Touching a Liberal Third Rail
The Trump administration rightly proposes to fix the Community Reinvestment Act and its damaging legacy.
The Trump administration is under fire for daring to touch a third rail of liberal financial regulation: the 1978 Community Reinvestment Act, or CRA. The proposed new regulations would affect 70 percent of banks by replacing requirements that bank lending target specific geographies or borrowers, such as low-income minorities. Instead, banks would set total dollar goals for lending to low-income borrowers, with the aim of helping poor communities broadly, rather than focusing on specific neighborhoods.
Some of these loans might have occurred anyway, and critics (which include the Federal Reserve) oppose the idea that banks could get “CRA credit” for them. But the new policy should be welcomed as an improvement for lower-income business and mortgage borrowers. Operating in a far more competitive financial-services industry than the late 1970s, lenders will better serve poor neighborhoods by treating them no differently than more affluent areas.
The CRA has become a liberal icon—and a conservative bête noire, cast as a partial accessory to the 2008 financial crisis, on the view that pressuring banks to make loans based on borrowers’ location, rather than on their creditworthiness, leads to poor underwriting practices. Regardless of how one sees the CRA’s history, the Trump administration is right to revise the law; it would be right to repeal it, too, though repeal is unlikely.
The CRA doubtless pushes banks to allocate capital in unconventional ways. For groups like the National Community Reinvestment Coalition, a defender of the law, that’s exactly the point. In their eyes, low-income minority areas are “underserved” by lenders. The New York Times echoes that view. “Banks don’t like lending in lower-income neighborhoods,” its editorial board declared, “even as they profit from deposits taken from those same communities.” Many neighborhoods, the paper continued, are “credit deserts.”
Such declarations ignore how the financial-services industry has transformed since Jimmy Carter signed the CRA into law. At that time, interstate banking was still prohibited; online competition from Quicken Loans, for example, didn’t exist, and nonbank lenders were nowhere on the horizon. It’s true that banks “redlined” select neighborhoods, but that’s because they could do so with impunity, in protected cocoons.
Backers of the CRA act as if the lending it requires is a self-evident good. On the contrary, the law poses more risks than benefits for low-income borrowers and neighborhoods. In these areas, homeowners and business owners must hope that banks insist on standard underwriting approaches: a foreclosed house on one’s block is a problem for neighboring owners. Indeed, the foreclosure belts that emerged in the wake of the financial crisis played a role in the diminution of minority asset wealth. When under-qualified borrowers secure loans so that banks can make their “virtue quotas,” it’s reasonable to worry that they will not be able to make their payments and that their neighbors’ property values will decline.
The same view applies to geographically focused lending. Absent regulatory pressure, distressed, low-income neighborhoods are less likely to attract bank investment. That’s good reason not to insist on poor underwriting, but rather for residents and local governments to collaborate on what makes their neighborhoods attractive to investors—lowering crime, improving schools, and keeping streets and parks clean and safe.
As another Martin Luther King Day approaches, it’s hard to believe that the civil rights leader would have wanted African-American neighborhoods to be perennial charity cases. Yet that’s what an unchanged CRA portends. The CRA’s problem isn’t that it leads to red tape and increased costs for banks—though it does. The program’s true failing, as with so much legislation from the era that spawned it, is the damage that it does to those whose interests it was intended to serve. The Trump administration should be applauded for taking on what now amounts to a CRA industry and doing what banks themselves won’t do. If anything, the administration has not gone far enough.
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