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The 25Th Anniversary of the Community Reinvestment Act: Access to Capital in an Evolving Financial Services System

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The 25Th Anniversary of the Community Reinvestment Act: Access to Capital in an Evolving Financial Services System THE 25TH ANNIVERSARY OF THE COMMUNITY REINVESTMENT ACT: ACCESS TO CAPITAL IN AN EVOLVING FINANCIAL SERVICES SYSTEM March 2002 Prepared for the Ford Foundation by The Joint Center for Housing Studies Harvard University The 25th ANNIVERSARY OF THE COMMUNITY REINVESTMENT ACT: ACCESS TO CAPITAL IN AN EVOLVING FINANCIAL SERVICES SYSTEM March 2002 Prepared for the Ford Foundation by The Joint Center for Housing Studies Harvard University Cambridge, Massachusetts i © by the Joint Center for Housing Studies. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, in- cluding © notice, is given to the source. Any opinions expressed are those of the authors and not those of the Joint Center for Housing Studies of Harvard University or of any of the persons or organizations providing support to the Joint Center for Housing Studies. ii ACKNOWLEDGEMENTS This study was funded by a Ford Foundation grant to Harvard’s Joint Center for Housing Studies. The Joint Center and Center Director Nicolas Retsinas gratefully acknowledge the guidance and support of Frank DeGiovanni and George McCarthy of the Ford Foundation, and thank them for their continuing efforts on behalf of lower-income people and communities. The empirical work reported here extends previous Joint Center research done in cooperation with the U.S. Department of Treasury and The Brookings Institution (Belsky et al., 2001, Litan et al., 2000). The Joint Center acknowledges the significant contributions to this initial effort by former Treasury Department officials Michael Barr and Alan Berube. At the Joint Center, William Apgar led the project study team. The team included Eric Belsky, Yi-Ru Chen, Mark Duda, Gary Fauth, Dawn Patric, Madeleine Pill, Nicolas Retsinas, and Alex- ander Von Hoffman. The study team gratefully acknowledges the many insights obtained during a series of in-depth interviews and discussion groups convened as part of the overall project. In the spring of 2000, the Joint Center held 11 discussion groups with over 100 experts in housing policy, housing finance, and community development. The Joint Center also conducted in-depth interviews with more than 100 individuals in the Baltimore, Birmingham, Chicago, and Los An- geles metropolitan areas, as well as in rural Colorado. These interviews and group discussions examined CRA in the context of the changing organization of the mortgage industry, the growth of affordable lending tools, and the resulting changes in the provision of credit to lower-income borrowers, and were invaluable to the success of the overall project. Finally, we are indebted to an Advisory Committee established by the Joint Center that provided helpful comments at each stage of the project. The Advisory Committee included senior officials from bank regulatory agencies, as well as nationally recognized experts drawn from the housing and mortgage finance industries, and national and local non-profit community development and advocacy organizations. A list of Advisory Committee members is presented in an appendix to this report. The report also benefited from the advice and counsel of numerous outside technical experts, most particularly Robert Avery, Raphael Bostic and Glenn Canner of the Federal Re- serve Board of Governors, Daniel Milkove and Samuel Calhoun of the USDA’s Economic Re- search Service, Michael Schill of New York University School of Law, and Anthony Yezer of George Washington University. ii EXECUTIVE SUMMARY The United States Congress passed the Community Reinvestment Act (CRA) in 1977 to encour- age depository institutions to meet the credit needs of lower-income communities. The Act re- sponded to the contention that savings and loans associations and banks were ‘redlining’ or sys- tematically denying credit to lower-income and minority neighborhoods. CRA advocates argued that by restricting credit access based on neighborhood characteristics as opposed to the credit- worthiness of individual loan applicants, the actions of depositories were exacerbating urban de- cline. CRA was built on the simple proposition that depositories have an obligation to serve the credit needs of the communities where they maintain branches. The linkage between depositories and community credit access reflected the structure of the banking and mortgage industry at the time of enactment. Unlike today, 25 years ago banks and thrifts originated the vast majority of home purchase loans. Restrictions on branching and interstate banking limited the geographic scope of banking operations, making CRA’s focus on markets where CRA-regulated entities maintained