Financial agencies looking to modernize reinvestment act

Financial agencies and federal lawmakers are moving to revamp a 1970s-era law designed to reduce racial discrimination in lending and bolster loans to low- and middle-income communities.

Financial agencies have held a series of summer field hearings to look at ways of modernizing the law, which many Republicans claim contributed to the housing crisis and Democrats say should be expanded to better accomplish its mission.

ADVERTISEMENT
The Community Reinvestment Act was not part of the final overhaul effort this year. But regulators, consumer groups and others are beginning to focus on ways to update it, because its last significant revision came in the mid-1990s. The law requires federal agencies to examine financial institutions so they meet the broad credit needs of their communities, including low- and moderate-income neighborhoods.

The hearings have drawn scores of comments and presentations from consumer advocates, banks and other trade associations. The final one is Tuesday in Los Angeles.

Regulators are considering changes to how banks comply with federal examinations, the overall community development needs and ways to make the law generally more applicable to a lending industry that’s nothing like it was when the law was enacted in 1977.

On Capitol Hill, the law has spurred a fiercely partisan debate.

“The Community Reinvestment Act is one of the programs that keeps our communities moving and keeps the economy moving. It literally ensures that the life blood of the economy — small businesses, home ownership, the investments in low- to moderate-income communities — keeps flowing,” said Rep. Luis Gutierrez (D-Ill.) at an April congressional hearing.

At the same session, minutes later, Rep. Jeb Hensarling (R-Texas) called for the law’s repeal.

“Regardless of what CRA was, today it is a costly and redundant anachronism that has contributed to our economic crisis and still enables certain activist groups to essentially shake down financial institutions, harming credit and job opportunities for all Americans,” Hensarling said.

Consumer advocacy groups have strongly urged a broadening of the law and regulations, and some have called for legislation to extend its influence over non-bank lenders, which grew rapidly before the financial crisis.

John Taylor, head of the National Community Reinvestment Coalition, said in a presentation to the regulators that between 1996 and 2008 there was $1 trillion in lending under the act for low- and moderate-income neighborhoods.

One main problem, he said, is that there is not enough lending under the act and that many of the worst lending practices fell outside the law.

Some economists and Republican lawmakers have suggested the act played a role in the housing crisis by encouraging loans to low-income borrowers who might not have been creditworthy in the first place.

Looking at the housing crisis and law’s role, Federal Reserve researchers in 2009 found that loans made under CRA assessments “helped to ensure responsible lending, even during a period of overall declines in underwriting standards.”

Some activists are also criticizing the nation’s largest banks, arguing they pushed irresponsible loans but only outside of their responsibilities under the law.

National People’s Action, a grassroots organization, released a report Friday that criticized four of the largest U.S. banks for “gaming the system” by relying on affiliate lenders that did not function under CRA.

“The vast majority of the lending that caused this crisis occurred outside the law of CRA through unregulated mortgage companies and through the shielding practices of the big banks. Had CRA covered all of the lending that was occurring, it is likely that the worst of the crisis could have been averted,” the group said in the report.