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Regulators Walk Tightrope on Race in Community Lending Update

May 9, 2022, 2:33 PM

U.S. financial regulators hope that proposed changes to a federal anti-redlining law will increase public pressure on banks to boost mortgage loans and other lending to Black, Latino and other borrowers.

Community Reinvestment Act rules proposed last week by the Federal Reserve and other regulators didn’t set specific lending targets for minority borrowers in low-income areas. But the plan would incorporate public data from other fair lending laws to provide a more accurate and transparent assessment of how well the largest banks are actually doing.

The Fed, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency are constrained by the CRA, a 1977 law that directs lending to low- and moderate-income geographic areas, but makes no mention of minority groups.

Still, advocates see the posting of public data on the racial characteristics of borrowers, combined with the other incentives, as a concrete way for financial regulators to boost lending to low-income people of color.

“I wanted them to go further, but they went further than I thought they would on the inclusion of race,” said Jesse Van Tol, the president and CEO of the National Community Reinvestment Coalition.

Race Neutral

The CRA requires regulators to measure banks’ lending and investment into low- to moderate-income communities, regardless of the racial or ethnic groups that might live there.

Many of the geographic assessment areas under the CRA are underserved inner-city neighborhoods that have large Black and Latino populations. The law also covers lower-income rural areas that tend to have larger White communities.

“The issue of considering race more in CRA first became an issue in the early ‘90s after the Rodney King incident in Los Angeles, said Ken Thomas, president of Community Development Fund Advisors, an investment fund that focuses on low- to moderate-income communities. “But it is clearly a front-burner issue today.”

Beginning in the 1990s, federal regulators began taking fair lending violations into account in CRA reviews, Thomas noted. Under existing regulations, banks can have their CRA evaluations downgraded by a full level due to fair lending violations.

Public Data

The regulators proposed to include data collected under the Home Mortgage Disclosure Act—a law which requires banks to report mortgages issued by race, gender, income, geographic location and other borrower characteristics—in the public portions of CRA evaluations. The requirement would only apply to CRA evaluations for larger banks with more than $10 billion in assets.

“The proposal better reflects congressional intent by more explicitly acknowledging race and ethnicity and creating greater transparency about retail lending,” Consumer Financial Protection Bureau Director Rohit Chopra, a member of the FDIC’s board who voted for the proposal, said May 6.

While the HMDA data would be included in CRA evaluations, it wouldn’t be used to actually grade banks.

HMDA data for individual banks is already made public through government websites, but the data can be hard to find on some websites.

Making the data more accessible in CRA evaluations could increase pressure on banks to extend mortgage credit into communities where it is lacking, said Buzz Roberts, the president and CEO of the National Association of Affordable Housing Lenders.

“What putting out the metrics does is it provides much more transparency to the public, so it takes CRA into the public relations and reputational framework,” he said.

The only potential snag is that mortgage lending by banks is a shrinking part of the market. Nonbank mortgage lenders, which are not subject to the federal CRA, issued nearly 70% of mortgages in the U.S. in 2020, according to a McKinsey & Co. report.

New York, Illinois and Massachusetts all have their own Community Reinvestment Acts that cover nonbank mortgage lenders.

But other types of lending data could work their way into the federal CRA.

The CFPB is currently working on small business lending data-collection rules that would also require the disclosure of borrower characteristics like race and gender. That small business lending data also could be included in public CRA evaluations, Chopra said.

Other Tools

The updated rules would extend CRA reviews beyond banks’ brick-and-mortar locations. Banks would also undergo evaluations in low-income areas where they have a high concentration of online borrowers.

Regulators also want to focus CRA reviews on counties with “persistent poverty,” many of which have large minority populations. The proposal listed the Mississippi Delta and Native American lands as areas that could get a lending boost, as well as Appalachia.

Still, the proposed rule doesn’t give credit for specifically lending to minority populations, something that community advocates and some Democratic lawmakers would like to see.

There are restrictions based on the text of the law—which is race neutral, Thomas said.

“Regulators are clearly conflicted on how far they should go,” he said.

Litigation Threat

The threat of potential litigation also may have caused regulators to pull back from making race more directly part of the CRA, Van Tol said.

That litigation wouldn’t necessarily come from banks. Conservative groups have targeted portions of the 2021 American Rescue Plan that directed $5 billion in Covid-relief funds to Black and minority farmers.

A conservative group led by Stephen Miller, who served as an aide to former President Donald Trump, sued to block those payments. Litigation over the program continues around the country, holding up the payments.

Despite the law’s limitations and other impediments, regulators have crafted a proposal that should have a major impact on boosting lending to minority borrowers, said Susan Wachter, the co-director of the Penn Institute of Urban Research at the Wharton School of Business.

“If you compare this to where we were two or three years ago, this is an amazing accomplishment,” Wachter said.

To contact the reporter on this story: Evan Weinberger in New York at eweinberger@bloomberglaw.com

To contact the editors responsible for this story: Michael Ferullo at mferullo@bloomberglaw.com; Keith Perine at kperine@bloomberglaw.com