbook cases of redlining. Worse, the proposal will likely continue the past practice of granting banks inflated ratings irrespective of whether or not the lives of people living in LMI communities are actually improved by the CRA.
One of the primary issues with the current CRA involves how institutions are assessed for meeting their obligations to offer banking services to LMI communities. The current Retail Lending Test, which accounts for 50% of a bank's CRA score, examines a bank’s LMI lending and its loan-to-deposit ratio. However, this evaluation is done across lenders at each point in time. As Figure 2 demonstrates, banks have systematically reduced their LMI lending over the last 10-15 years despite an increase in their deposits.
The current proposal fails to address unlawful and harmful restriction of credit, ultimately boiling down to a less transparent version of the CRA rule that will not penalize lenders for reducing their LMI loans over time if other banks in the area are doing the same thing. It continues to assess a bank’s lending obligations relative to their peers, ignoring the widespread exit of banks from their lending obligations. What’s more, the new benchmarks would allow banks to cherry pick where they provide banking services to maximize their CRA score. This became clear to us in the analysis we conducted on how the proposed Retail Lending Test (RLT) would grade institutions. Our analysis is the only one conducted that we are aware of.
Fixing the current proposal is not difficult, but it requires the banking agencies to prioritize getting it right over getting it done. As we outline in our analysis, two relatively easy and modest changes would materially improve the regulators’ proposed Retail Lending Assessment. You can read about it here: “The Banking Regulators’ Proposed Community Reinvestment Act Rule Will Not Work, But Dramatically Improving It Is Not Complicated.”
The goal of the CRA is clear: increasing credit to LMI communities. The racial economic inequality, born from centuries of racial bigotry, is a persistent injustice that remains hanging over our country. Access to the financial system and homeownership are key ways that wealth is built. Banks have clearly failed in their affirmative obligation to increase credit to underserved communities. While we here at Better Markets strongly favor improving the CRA as expediently as possible, the tens of millions of LMI Americans that have suffered for decades deserve a CRA rule that works better for them. A 99% success rate for LMI communities should be the result of an effective CRA, not a 99% pass rate for banks while credit availability remains inadequate.