Banks have to invest in the low-income communities surrounding their branches. What if they didn't?

For banks and other traditional lenders, low- and moderate-income people and neighborhoods are considered risky investments.

Banks are reluctant to extend loans for construction, homebuyers, and small businesses. They want a surer bet in terms of value, stability, and repayment.

The Community Reinvestment Act is intended to rebalance investment in low- and moderate-income communities. It mandates FDIC banks of a certain size make investments in the “risky” communities they serve.

In December 2019, two of the three federal agencies that oversee CRA compliance proposed a second major overhaul since the CRA was enacted in 1977. Its first revision was in 1995.

The proposal isn’t suggesting major cuts. It’s suggesting changes to how funds are spent.

Proponents say it’s a needed modernization that gives banks more flexibility to serve their communities. Opponents say it’s just the newest way for banks to grow profits at the expense of low-income people and communities of color.

Traditional lenders’ long history of discriminatory lending practices based on race and income created the disinvestment they now used to deny financing.

Opponents argue that while funding amounts wouldn’t necessarily decrease, the revision will eliminate virtually all incentives to invest in the most disinvested communities where there's little to no profit to be made. 

Memphis is one of the poorest cities in the nation. Many of its neighborhoods already struggle with a lack of adequate support and investment.

So what could the proposed changes to the CRA mean for low-income Memphians and communities?
 

How Banks Bankrupted Black Neighborhoods

According to Amy Schaftlein, executive director of United Housing, Inc., access to safe and affordable loan products and neighborhood investment is the most important factor in neighborhood stability.

But beginning in the early 1940s, realtors, lenders, and government officials and policies worked together to intentionally and systematically deny loans and capital in low- to moderate-income communities of color. Most were black communities.

In a practice known as redlining, those decision makers designated certain neighborhoods as safe for investment and others as high risk. Decisions were made based on a few criteria, but chief among them was race.

Other race-based practices and policies—segregation, white flight, blockbusting, urban renewal, subprime lending—have combined with redlining and larger economic shifts like deindustrialization to devastate the economies of black and brown communities across the country.

As a result, those communities are significantly more likely than white communities to experience severe poverty today. 

Congress passed the CRA in 1977.
Cleaborn Pointe at Heritage Landing is a complex of mixed-income apartments that runs along Lauderdale Street on the former site of the Cleaborn Homes housing project. (High Ground News)

The CRA Needs Help But How?

Virtually everyone agrees that the CRA needs revision.

The guidelines on what is and isn’t a CRA-approved investment are unclear. The current proposal would clarify those acceptable investments.

The CRA has no specific quotas or requirements. Banks do receive a CRA rating, but the criteria are complex and largely ineffective. Considering long-term data, most banks pass CRA assessments, but research shows banks have continued denying borrowers of color at disproportionate rates.

Under the new proposal, those standards could become even more lax. Banks could conceivably fail as many as 50% of their assessment areas and still be considered compliant overall. They cannot do so under the current CRA.

“We don’t need to scale back the CRA, we need to modernize it,” said Schaftlein.

“Ultimately, we need more transparency in the form of public hearings and public comments, allowing more time for feedback from the community,” Schaftlein continued. "Closing the digital divide would also help with access for those who don’t have easy access to technology."

The proposed CRA changes came after months of meetings, tours, and discussions between communities, banking professional, and the three federal agencies that oversee the CRA

The Office of the Comptroller of Currency, Federal Deposit Insurance Corporation, and Federal Reserve are the three regulatory agencies. The OCO and FDIC issued the CRA revision proposal. The Federal Reserve is investigating its own suggestions for revision.

Supporters say the update will align CRA investments to clients’ online banking practices, which weren’t a consideration during its first revision in 1995. They argue that low-income clients’ banking practices are no longer geographically-based and CRA investment should be able to serve them where they are.

Currently, CRA funds are linked to assessment areas around branch locations.

The changes would also expand the types of investments allowed under the CRA to give banks flexibility to invest in a wider range of projects in wider geographic areas, including rural areas and tribal lands where there are no bank branches.

