As online banking threatens to make in-person banking at brick-and-mortar branches as archaic as video rental stores, it may do the same to a 1977 law created to counteract decades of underinvestment in minority neighborhoods.
The Community Reinvestment Act was Congress’ response all those years ago to redlining — the practice of discriminatory lending that denied or offered more expensive credit to minorities and the poor and led to urban blight and white flight from city centers.
Community activists and big banks alike now say the law needs to get with the times.
Redlining, coined in the 1960s, comes from Home Owners’ Loan Corporation maps that were used for assessing neighborhoods — minority communities were outlined in red, making them no-go zones for financing home loans. The CRA required banks to serve low- and moderate-income individuals and communities near their branches, recognizing the geographic link between traditional brick-and-mortar banks and their customer base.
And for the most part, it appears to have had a major impact. A 2018 study by the Federal Reserve Bank of Philadelphia showed banks made 10 to 20 percent more loans to low- and moderate-income residents inside their assessment areas than outside.
But the growth of online banks is poking holes in the law’s coverage. The internet and mobile phones have helped branchless banking reach $1.5 trillion in domestic assets, says Benson Roberts, president of the National Association of Affordable Housing Lenders, a bank trade group.
Fewer branches, more online
While that includes some wholesale banks or limited purpose institutions, like credit card banks, online banking is driving the sector’s growth.
At the same time, the number of bank branches with an obligation under the CRA to provide loans and other services is falling. Branches have declined every year since a peak in 2010, at 99,550, according to data from the Federal Deposit Insurance Corporation. Banks closed 1,700 branches in 2018, dropping the total number to 86,375.
Meanwhile, the percentage of U.S. adults with bank accounts using a mobile phone for banking surged from about 20 percent in 2011 to more than half in 2017, according to Federal Reserve surveys.
A recent report from the real estate firm JLL predicts that both of those trends will continue, with more banks closing more branches as more Americans move their accounts online.
The closures may already be hitting low- and moderate-income communities: After steadily rising to a peak of $505 billion in 2016, the number of CRA-compliant loans that banks issued dropped in 2017 to $482 billion, according to the Office of the Comptroller of the Currency.
“Obviously, if you don’t apply to the whole market, you have less of an impact,” says Jesse Van Tol, CEO of the National Community Reinvestment Coalition, a finance-focused association of community groups.
That regulatory gap is growing as the percent of blacks who own their own homes declined in the first quarter of 2019 to 41.1 percent — a new all-time low and more than 20 points below the rate of white homeownership. While white and Hispanic homeownership has been recovering steadily from the market’s collapse in 2007, black ownership levels have declined despite a booming economy and with black unemployment at historic lows.
In most regards, the CRA is a roundabout law. It tries to address racial discrimination without ever mentioning race, instead attempting to assure that low- and moderate-income individuals and communities are served by their local banks. That circuitous route is necessary to get around the Supreme Court’s opinion that the 14th Amendment’s Equal Protection Clause should not be used to explicitly differentiate on the basis of race, even in redressing racial disparities.
Under the CRA, banks are judged on how well they perform in assessment areas around their branches.
Redlining didn’t merely deny credit to borrowers from certain areas — it shifted wealth away from them by leading minorities to make deposits at the same banks that would deny them loans, which then extend credit to wealthier, whiter neighborhoods.
Branchless bank options
If regulators map out assessment areas around bank branches, what should the CRA cartographers do with branchless banks?
One thought is to use the online bank’s offices instead of branches. But that would concentrate low- to moderate-income services in a few big metro areas that are home to the online lenders, an outcome banks and community advocates both disfavor.
It would exacerbate the concentration of wealth in such cities and would force banks to compete more over a limited supply of lending and community development opportunities. It would also increase CRA compliance costs, which already account for 7.2 percent of smaller banks’ overall regulatory expenses.
The NAAHL wants brick-and-mortar banks to keep their branch assessment areas, and suggests branchless banks be assessed based on their nationwide low- to moderate-income activities.
“If branchless banks had flexibility to go anywhere to serve low-and-moderate income communities, that would even out access better among the underserved communities than today, when many of these banks don’t get the full credit for going beyond their assessment area,” says Roberts.
Van Tol agrees that banks with different business models should be able to use different methods for defining assessment areas. But he’s not a fan of a nationwide assessment, which would allow banks to take deposits from people in struggling communities and invest them in booming places thousands of miles away.
“I think every bank is willing to make a profitable loan or take a person’s deposits from no matter where it is,” says Van Tol. “The question is: What are they willing to invest back into those places?”
Under the current law, banks get limited credit for low- to moderate-income activities that fall outside their assessment areas. If banks could get examiners to consider CRA activities in the aggregate — not just within the concentrated geographies — it’d make compliance easier and cheaper.
That can actually be a win-win, says Roberts, leading to more community investment overall. “It’s not a perfect trade-off,” he says. “The CRA should be about making life better for communities, not particularly worse for banks.”
Van Tol says gutting the CRA of its geographic focus would run counter to its fundamental purpose of ensuring that banks are responsive to the communities they draw deposits from.
“The entire point of the CRA is to keep the banks accountable to community needs,” he says. “It is the goal of the CRA to ensure that banks … develop some local knowledge and expertise about what’s going on in that local community.”
Roberts argues that another idea — creating assessment areas where branchless banks collect deposits — would just concentrate CRA loans around where you’d expect to find the most potential bank accounts: big cities, again.
For now, it’s unlikely the federal government will address the growing gap in CRA coverage.
By the National Community Reinvestment Coalition’s count, only 30 percent of mortgage lending falls under CRA obligations, and as more types of lending expand online, Van Tol worries that fewer small business loans will go to low- and moderate-income entrepreneurs.
The Treasury Department called for modernizing the CRA in April 2018, and federal banking regulators issued an advance rulemaking notice four months later. But those changes are still a long way off and may not ultimately address the financial technology issue.
A few modernization bills have been introduced, including one from presidential candidate Sen. Elizabeth Warren, D-Massachusetts, but they don’t have much momentum. While the banks and community advocates may not agree on what to do, doing nothing may be the worst outcome for both. Without reform, the CRA’s ability to counteract decades of redlining will fade, even as it continues to splash traditional banks with red ink.