CRA and the Future of Community Redevelopment
Summary of A Conference on the Community Reinvestment Act
Held February 6, 2009 at the Federal Reserve Bank of Cleveland
With the Community Reinvestment Act under intense scrutiny as a suspected contributor to the nation’s mortgage meltdown, the Research and Community Development departments at the Federal Reserve Bank of Cleveland decided to convene a group of banking, regulatory, and community development experts to discuss two key questions:
is the CRA responsible—and if so, to what degree—for the glut of mortgage loans that have gone into foreclosure, leading to the collapse of financial institutions and pushing the economy into recession, and
what policy recommendations might this group make to legislators who are revisiting this landmark legislation in 2009 with an eye toward rebuilding communities wracked by foreclosures and their spillover effects?
More than 100 people gathered in Cleveland on February 6 for this one-day forum, which included presentations offering a range of research-informed perspectives as well as ongoing discussion of policy recommendations. “These kinds of forums are designed to challenge our assumptions and sharpen our thinking,” said Cleveland Fed Vice President and Community Affairs Officer Ruth Clevenger in her opening remarks. “In this year of change, we have to look hard at whether the CRA is still relevant. Is it the right tool for community and asset building?” The conference served as one of an ongoing series of CRA-specific forums sponsored throughout the Federal Reserve System.
The presentations began with Ben Keys’ assessment of access to financial services among residents of several low- and moderate-income communities in Detroit. Continued gaps exist between the provision of mainstream banking products aimed at LMI individuals and what these individuals are actually using. The study conducted by Key and fellow researchers at the University of Michigan found, for example, that 29 percent of the households they interviewed were unbanked. A higher percentage of unbanked respondents use tax-refund anticipation loans, which carry high fees, than their banked counterparts.
Among the obvious follow-up questions are these: do cultural barriers keep some residents from using mainstream banks, or do banks need to develop better products that are more specific to the needs of low-income customers? Is it simply a matter of low-income residents not knowing these products exist and what the benefits of having a mainstream banking account are? The research Keys presented suggests that a marketing outreach campaign may not be sufficient to address the gap: of the unbanked households they interviewed, 70 percent used to be banked. And the great majority of them want back in. “They want products with low fees and ease of use,” Keys said.
Policy suggestions include savings cushions, short-term loan alternatives, disclosure across formal and informal financial services options, regulation of mortgage products, and opt-out policies for credit cards and mortgage loans. In terms of the study’s relevance to the CRA, policymakers might rethink how the CRA service test is administered. “The cost of excluding these households is large,” Keys said. “It’s better for the economy to have a more inclusive policy.” Keys pointed out that fellow researcher Michael Barr has long advocated for a low-cost, electronically based bank account with a new tax credit for depository institutions. Such subsidized accounts could help
Next, Stephen Ross shared highlights of his research analyzing racial differences in mortgage lending using data from Boston (the Boston Fed data) and the results of a paired-testing study of mortgage lending discrimination conducted in Chicago and Los Angeles. Professor Ross's research suggests that differences in the assistance and advice provided to borrowers may be an important mechanism through which discrimination affects mortgage market outcomes. He also spoke about related work he had been involved with, including an investigation of discrimination in mortgage pricing, efforts to reduce predatory lending in Connecticut, and some paired-testing work with a network news magazine that was less scientific, but nonetheless revealed insights into the context in which discrimination takes place. Professor Ross emphasized two important lessons for policymakers: the decentralized nature of the system of mortgage brokers facilitates discrimination, and effective lender command and control systems that limit the discretion of loan officers or mortgage brokers lessens the likelihood of discrimination.
The next two presentations addressed one of the key questions of the forum, that of whether CRA lending is responsible for the subprime mortgage meltdown. The evidence presented in both Neil Bhutta’s and Lisa Nelson’s presentations exonerates the CRA. In fact, Nelson’s analysis of CRA lending in the Cleveland Fed’s Fourth District (Ohio, western Pa., eastern Ky., and the panhandle of WV) shows that subprime mortgage loans made by CRA-regulated lending institutions in three of the largest communities in the district account for only a very small percentage of the subprime mortgage loans made overall. This is true across the income spectrum. Bhutta presented findings [link to PowerPoint] of a study he initiated while a graduate student at MIT, involving examination of national mortgage lending data over several periods of time. The findings suggest that CRA had a modest positive impact in larger MSAs, though the preliminary finding for the more recent time period—2004 to 2006—is that there is no detectable effect of CRA on mortgage originations (see paper).
Following these presentations, Mark Willis of the Ford Foundation led a dynamic, interactive discussion that proved the crux of the forum. He launched it with this question: what should the Community Reinvestment Act look like going forward? Willis, the former head of community banking at JP Morgan Chase, plays a central role in helping to reshape the CRA, having been charged with gathering input from bankers, community development practitioners, regulators, and government officials across the country and then developing a policy recommendation on behalf of the Ford Foundation. At the Cleveland Fed, Willis posed questions and challenged the audience to come up with new ways of looking at the legislation that has shaped community development policy for the past 30 years. Pointing out that it’s a lot easier to criticize than to come up with constructive criticism, Willis suggested starting with a cost–benefit analysis of the CRA. “Assume CRA is successful,” he said. “What are the measures?”