branches a sensible one. Along with the Home Mortgage Disclosure Act (HMDA) and closely related Fair Lending and Fair Housing legislation, CRA today continues to provide significant incentives for CRA- regulated institutions to expand access to credit to the lower-income and minority communities in which they maintain deposit-taking operations. Yet, in the quarter-century since its passage, dra- matic changes have transformed the financial services landscape, especially home mortgage lend- ing. Entirely new forms of mortgage lending provided by new lending entities have appeared and grown explosively, as global capital markets and institutional investors have replaced deposits as the source of funding for residential mortgages. As the link between mortgage lending and branch-based deposit gathering has eroded, however, so has the scope of CRA in the mortgage lending industry. Today, less than 30 percent of home purchase loans are subject to intensive re- view under CRA. In some metropolitan areas this share is below 10 percent. With a substantial portion of home purchase lending no longer subject to detailed scrutiny under CRA, the issue of how best to modernize CRA has emerged as an important public policy chal- lenge. Some argue that CRA’s costs exceed its benefits. Others advocate expanding regulatory oversight. Congress considered changes to CRA in the debate leading up to the passage of the 1999 Gramm-Leach-Bliley Financial Modernization Act (GLBA) but in the end did little to adapt CRA to the realities of the evolving financial services marketplace. Though CRA continues to provide significant benefits to lower-income households and communities, reform is needed for the Act to encourage financial services providers to meet the continuing needs of these groups. In light of the changing mortgage lending landscape, reform of CRA could follow either one or both of two broad paths. One path builds on CRA’s traditional mortgage lending focus and calls for extending the Act to the entities that now conduct the bulk of mortgage lending - mortgage brokers, finance companies, and the affiliates of depository banking organizations operating out- side of the areas where they maintain deposit-gathering operations. The other path builds on CRA’s traditional branch banking focus and proposes repositioning the Act to give greater em- phasis to the provision of financial services to lower-income borrowers and communities. Unlike mortgage lending, many financial services including community development lending and the provision of low-cost checking and savings accounts are still closely linked to branch banking operations. Providing enhanced incentives for financial services organizations to expand these activities to better serve lower-income and/or minority communities could provide a new focus for a reformed and revitalized CRA. Executive Summary PRINCIPAL FINDINGS This report examines CRA in light of the transformed world of mortgage and financial services provision. Using the detailed data on home purchase and refinance loans for the period 1993- 2000, the report compares the lending patterns of CRA-regulated entities with those of lenders outside of CRA’s regulatory framework. The analysis divides lending by CRA-regulated entities into two components: the assessment area loans subject to the most detailed CRA review, and the ‘out-of-area’ loans that do not come under any, or at best scant CRA scrutiny because they are made outside of areas where they maintain deposit-gathering branches. In addition the report tracks the activity of independent mortgage companies and other non-bank lenders that are not covered by the Act. Principle findings include: CRA Has Expanded Access to Mortgage Capital. Simple descriptive statistics and complex multivariate techniques document how CRA-regulated entities lead the primary market in the provision of prime conventional mortgage loans to lower-income people and neighborhoods. Here lower-income is defined as having an income that is less than 80 percent of area median in- come, CRA-regulated lenders refer to federally regulated banks and thrifts as well as their mort- gage company and finance company affiliates, and CRA-eligible loans refer to loans made to lower-income households and/or to households living in lower-income areas. • In both 1993 and 2000, CRA-regulated lenders operating in their assessment areas (areas where they maintain deposit taking operations) have shares of conventional, conforming prime home purchase loans to CRA-eligible borrowers that exceed the equivalent shares for out-of-area lenders or non-covered organizations. • The CRA-eligible share of conventional prime lending to blacks is as much as 20 per- centage points higher for CRA-regulated lenders operating in their assessment areas than for independent mortgage companies. For Hispanics, the equivalent gap
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