Opponents argue that expanding area requirements and types of qualifying projects will result in banks choosing the most financially attractive options in the highest-income areas possible. Meanwhile, low- and moderate-income neighborhoods will see further disinvestment.

Opponents say the changes fully separate the CRA from its history and intended purpose as a response to neighborhood-level urban disinvestment.

Organizations like Habitat for Humanity, pictured here, use CRA-related funds and other funding sources for new construction, new loans, education, and other critical components of supporting affordable housing. (High Ground News)

WHO’S “RISKY”?

Traditional lenders assess reliability and risk based on the individual borrower and the area where the property is located.

For the area, they look at property values and long-term stability of those values. For the individual, they examine income, wealth and assets, and the borrower's history of regular payment on revolving lines of like credit cards and auto loans.

Roshun Austin is president and CEO of The Works, Inc.

She knows that decades of discriminatory practices have left The Works' target borrowers and communities with little stability, wealth, or credit.

The Works uses some CRA-related funds in combination with other funding sources to support a number of initiatives in South Memphis, Frayser, and other disinvested communities of color. One program offers mortgage products for nontraditional borrowers, which are buyers and neighborhoods considered high risk by large lenders.

With no standard credit history to show reliability, The Works considers alternative measures to assess borrowers. This includes phone, utility, and rental payment histories. 

They help borrowers with financial literacy and establishing a realistic household budget with room for savings. They keep in close, regular contact with their borrowers to ensure they can continue to make payments despite changes in circumstances.

As a result, their borrowers rarely default.

Beyond their borrowers, Austin said her organization is also considered risky. The proposed changes to the CRA likely wouldn’t have much impact on The Works’ programs since they already receive comparatively less CRA funding that many other organizations.

Those organizations, Austin noted, have less longevity and experience while The Works has a consistent history of repayment and ample assets and capital for collateral.

The Works' communities are majority-black and include some of the most severely under-resourced neighborhoods in the country.

Austin said the historic discrimination in traditional lending is alive and well today, and it's levied against both her borrowers and her organization, whose staff is majority-black.

“There’s clearly some bias ... mostly because of racial discrimination,” said Austin.
 

WHO TAKES THE RISK?

Larger lenders often dispersed CRA funds by lending to local community development corporations, CDFIs, and other community-based lending partners.

Those organizations are typically already working in low-income, low-wealth communities. They use CRA-related funds to target those “high-risk” borrowers and neighborhoods with homebuyer education and support programs, entrepreneurial education or incubators, and low-interest, low-payment loans.

They also spend CRA-related funds on home rehabs, repairs, and new construction of affordable single-family and multifamily homes and commercial properties.

In the Mid-South, those community-based lenders include The Works, United Housing, Frayser CDC, Communities Unlimited, and many others.

“People mostly look to us for help with budgeting, credit and access to home repair,” said Schaftlein. “We are builders and developers and also have homes for sale.”

Austin said the CRA’s structure benefits the large lenders subject to the CRA mandate.

Large lenders can lend directly to low-income borrowers and assume the risk of default or they can lend to their community-based partners. Those loans still count towards CRA compliance, but it's the partner that uses its capital and assets as collateral and assumes the risk.

Banks benefit from compliance. CRA compliance ratings affect applications for new charters, new branches and relocations, consolidations, mergers, and acquisitions. 
 

The Last Big Change

Austin previously worked in the banking industry.

She said the more individualized approach to lending that her current staff takes was more common prior to the 1990s. She saw firsthand the shifts in the industry and the CRA.

“In the 90s, we had a lot more locally owned banks. At that time, families and individuals could qualify for loans much easier,” said Austin.

Smaller banks offered portfolio products which they owned and seasoned prior to selling them into the secondary market. A seasoned loan is one that has been paid on time for a sufficient amount of time to give a lender the reasonable belief that it will continue in a like manner.

Austin said now, traditional lenders regularly pass their loans to companies like Fannie Mae that service millions of loans with no connection to the people or communities they’re serving or understanding of their needs. They’re less likely to approve “risky” loans.

“As banks have grown and been bought out, relationships have changed and so does lending authority. Local officers often don’t have the authority to approve loans,” said Austin.
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