Some quick answers came back: Increased employment of minorities. Higher homeownership. More participation in financial education programs. Banks focusing on philanthropy. Greater product development. Then, a redirect from an audience member: “Maybe the better question to consider is, how would the world change if we got rid of CRA?” Instead of articulating a Capra-esque view of community landscapes without the ostensible benefits of the CRA, forum participants continued to point to advantages of the legislation. One banker said that the CRA had “clearly and dramatically expanded credit opportunities in LMI communities” over the past 30 years. A regulator (who volunteered his background as a one-time student of philosophy) said that CRA had created opportunities for upper management at banks to engage in philosophical and ethical discussions about the underpinnings of markets.
Willis steered the conversation to the issue of sustainability, asking, should banks be obligated to do things that aren’t profitable? The follow-up discussion to that query covered a lot of ground, including what exactly constitutes ‘profitability’; whether financial education is or is not a responsibility of banks that sell these products; and how can banks be appropriately incentivized to provide a greater array of products, given the quid pro quo inherent in CRA legislation. Another question that arose was whether banks of different sizes should be subject to the same three-part CRA tests. And should there be varying requirements based on geography?
All the questions, comments, and discussion served to illuminate one undeniable truth: there is no simple solution to revamping the CRA. Willis pointed to the book Good to Great, by Jim Collins, and suggested applying the main tenet of that tome—find the thing or things you’re good at, focus on them only and forget the rest—to CRA. “What is it doing well?” he asked again.
In summarizing the discussion, Willis made these broad-based suggestions for modifying the legislation:
Keep it simple.
Be clear about its mission.
Create a system whereby the legislation can be readily adapted in the future.
“I don’t want to pretend there are simple answers,” he added. “This is very complicated.”
In the first of two afternoon sessions, Bob Avery discussed changes in the financial landscape from 1977 to the present, including changes in consumer lending, small business lending, mortgage lending, and LMI lending. Breck Robinson then spoke on the benefits of CRA agreements, which are pledges by lending institutions to increase the level of their financial services offerings within defined geographic areas. In terms of future incentives for banks, Robinson felt that banking institutions going forward may not find it beneficial to have CRA agreements. CRA agreements, he added, represented “a big-stick approach.” Today, there are ways to have community groups work with banks on financial education, approaches that are “more tailored to the needs communities have.”
The final session included a presentation by Peter Wallison of the American Enterprise Institute, in which he pointed to Fannie Mae and Freddie Mac as two primary players in the mortgage meltdown. He cited irresponsibility, lax oversight, and a mandate from Congress to support LMI housing among the reasons why these two organizations were aggressive buyers of subprime mortgage-backed securities and, in recent years, subprime mortgages. These assets went bad on their balance sheets and they are now owned by the taxpayers. Wallison was followed by Glenn Canner, a senior research economist at the Board of Governors, whose extensive work with mortgage lending data underscores again the point that CRA did not cause the nation’s mortgage crisis. “The evidence all points the other way,” he said.
Canner also shared results of a study he and Raphael Bostic of the University of Southern California conducted for Congress. In it, they surveyed banks, inquiring about lending practices, profitability, how the bank was or was not incentivized by the CRA, and more. Canner summarized his assessment thus: “I’m confident that if CRA disappeared tomorrow, lending to low-income borrowers would not disappear.” He also shared data that show the most rapid growth of foreclosure filings is in middle- and upper-income areas.
Finally, a Q&A session was held with all the speakers on stage. If CRA didn’t cause the crisis, Glenn Canner was asked, what did? In his response, which covered the national view, Canner cited the run-up of housing prices, investors who bought bundled loans without knowing all the risks, greater lending flexibility, and a resultant excess of supply as contributors. To this list Willis added rising interest rates, then said, “Clearly, CRA was not a driver. But to think it wasn’t a contributor is naïve.” Bob Avery cautioned against a rush to judgment, pointing out that there are a lot of issues we still don’t understand. “How were laws complicit in this?” he asked. “How were banks culpable?”
In sum, the forum was a robust exchange of research-informed perspectives and ideas from experienced bankers and community development practitioners on how to reformulate legislation that, arguably, will be responsible for shaping communities for the next several decades. Read also the recently published Revisiting the CRA: Perspectives on the Future of the Community Reinvestment Act, a compilation of articles and commentary that was produced by the Federal Reserve Banks of Boston and San Francisco.
Additional Fed-sponsored forums are slated for the Spring and Summer, including the 2009 Community Development Policy Summit, [link to save the date page you set up] scheduled for June 10–11 in Cleveland. We will also extend this and future discussions on the CRA in a forthcoming Cleveland Fed policy discussion paper, to be published in the second quarter of this year.