For a law meant to undo the harms of discriminatory lending practices of the past, the Community Reinvestment Act has little impact on household credit.
So says the
The study centered on mortgage lending, which accounts for more than 80% of household borrowing. While CRA-eligible areas tend to see higher volumes of mortgage originations — including both purchase loans and refinancings — than non-eligible communities, the report notes that this activity has not resulted in a corresponding uptick in borrowing levels, citing anonymized data from Equifax about household balance sheets.
The report also found that banks subject to the CRA tend to build their exposures to eligible communities by purchasing loans originated by nonbank lenders, which do not have to meet CRA obligations.
"Because banks receive credit for originating or purchasing loans in [low and moderate income] tracts, they can effectively increase their CRA lending without changing overall credit supply in the tract," the study states. "Our results confirm the importance of the 80% eligibility threshold for lender incentives, but suggest that substitution from nonbanks and loan purchases allow banks to meet their CRA obligations without impacting the overall level of household credit."
Enacted in 1977, the CRA was designed to encourage banks to lend and invest in lower income parts of the communities where they have bank branches. The law was intended to address credit issues that arose from redlining, a historical practice that restricted credit access to certain neighborhoods, generally those with higher populations of minority residents.
The Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency examine the banks they supervise for CRA compliance on three- or four-year cycles. Consumer lending is one of numerous factors that contribute to a bank's CRA score, with mortgage and small business lending being top considerations, along with certain types of community investments.
CRA scores are often considered when banks seek to expand through mergers and acquisitions or by opening branches. They also carry a reputational impact, as well. Roughly 98% of banks get a passing grade on their exams.
The New York Fed findings come as the Fed, FDIC and OCC
The primary objective of the modernization effort is to adapt the law to the internet era. Regulators are aiming to do this by allowing banks to receive credit for community investments in areas where they have concentrations of digital banking customers instead of just places within close proximity to physical branch locations. But policy experts and advocates see the reform effort as a chance to address other shortcomings in the law, including those highlighted by the New York Fed report.
Kevin Hill, the CRA Manager at the National Community Reinvestment Coalition, a Washington, D.C.-based advocacy group, said the report points to needed changes around the treatment of originated versus purchased loans.
"The study provides evidence that loan purchases are having little impact on the overall supply of credit," Hill said. "We also suggested loan purchases be examined separately from loan origination, which isn't something CRA currently does, and then, ultimately, for loan origination receive more weight."
Hill said only smaller banks that rely on brokers to originate mortgages should get full CRA credit for non-originated loans. Large banks, he said, should get little to no credit unless they purchase from community development financial institutions, minority-owned deposit institutions or women-owned depository institutions that cannot sell their loans to the government sponsored entities Fannie Mae and Freddie Mac.
Hill added that the New York Fed findings also support another policy of priority for his group: the inclusion of credit unions, online mortgage originators and other nonbanks under the umbrella of CRA.
"One of the big things that comes out of this study is that nonbank mortgage lenders should have the CRA applied to them," he said. "That's a position that NCRC and our members 100% agree with."
Kenneth H. Thomas, president of Community Development Fund Advisors, said including nonbanks in the CRA is something many banks would like to see as well, but it is an unrealistic goal because it requires a legislative change not likely to gain traction in this Congress.
"Banks and community groups alike are in favor of broadening CRA's umbrella to credit unions and nonbanks, but that is not an easy legislative ask," Thomas said. "The banking industry can keep throwing its challenge flag to level the playing field, but the congressional refs will continue to deny those challenges because of the very strong credit union and nonbank lobby."
As far as originations go, Thomas said nonbanks will likely continue to dominate single-family and small multifamily mortgage lending, but small and community banks are still best positioned for more complicated lending that requires on-the-ground expertise.
While originated and purchased loans are technically supposed to be counted the same, Thomas said he often sees examiners giving more credit to banks with greater concentrations of originated loans when judging community responsiveness. He added that applying a CRA credit multiplier to originated loans would not result in more credit being extended to households, but rather banks being able to get more credit for the same amount of lending.
Still, he said, it is worth adjusting the framework to prevent multiple banks from getting credit from the same loan.
"There is a public policy 'double counting' concern over giving one bank CRA credit for an origination of a loan, which is then sold to another bank, which also gets CRA credit for purchasing that same loan," Thomas said. "This is currently not a concern when Quicken or other nonbanks that are not under CRA sell a loan to a bank, since only one entity is getting CRA credit for that loan."
For the study, New York Fed researchers compared household credit use in CRA eligible areas against similar data in non-eligible communities. They did this in three ways: First by comparing census tracts that are just within and just outside the CRA's income eligibility; then by conducting a block-by-block comparison of neighboring areas on the boundary of CRA eligibility lines; and finally by looking at areas that either became eligible or ineligible for the CRA during the examined period and compared data from before and after the change.
All three approaches yielded the same result: CRA eligibility had a negligible — if any — impact on household credit use or outcomes such as bankruptcy, risk scores and delinquency.
Hill said the lack of impact on household credit tracked by the study should not be viewed as a mark against the CRA. Since the research focused on overall credit use, including credit cards, it is not entirely material to the act's core mission. He said a
Also, because the New York Fed study focused on areas just barely eligible for the CRA, Hill said it may not be representative of poorer areas that likely benefit more from the law.
"It's possible that the impact of CRA is larger in areas that have less income, whereas moderate income, by definition, means you're closer to the area median income," he said. "They were looking really closely at the thresholds there, so looking at low income may reveal more of an impact on CRA."
Brian Knight, director of Innovation and Governance and a senior research fellow at the Mercatus Center at George Mason University, said the study's focus on nonbank origination could be misleading, too. Even if a loan is not issued by a bank, the CRA could still be serving as an incentive for the extension of credit since it could enable a nonbank to sell loans at a premium to banks seeking CRA credit.
"It's not that the law only changes behavior at the margin, at the interface between the bank and the consumer," Knight said. "You would expect it to change behavior across the entire lifecycle of the transaction. So long as part of the value of any given loan gets CRA credit, that's going to change its value proposition."
Nuances aside, some see the brass tacks finding that the CRA has no impact on overall household borrowing or outcomes to be an indictment of a law predicated on expanding credit access to historically marginalized areas.
Norbert Michel, director of the Cato Institute's Center for Monetary and Financial Alternatives, said the fact that the CRA cannot demonstrate a positive impact on consumer borrowing supports his belief that the law is antiquated. Rather than trying to address long-running economic inequalities through nebulous requirements, Michel said he'd rather see Congress replace the framework with actual appropriated spending.
"You have a stronger case for repealing the CRA, and if you have to replace it with something, then replace it with something that's very direct as opposed to something that's indirect," he said. "I don't agree that it is the case, but if Congress believes we need more public funding for certain loans in certain places, then do all of that on-budget, above board, so everybody can see it, and it is transparent and measurable."
