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A Next System of Community Investment: COMMUNITY REINVESTMENT ACT REFORM in the 21ST CENTURY by Devin Case-Ruchala

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A Next System of Community Investment: COMMUNITY REINVESTMENT ACT REFORM in the 21ST CENTURY by Devin Case-Ruchala A Next System of Community Investment: COMMUNITY REINVESTMENT ACT REFORM IN THE 21ST CENTURY By Devin Case-Ruchala A next system of community investment: Community Reinvestment Act reform in the 21st century Working paper Table of Contents October 2018 Introduction: CRA and the need for system change 3 Devin Case-Ruchala Part 1: A resilient 40 years 7 Evolution of the CRA: Resilience and stagnation 11 The origins of the Community Reinvestment Act 13 The CRA regulatory framework today 19 Wall Street crash: It was the system, not the CRA 20 Gaps and opportunities for reform 24 Part 2: CRA reform and community wealth building 30 The design challenge of system change and barriers to reform 30 Advancing the community wealth building model 35 Rethinking the CRA as a community wealth building tool 41 Potential reforms: challenges and opportunities 44 CRA reform: One piece of the next system puzzle 56 Part 3: A policy agenda for community reinvestment 58 Advocacy routes for a next system of community reinvestment 58 Key reforms and ways to advance them 59 In the meantime: Defending the CRA and laying the groundwork 63 Conclusion: Toward a CRA that puts community first 68 About this report Since 1977, the Community Reinvestment Act (CRA) has required banks in the United States to take affirmative steps toward meeting the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods. In 2018, the Office of the Comptroller of the Currency requested public comment on proposed reforms that could make significant changes to how the CRA is administered. This working paper is intended to inform and guide responses to the OCC pro- posed rulemaking notice as well as a longer-term reform agenda that could lead to a “next system” of banking and investment that better serves the credit and de- velopment needs of communities. This agenda aims to align the CRA with com- munity wealth building approaches and assert a more fundamental public pur- pose obligation for financial institutions. The regulatory and legislative reforms proposed in the working paper address broader changes within the financial ser- vices industry and critical assessments of the law’s effectiveness in the communi- ties that it is intended to serve. About the author Devin Case-Ruchala is a graduate student at the University of North Carolina at Chapel Hill, pursuing a political science doctorate in the political economy of finance. Devin has a background in the cooperative sector, including several years served as treasurer and board member of a 50-member housing cooperative in Bloomington, Indiana, and work with Shared Capital Cooperative, a national cooperative loan fund and community development financial institution (CDFI). 2 THE NEXT SYSTEM PROJECT Introduction: CRA and the need for system change n late March 2017, the Office of the Comptroller sive and pervasive pattern and practice of vio- Iof the Currency (OCC) released its results of an ex- lations across multiple lines of business within amination into Wells Fargo Bank’s compliance with a the bank, resulting in significant harm to a law called the Community Reinvestment Act (CRA). large numbers of consumers. The bank failed to The CRA, initially signed into law in 1977, requires implement an effective compliance risk man- that banks lend and invest in the communities where agement program designed to properly prevent, they have deposit-taking branches. The report exam- identify, and correct violations. Further, bank ined Wells Fargo’s “record of meeting the credit needs management instituted policies, procedures, of its entire community, including low-and moderate- and performance standards that contributed to income neighborhoods, consistent with the safe and several of the violations for which evidence has sound operation of the institution” between Novem- been identified.1 ber 2009 and November 2012. Immediately above this text is a table indicating that, The results of the assessment are worth reviewing be- aside from these “egregious” practices with regards to cause for newcomers to the CRA it highlights some “fair lending and other illegal credit practices,” Wells incongruities of the legislation in the modern banking Fargo was awarded an “Outstanding” rating for its context (whereby some banks, particularly the larg- “Lending” and “Investment” activities, and a “High est banks, are simultaneously key providers of a sig- Satisfactory” rating for its “Service” activities. That is, nificant amount of community capital but also a force it received an “Outstanding” and “High Satisfactory” stripping capital from communities and perpetuating rating for its lending, investing, and service activities inequities in access to capital). to the “entire communities” surrounding its branches, including low- and moderate-income neighborhoods The examiners write: (emphasis added). The bank’s overall CRA