What Banks Owe America

AP Photo/Richard Drew

The logo for Wells Fargo appears above a trading post on the floor of the New York Stock Exchange.

The last time the Community Reinvestment Act (CRA) was in the news, conservative critics of financial regulation blamed the law for the 2008 financial crisis, complaining that Wall Street’s reckless behavior didn’t cause the crash; it was all that mandated lending to poor people

So ten years later it is scarcely surprisingly that the law is under attack again. Activists in the low- and moderate-income communities that the law is supposed to benefit seek to hold banks to a higher standard that includes investments by financial institutions that build wealth and power for marginalized residents, rather than simply extracting profits from them. 

The new goal for Wall Street lobbyists and anti-regulation ideologues remains essentially unchanged from what it has been since the law was passed 41 years ago: eliminate the mandate that banks commit to recycling depositors’ money back into local communities. This regulatory battle is playing out at the Office of the Comptroller of the Currency (OCC), which is collecting public comments until November 19 on a plan that could lead to significant changes in how banks respond to the economic and financial needs of the country’s most vulnerable neighborhoods.

One of those changes would be what the OCC calls “a metric-based performance measurement system,” a fancy way of saying that banks would be measured by the dollar value of CRA-related banking activity that they engage in as a percentage of their size. Currently banks are evaluated differently based on their size and on the types of lending and investment activity they engage in. Large banks, with more than $1.2 billion in assets, are run through lending, investment, and service tests for their retail and community development activities; smaller banks are reviewed less comprehensively. 

The OCC notice says that “some stakeholders” find the current regulatory framework “too complex.” The agency says it seeks “greater clarity, consistency, and certainty in the evaluation process.” It also wants to provide more”. flexibility to accommodate banks with different business strategies.” The OCC says a metric-based framework would make it easier to compare banks of different sizes and business models, and would eliminate complexity.

The stakes are high: According to the National Community Reinvestment Coalition, some $800 billion in community development loans and $900 billion in small business loans were funneled into low- and moderate-income communities through the CRA between 1996 and 2014 to meet what the law says is “the continuing and affirmative obligation” of regulated banks to meet “the credit needs of its entire community, including low- and moderate-income neighborhoods.” 

That’s on top of billions worth of home mortgages that met CRA requirements. The law has helped sustain a network of community development corporations, financial institutions, and other organizations that focus on bringing economic vitality to previously redlined neighborhoods

The banking industry today has substantially changed in the decades since the enactment of the CRA. In the 1970s, bank operations did not cross state lines. Online banks, of course, did not exist, and neither did the broad array of independent entities that offer consumer lending and mortgage services. In 1977, a bank’s service area for the purpose of CRA compliance was relatively clear: It was where the bank had physical branches. Today, banks can set up a beachhead at any place that can accommodate an ATM machineor, for that matter, wherever a person can carry a smartphone. The law does not speak to where a bank’s community obligations begins and ends in this new commercial landscape. 

But the law does require regulators to rate a bank’s compliance with the CRA. A consumer doing a quick look to see which bank in their community has the best community investment record might conclude all banks are pretty much the same. That’s because 98 percent of banks get either “satisfactory” or “outstanding” overall ratings. 

The lowest “substantial noncompliance” or next-to-lowest “needs to improve” rating is rare, and even when that rating shows up, as it did in the 2012 CRA report for Wells Fargo, it can be overshadowed by counterintuitive conclusions elsewhere. Within two pages of the report, a chart shows the bank received an “outstanding” rating on lending while examiners wrote that the bank’s overall CRA performance evaluation was rated “needs to improve” because of “the extent and egregious nature of the evidence of discriminatory and illegal credit practices.”

The problem of confusing or inconsistent ratings that don’t reflect serious problems with how the bank does business is one that community activists fear will be made worse by the OCC’s plan, which would supplant what they believe is an already inadequate rating system of banks’ community activity, with a score based on the ratio of the dollar value of bank lending and investment in lower-income communities to bank asset size. The National Community Reinvestment Coalition calls the approach “a recipe for more and not less CRA grade inflation.”

It is more specifically a recipe for continuing to reward banks that make a show of serving lower-income communities by exploiting them with high-interest consumer and mortgage loans or backing projects by well-heeled developers that displace residents rather than improve their lives. 

But these proposed changes point to an opportunity: The Democracy Collaborative released a working paper in late October that details several much-needed CRA reforms. The most dramatic changes would require financial institutions to broaden the kinds of economic development strategies they seek out and support and to work with groups that are “taking up models and approaches that bring more democratic ownership and control of assets at the local level, such as cooperatives, social enterprises and land trusts.” To do that, the report says, the CRA needs to become “an even more effective tool among many to advance a community wealth building approach to community development.” 

Some of the proposed reforms could be done through changes in how the law is administered, such as revising evaluation criteria to encourage lending to cooperatives, land trusts and other economic arrangements based on community ownership. 

But Congress would have to step in on issues like expanding the kinds of institutions covered by the law and toughening penalties for noncompliance. Before now, supporters of stronger CRA legislation have pulled their punches “due to a fear that putting forward major reforms might lead to complete repeal by Congress.” 

But that fear now appears to be giving way to an effort to hold banks—including newer forms of nonbank financial institutions—to a higher level of accountability. One sign of that is legislation drafted by Massachusetts Senator Elizabeth Warren that includes proposals to expand the kinds of institutions that are required to comply with the CRA, such as the online banks like Ally and mortgage lenders like Quicken Loans, and toughens penalties for noncompliance. 

Many individuals and groups find the OCC’s statements of good intentions unconvincing. A review of a sampling of the more than 600 public comments as of mid-November suggested overwhelming opposition to the proposed framework

Meanwhile, the OCC’s director, Joseph Otting—a Trump administration appointee and a former CEO of California-based banks, OneWest and CIT Bank—has made it clear one of his top priorities is reducing theregulatory burdens on banks. Moreover, when repeatedly asked during a June House Financial Services Committee hearing whether he believed racial discrimination exists in America, his response was, “I have personally never observed it.”

With Trump’s mandarins in full control of the federal regulatory machinery, securing a more robust Community Reinvestment Act that gets Wall Street engaged in building wealth and economic power for people in marginalized communities instead of using them to mine profits will be an uphill climb.

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