CRA Rule-Making Should Invigorate Investment in CDFIs and Expand Beyond Traditional Banks
The Federal Reserve, OCC, and FDIC’s proposal to revise and modernize the Community Reinvestment Act (CRA) is long overdue. Originally passed in 1977 and amended in 1995, the CRA established oversight by federal regulators and encouraged federally insured banks to serve the communities in which they operate.
The CRA tracks banks’ support for marginalized borrowers, low-income, and diverse neighborhoods that have been historically underserved by redlining and discriminatory practices. Limitations to the law, like its focus on the physical location of bank branches, have ignored the FinTech revolution of the past two decades and continue to leave out marginalized communities and communities in banking deserts not serviced by brick-and-mortar branches.
The proposed rule-making tackles some of these limitations head-on and should invigorate more partnerships between massive, traditional banks and community development financial institutions (CDFIs) with access and relationships in low- and middle-income communities where capital is needed most.
Bank partnerships, loans, and investments in CDFIs are important tools for Community Reinvestment Act compliance. Under the proposed rules, CRA assessments will move beyond outdated geographical limitations and consider bank activities associated with the flexibility of modern banking, including mobile banking, branchless banking, and hybrid models. Banks will have to show that they are actively engaging with low- and moderate-income in communities, regions, and across the country. This should encourage traditional financial institutions with massive balance sheets to spread resources to the more than 1,300 CDFIs on the ground in underserved communities to meet the broadened requirements.
Like banks, many CDFIs are also modernizing their tools and services to better serve target communities, offering additional opportunities for effective CRA compliance under the proposal and for traditional banks to impact more underserved communities. Like others in the financial service sector, modern CDFIs serve underserved communities with technology and innovation. The increasingly diverse mortgage products offered by CDFIs reflect the realities of today’s rapidly changing economy and the diverse lives of American homeowners. CDFIs can and have developed innovative loan products to serve prime, credit-worthy borrowers with non-traditional circumstances that prevent access to mortgages offered by traditional banks.
To comply with updated CRA regulations that look beyond a bank’s support for its local community, firms should leverage local, regional, and national CDFIs dedicated to mission-driven financial services. The persistent wealth and homeownership gap in the U.S leaves Black, Latino, and low-income families out of the modern economy, and as a result, limits economic growth across the board. Investments in CDFIs are a proven way to expand access to the services, credit, fair-market, and non-predatory loans that these communities need to break away from the cycles of expensive debt and financial challenges that prevent economic growth and limit the opportunity for generational wealth-building.
And while regulators are in the habit of expanding and modernizing CRA rules, they should also consider expanding CRA requirements to cover non-bank financial institutions that make up an enormous part of today’s lending economy. Non-bank mortgage lenders issue more than two-thirds of home loans in the U.S. but are not held to the same community investment standards as traditional banks. It’s no secret that their track record is less than stellar when it comes to serving low-income and minority communities, despite modern fair housing laws. If these lenders remain outside of the CRA ecosystem, then there’s little doubt they will continue to service the most profitable, safe communities at a much higher rate than others, leaving the rest out of the system.
By expanding CRA requirements to nonbank lenders, regulators will ensure more equitable servicing of low-income and diverse communities through direct lending from these institutions and additional partnerships and investments from them into CDFIs.
Leaders and advocates from across the CDFI, fair housing, economic/racial justice, and social investing landscape should take advantage of this moment and offer comments on the proposed rulemaking. We should be encouraging these reforms, which would make it easier for banks to comply with CRA requirements through investment and partnership with CDFIs, and call for even stronger CRA requirements that include both bank and nonbank financial institutions. With significant investment and targeted efforts, we can close the persistent racial wealth gap plaguing our country. Financial institutions’ compliance with requirements, direct support for target communities, and support for the CDFIs driven to serve them is just one, albeit a significant, piece of the puzzle that will help us take on this massive and critically important challenge.
Faith Bautista is the President and CEO of National Asian American Coalition (naac.org, formerly Mabuhay Alliance), a program-oriented nonprofit that provides housing counseling, small business lending, and technical assistance services to minority and low-income populations.