Performance Evalu- On a purely intuitive level, without going into the his- ation rating was lowered from “Outstanding” tory or detail on the mechanisms of the CRA and [as awarded in 2008] to “Needs to Improve” 1 Office of the Comptroller of the Currency. “Community Reinvest- as a result of the extent and egregious nature ment Act Performance Evaluation: Wells Fargo Bank, National Association.” September 30, 2012. The OCC is the federal financial of the evidence of discriminatory and illegal supervisory agency responsible for reviewing the performance of credit practices...The findings reflect an exten- nationally chartered banks in meeting CRA requirements. The next system of community investment 3 A chart from the 2012 examination of Wells Fargo’s compliance with the Community Reinvestment Act. its exam ratings, these results seem in conflict with Still, this technical response, which is not made partic- one another. First, we may ask, how it is that Wells ularly clear in the remaining 1,200 pages of the exam Fargo used “egregious” discriminatory and illegal report, does little to explain the more fundamental credit practices that resulted in “significant harm to logical incongruities of this exam result. Given that large numbers of consumers,” but also did an “out- the lending exam is intended to assess Wells Fargo’s standing” job at meeting the credit needs of the com- performance in lending to the entire communities in munities where it operates? Moreover, how does “an its assessment area and given that Wells Fargo en- extensive and pervasive pattern and practice of viola- gaged in discriminatory lending practices, how does tions... resulting in significant harm to large numbers it manage receive a rating of “outstanding” in the first of consumers” not amount to a rating of “substantial place? And still we are left with the question of how noncompliance”? Lastly, how useful is a report dated such practices result in a rating of “needs to improve” September 30, 2012, but only released in 2017? and not “substantial noncompliance”? What’s more, the sole repercussion for Wells Fargo’s CRA exam The technical explanation with regards to the first of rating is that an application for a merger or expan- these questions is that the CRA exams first evalu- sion through a new branch may be denied. No fines, ate financial institutions on the basis of their lend- revoking of existing privileges, or any other punitive ing, investing, and services provisions, and then pro- penalties may be assigned, outside of what may result vide an additional review of fair lending practices to from separately filed class action lawsuits related to its test for discrimination on the basis of race or gender. “discriminatory and illegal credit practices.” Poor performance on this corollary test can result in a downgrade in the rating of the overall test. In this The outcome of Wells Fargo’s exam is perhaps unsur- case, Wells Fargo was downgraded for price discrimi- prising. It fits neatly into the now-prominent narra- nation, meaning it may have done an “outstanding” tive that has emerged in the 10 years since the 2007- job lending to low or-moderate communities, but si- 2008 financial crisis of “big banks” favoring short- 2 multaneously discriminated on the basis of race. term profit gains via whatever means possible rather 2 Horowitz, Ben. “Fair lending laws and the CRA: Complementary than supporting equitable and sustained social and tools for increasing equitable access to credit.” Federal Reserve Bank economic welfare (and long-term financial and eco- of Minneapolis. March 8, 2018. https://minneapolisfed.org/publica- tions/community-dividend/fair-lending-laws-and-the-cra-comple- nomic stability). However, using Wells Fargo’s exam mentary-tools-for-increasing-equitable-access-to-credit. results as an example here is not to single out that 4 THE NEXT SYSTEM PROJECT particular bank as a folk-devil, an easily identifiable The CRA is critically important entity to offload blame about the nation’s economic for funneling capital back into ills, including growing income inequality, recurring marginalized communities. But as economic crisis, increasing concentration of wealth, persistent racial wealth gaps, stagnant wage growth, the CRA has grown increasingly and growing employment precarity. Rather, it illus- necessary, so has the need for trates the role major banks can, and all too often do, reform. play at a systemic level in perpetuating and exacerbat- ing these economic ills, at the same time that they direct billions of dollars into communities under the guidance of the CRA. However, the other half of the contradiction persists due to, among other factors, weak enforcement mech- The incongruities evident in the exam results (and anisms, gaps in the examination process, and changes Wells Fargo’s behavior) further highlight the chal- in the structure of the financial system since the CRA lenges facing contemporary public policy to holisti- was first enacted in 1977. This has led to increasing cally assess and reform the behavior of major econom- and widespread agreement in recent years that the ic institutions.
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