WASHINGTON — Sen. Elizabeth Warren, D-Mass., on Tuesday threw a new twist into efforts to reform the Community Reinvestment Act.
Just as the federal bank regulators try to modernize their CRA policy through reforms authorized under the current law, Warren released a bill that would apply CRA requirements to a broader array of institutions — including credit unions — and make penalties tougher for any violations.
"Obligations under the Community Reinvestment Act ... to provide credit to lower-income and middle-class communities are too weak," according to a summary of the bill, which includes other housing and economic proposals. "The bill extends the law to cover more financial institutions, promotes investment in activities that help poor and middle-class communities, and strengthens sanctions against institutions that fail to follow the rules."
Whereas now the law only applies to FDIC-insured banks, both credit unions and nonbank mortgage originators would have to follow CRA requirements under the proposal. Warren's bill also proposes billions of dollars of new investments into affordable housing trust funds. Those include $445 billion into the Housing Trust Fund and $25 billion in the Capital Magnet Fund.
The summary of the bill said reductions in investments for lower-income and middle-class housing projects "creates shortages that drive up costs for everyone, produces crumbling and unsafe housing stock in many urban and rural communities, and slows economic growth."
"Homeownership is the primary way that American families build wealth — but for decades, misguided and discriminatory Federal policy has excluded millions of families from the American Dream," the summary said.
The bill, called the American Housing and Economic Mobility Act, would also prohibit discrimination on the basis of sexual orientation, gender identity, marital status and source of income, among other things.
The proposed revamp of CRA and other housing policies would face an uphill battle under a Republican president and with odds favoring the GOP retaining Senate control in the midterm elections. But Warren's plan could gain clout as Democrats are expected to pick up congressional seats this November, particularly in the House, and as the Massachusetts senator is widely speculated to be considering a presidential run in 2020.
The plan also adds a significant wrinkle to pending efforts by the regulators, led by the Office of the Comptroller of the Currency, to modernize CRA policy.
Last month, the OCC issued an advance notice of proposed rulemaking asking for comment on more than 30 questions about how to revamp the CRA. Regulators are considering whether to expand the assessment areas where banks are graded for their community lending and changing the ratings system itself, which Comptroller Joseph Otting said would be a more transparent and accurate system.
Consumer groups have long argued that CRA grades are unclear and lack teeth. They say the grading system has strayed from the original intention of CRA that was meant to stop banks from “redlining” whole communities. Warren’s proposal focuses more on protecting consumers against discrimination, which could create an added layer of enforcement.
“This bill presents a vision for updating the Community Reinvestment Act that places the well-being of communities at the center of it,” said Jesse Van Tol, CEO of the National Community Reinvestment Coalition. “Sen. Warren has outlined a broad commitment to safer and more accessible economic opportunity in neighborhoods, communities, cities and rural areas across the country. This legislation should have the support of every fair-minded member of the Senate.”
Yet in some areas, Warren's legislative proposal shares certain elements in common with others' vision for CRA reform.
The OCC's questions and a recent Treasury Department report did not explicitly say credit unions should comply with the law, but both suggested expanding CRA to digital banking, such as online loans.
Expanding the law to other types of financial institutions that currently have no CRA requirements would require congressional action in any case.
Credit unions are already pushing back against the bill, arguing that it will increase their regulatory burden even though they do invest in their communities.
“Credit unions’ commitment to community reinvestment is unlike any other financial institution, as credit unions exist to provide provident credit and every loan made and every dollar earned serves the membership,” said Carrie Hunt, executive vice president of government affairs and general counsel for the National Association of Federally-Insured Credit Unions.
“The CRA was designed to ensure banks reinvest in their local communities, rather than using deposits gathered from one community and lending them to another. Extending CRA regulations to member-owned democratically controlled credit unions would add to regulatory burden, while providing no additional benefit to American consumers.”
Jim Nussle, president and CEO of Credit Union National Association, said credit unions "have not and do not engage in the discriminatory lending activity that prompted Congress 40 years ago to enact the Community Reinvestment Act."
"Therefore, it makes no sense to subject them to the type of punitive requirements that banks with a history of redlining must follow,” Nussle said.
“Credit unions are not-for-profit, member-owned financial institutions who deliver $14 billion in benefit to consumers every year. Make no mistake: This bill would jeopardize this benefit and the ability for credit unions to serve their members."
Echoing the OCC's notice, Warren has also proposed expanding CRA assessment areas to communities where a lender has a “significant number” of loans or products, not just where there is a branch or teller. The OCC's questions weighed whether the regulators should look at where a bank is lending the most rather than just its locations.
But consumer groups have raised concerns that expanding assessment areas could distract banks from focusing their CRA resources in the neighborhoods that need the most attention.
“The OCC expresses desire to broaden the scope of assessment areas in evaluating a bank’s footprint, as well as expanding the universe of activities that are eligible for CRA credit,” four California community groups said in a written statement responding to the OCC’s notice. “However, with over 96% of banks already receiving high scores on CRA exams, it is unnecessary to dilute CRA even more.”
