Yesterday, the House Committee on Financial Services held a hearing entitled “Proposals to Enhance the Community Reinvestment Act.” Testifying before the committee were the following individuals.
Eddie Bernice Johnson, Member of Congress Panel Two
- Steven L. Antonakes, Commissioner of Banks, Division of Banks, Commonwealth of Massachusetts
- Marc Morial, President and Chief Executive Officer, National Urban League
- Lawrence J. White, Arthur E. Imperatore Professor of Economics, Leonard N. Stern School of Business, New York University
- John Taylor, President and Chief Executive Officer, National Community Reinvestment Coalition
- Benson F. Roberts, Senior Vice President for Policy and Program Development, Local Initiatives Support Corporation
- Judith A. Kennedy, President and Chief Executive Officer, National Association of Affordable Housing Lenders
- Michael A. Stegman, Ph.D., Director of Policy and Housing, MacArthur Foundation
- Edward Pinto, Real Estate Financial Services Consultant
- Leslie R. Andersen, Chief Executive Officer, Bank of Bennington, on behalf of the American Bankers Association
- Orson Aguilar, Executive Director, The Greenlining Institute
Mr. Antonakes focused on three areas relating to the Community Reinvestment Act (CRA), which was designed to encourage commercial banks and savings associations to meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods. First, he argued that the subprime crises should not be attributed to the CRA as it does not require banks to make unsafe and unsound loans. Rather, he attributed the subprime crises to Wall Street’s greed. Second, he advocated a coordinated federal and state approach and emphasized the importance of preserving the ability of states to act in the absence of adequate federal consumer protections. He also discussed how Massachusetts has effectively expanded the reach of the CRA to include credit unions and non-bank mortgage lenders. Finally, in order to modernize the CRA, he stated that it should be revised to require affiliate lending to be reviewed, increase review standards for the largest institutions, downgrade banks that originate unsustainable home mortgage loans, mandate the evaluation of loan modification efforts, and downgrade banks whose partnerships harm the underbanked.
Mr. Morial emphasized the need to bolster small and minority-owned business as key engines of job creation and that access to bank lending is key to minority business development and minority employment. With that in mind, he made the following recommendations for improving the CRA:
- Make mandatory the inclusion of a bank’s non-depository lending affiliates and subsidiaries in CRA exams.
- Reform bank examination assessment area procedures so that the majority of a bank’s loans are included in its CRA exams.
- Modify how CRA assessment areas are defined to reflect the true areas where banks conduct business, since many banks now lend nationwide, not just from their brick-and-mortar branches.
- Require regulatory agencies to provide detailed descriptions of fair lending and safety and soundness reviews conducted as part of CRA exams.
- Require that regulators give banks failing CRA performance reviews when fair lending reviews uncover widespread discrimination at those institutions.
- Require CRA exams to examine lending and services to minority borrowers and communities.
- Require that regulatory agencies hold hearings upon request by community representatives to address major bank business decisions or changes such as mergers and acquisitions.
- Require all banks and thrifts to submit CRA small business loan data indicating race, gender and location of the borrower.
- Extend CRA coverage to credit unions.
- Expand CRA to cover all institutions making mortgages, including all bank affiliates and independent mortgage companies.
- Include provisions similar to the CRA and Home Mortgage Disclosure Act for the insurance industry so that insurance redlining does not hinder the upgrading and production of affordable housing for all Americans.
Mr. White argued that the CRA is not the appropriate instrument for achieving its stated goals. First, the right tool to combat discrimination against racial or ethnic groups is more vigorous enforcement of anti-discrimination laws. Second, vigorous enforcement of antitrust laws is necessary to keep financial markets competitive so that banks and other lenders are under constant pressure to provide attractive services to their customers. Third, socially worthwhile lending opportunities should be funded through the public fisc. Finally, he argued that if public policy mandates the existence of the CRA, annual local lending obligations of banks should be quantified.
Mr. Taylor argued that, had the CRA been applied broadly throughout the financial industry, the foreclosure crisis would not have occurred or would have had a much smaller impact since the CRA requires safe and sound lending practices. He also stated that the broad application of CRA would significantly bolster the government’s economic stimulus efforts by channeling money to America’s neighborhoods. He advocated changes to the CRA that would heighten public participation in the CRA process on multiple levels and increase accountability of financial institutions to smaller cities and rural areas as well as larger urban centers.
Mr. Roberts made the following suggestions for modernizing the CRA:
- Recognize community development as a formal objective of CRA.
- Expand the range of institutions that CRA covers.
- Reach rural and other underserved areas.
- Strengthen performance incentives and enforcement tools.
Ms. Kennedy testified that two basic principles should guide the process of enhancing the CRA. First, we need to address the weaknesses in the current regulatory regime and restore meaningful regulatory incentives for high-impact activities. Second, any changes to the law should be carefully considered, practical to implement and incentivize lenders to engage in high-impact activities. Among other things, she recommended expanding the affirmative obligation of CRA, safety and soundness supervision and enforcement of consumer protection laws to all primary and secondary market lenders. She also said that regulators need to adjust the regulations and examination process to encourage banks’ responsiveness to local needs rather than making measurement easier for examiners.
Mr. Pinto argued that “CRA is toxic lending which leads to unsustainable loans which leads to an unacceptable level of foreclosures.” He stated that there is not enough evidence as to how CRA loans have performed and that regulators should demand more data from larger institutions, including Wells Fargo, JP Morgan Chase, Citibank, Bank of America, Fannie Mae and Freddie Mac. He contended that once Congress has this information it should use it to ensure that lenders have “skin in the game” because “[i]t was [the] lack of adequate equity and capital by borrowers, lenders and investors that has put our entire economy at risk.” He maintained that by taking this approach “America will get the sustainable affordable housing programs she deserves.”
In contrast, Mr. Stegman began by emphasizing that there is no empirical basis to implicate the CRA in the subprime crises. In fact, he stated, “In outperforming other types of mortgage investments, CRA portfolios may have served as a stabilizing factor for many covered institutions.” Next he discussed the policy rationales for imposing community reinvestment requirements on covered institutions. The traditional rationale is that such institutions receive federal deposit insurance and related charter benefits. He felt that an even stronger argument is that “it is in the national interest and for the common good that in order for low and moderate income populations to fully participate in the American economy, the financial services industry must play a leading role in helping to meet their credit and financial services needs in the private marketplace.” He made various recommendations for a modernized CRA. He noted that there is a difference between requiring covered institutions to offer financial services that are not profitable—which the CRA does not do—and requiring covered institutions to offer financial services that are less profitable than other alternatives—which an enhanced CRA should do.
Ms. Andersen stated that the current state of bank compliance with the spirit and letter of the CRA is healthy. Going forward, she stated that the CRA regulatory process must be improved to favor simplicity and encourage greater flexibility and comprehensive application to other similarly-situated depository institutions.
Mr. Aguilar testified that modernization of the CRA is especially timely since, despite early indicators that the economy may be on its way to recovery, many communities are still being left behind. “CRA has the potential to be one of the most powerful tools to create win-win partnerships benefiting both consumers and financial institutions. It can ensure more transparency, responsibility, and innovation in the activities of the financial institutions in our nation’s communities. A renewed emphasis on community wealth creation, in addition to its current focus on access to credit, can further expand its effectiveness.”