Opinion: CRA does not work for banks or IMBs
Last year, in a Drafting Housing Wire, Community Home Lenders of America took the lead nationwide in opposing calls to extend the Community Reinvestment Act (CRA) to Independent Mortgage Banks (IMBs).
The National Coalition for Community Reinvestment (NCRC) then returned the volley in a editorial by Jesse Van Tol advocating for the extension of ARC to IMBs. And HousingWire has brought us together for a lively “Lunch and Learn” discussion on the subject.
While banking regulators are proceeding with significant CRA regulation, an honest assessment of the CRA is that it has not been effective when it comes to bank mortgages. So why would we extend it to IMBs? Instead, there are more effective ways to increase mortgage lending to underserved and minority borrowers.
Many community banks do a great job of lending mortgages to underserved buyers. But this is driven more by their commitment to their customers and communities than by ARC. By contrast, since 2008 many large banks have exited the mortgage market or targeted lending to FICOwealthier borrowers, in order to support their strategic objective of cross-selling other lucrative products.
The ARC didn’t change anything. And the NCRC seems to agree. In 2018, the NRC declared banks have “almost completely” abandoned lending to low-income and working-class borrowers. NRC March HousingWire editorial even called the federal government’s enforcement of CRA “weak” and asked “Is this going to give police banks some teeth?”
Thus, the CHLA was eagerly awaiting the NCRC’s comment letter on the current federal CRA regulations. We assumed that the NCRC would focus on things like:
(1) increase the weight that affordable mortgages play in CRA ratings;
(2) remedy the widespread practice of large banks intentionally exclude underserved borrowers through the use of mortgage credit overlays, or
(3) make tangible suggestions to banks responsible for providing mortgages to underserved borrowers and communities.
But nowhere in the NCRC’s 129-page comment letter do any of these changes appear to be addressed.
Instead, the NCRC seems to be doing all it can to offer even more ways for banks to pass their CRA exam. without meet the mortgage needs of underserved borrowers and communities. On its website, the NCRC highlights articles that advocate for banks to obtain ARC credit for climate change mitigation projects, for food justice activities, and for child care.
These are all laudable social goals. But extending more credit to ARC for even more non-mortgage business means that bank mortgages are no longer a priority for underserved borrowers and communities.
Arguably, if the ARC itself were to undergo an ARC review for its performance in bank mortgages, the rating would be “Substantial non-compliance.”
The March NCRC editorial seems to conclude that there is little that banking regulators can do about it, except for a few banks seeking mergers or acquisitions, where banks may be forced to engage in a “community benefits agreement”. But even these are largely restatements of actions the banks were going to take anyway.
So the question is obvious. If ARC doesn’t work for banks, why would we extend it to non-banks? Why give up on holding banks accountable for affordable mortgages – and in desperation turn to IMBs (which are already doing a much better job than banks) and try to force them to do even more?
As the CHLA explained last year, extending ARC to IMBs is unnecessary, unwarranted, and would be counterproductive.
Last year, the NCRC defended extending ARC to IMBs, citing Massachusetts, which did so in 2007.
But, before other states do the same, we ask them to take a close look at the empirical evidence from Massachusetts. Statistics and analysis from a recent CHLA letter to CSBS show that the relative performance of IMBs in Massachusetts since then has lagged that of the rest of the country.
We believe this is because the primary impact of a state adopting an ARC for IMBs is to create new compliance burdens and regulatory costs – with little or no real impact – which discourage IMBs (especially smaller ones) from deciding to lend in this state.
Expanding ARC to IMBs in more states may give housing advocates the satisfaction of a “victory.” But Massachusetts shows the likely outcome will be less — not more — mortgage lending by IMBs in that state.
Instead, let’s focus on practical ideas that will have a positive impact.
The Federal Reserve urges some community banks to issue more majority/minority mortgages (loans in census tracts where minorities make up the majority of the population). Community banks are developing loan programs, such as offering 100% financing without mortgage insurance in conjunction with down payment assistance.
But apparently the banks do not receive credit for these loans if purchased from IMBs. As with ARC, community banks should obtain credit for eligible loans purchased from IMBs.
The CHLA also outlined other concrete actions that would help IMBs do even more than they already do to serve underserved and minority borrowers – such as reducing FHA premiums, LO Comp reform for residential mortgages, State and Reducing the Cost of Licenses for New Minority Mortgages. loan originators.
Let’s focus on the changes that could really have an impact.
Scott Olson is the Executive Director of Community Home Lenders of America.
This column does not necessarily reflect the opinion of the editorial staff of HousingWire and its owners.
To contact the author of this story:
Scott Olson at [email protected]
To contact the editor responsible for this story:
Sarah Wheeler at [email protected]