Don’t Undermine the Community Reinvestment Act

(Bloomberg Opinion) -- Undermining a landmark piece of American civil rights legislation would be a bad idea in the best of times. At the moment, it’s indefensible.

Yet that is precisely what a new rule issued by Joseph Otting, the recently departed Comptroller of the Currency, would do to the Community Reinvestment Act.

Congress enacted the CRA in 1977 to address a long history of discrimination in lending. As recently as the 1960s, for example, the U.S. government officially excluded African-Americans from the federal subsidies that made the 30-year mortgage possible and helped create the white middle class — a policy known as redlining, after maps that designated certain areas as unfit for lending. The effects persist to this day. In too many disadvantaged neighborhoods, “financial services” means offerings such as payday lending and check cashing, which have nothing to do with building wealth.

The CRA is supposed to nudge traditional lenders to restore fairness by overcoming prejudice or mere habit. Some argue that it has encouraged lenders to take undue risks, but the evidence says otherwise. Regulators have translated the law into rules requiring banks to report on their efforts to serve low- and moderate-income neighborhoods — by making mortgage and business loans, for example, or investing in community development and providing retail services. Federal examiners conduct regular reviews and issue grades that, if unsatisfactory, can become an obstacle to mergers and expansions.

The CRA rules were last significantly revised in 1995 and do need updating. They should cover the non-bank institutions that account for an increasing share of mortgage lending (a reform that would require action from Congress). They should recognize the growth of online banking. They should provide the public with more information to assess whether activities such as small business lending and community development investments are doing any good. They should improve performance metrics and clarify what counts toward a good grade, with the goal of making lenders’ activities more effective.

In almost every respect, the new rule pushes the wrong way. It removes much of the largest banks’ retail lending from scrutiny. It de-emphasizes the quality of activities, by focusing on a single quantitative metric (the value of CRA-approved business as a percentage of deposits) and by making “responsiveness” to community needs an item for extra credit rather than a prerequisite. It relaxes the definition of approved activities. And it provides less granular data, making it harder for the public to assess what individual lenders are doing in specific communities.

Two other regulators help to enforce the CRA — the Federal Reserve and the Federal Deposit Insurance Corporation — and neither has signed on to the OCC’s final version. Thousands of commenters, including banks, have objected. Despite this, and despite a lack of data needed to assess the rule’s impact, Otting rushed it through one day before announcing his resignation last month.

The rule will probably face legal challenges. Given its remarkable genesis, it might meet the standard of “arbitrary and capricious” required for a court to strike it down. Otting’s successor, or the next administration, should devise a better alternative — one that would strengthen rather than undermine the CRA. The government can’t expect lenders to reverse the legacy of racism all by themselves, but it can and should keep nudging them to do the right thing.

Editorials are written by the Bloomberg Opinion editorial board.

©2020 Bloomberg L.P.

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