A small step for New York; A big faux pas for housing finance



  • Congress passed the Community Reinvestment Act (CRA) in 1977 to prevent deposit banks from withholding loans or general banking services from people living in low-income communities.
  • The CRA has been outdated for almost 50 years and is not even fit for the purpose it currently serves.
  • Despite its obsolescence, some state lawmakers are seeking to extend the CRA to non-depository banks, a constituency the law was never intended to cover, to meet a need these lawmakers were not. demonstrated to be a concern.


Lawmakers in the states of Illinois, Massachusetts and New York have taken steps to expand the range of financial services players subject to the Community Reinvestment Act (CRA), and other states are taking note. The CRA is a 1977 law passed to fight the “red line” where banks fail to provide services to low and middle income communities (LMI). Considering its age, it’s no surprise that the CRA is no longer fit for purpose and not performing adequately, even for the banking group it was designed for. State proposals to introduce CRA-type schemes that also cover mortgage banks therefore represent a doubling (and a duplication) of bad federal policy – extending dysfunctional law to constituencies that the law was never designed to achieve. to cover.

The Community Reinvestment Act

Congress adopted the Community Reinvestment Act in 1977 to prevent banks from withholding loans or general banking services from people living in LMI communities.

Banks are “encouraged” by the ARC to provide services to these communities and, in a multi-part assessment, are assigned an ARC rating by the three regulators managing the ARC: the Federal Reserve (the Fed ), Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC). ARC ratings are then factored into the decisions of these regulators to approve or deny mergers, acquisitions, branch expansions and bank branch combinations. In other words, banks must have a good CRA rating to continue the changes in their business. Thus, penalties under the CRA include refusal of mergers or branch expansions, as well as loss of expedited processing of corporate and regulatory affairs.

For an ABC primer, see here. For more information on the reform of the ARC proposed by the OCC, see here.

Mortgage banks

At this time, the CRA only applies to custodian lenders. A deposit institution is any business legally authorized to accept deposits from consumers, including savings banks, commercial banks, and credit unions. The best example of a non-depository institution is a mortgage bank. Mortgage banks are specialized banks that perform only a subset of banking activities in the sense that they underwrite, finance and manage loans, but nothing else; they do not hold customer deposits. Mortgage banks usually finance the loans they offer with large lines of credit and make a profit by selling these loans in the secondary market. Many mortgage banks provide better service to consumers because they are smaller, more agile, less regulated, and offer a wider range of products to consumers; this superior service is often at the cost of higher interest rates. The largest mortgage bank is Quicken Loans, the source of the largest number of mortgages nationwide in 2020.

Why CRA shouldn’t be extended to mortgage banks (or anyone else)

ARC was never designed to cover institutions that do not accept deposits

What exactly is the “reinvestment” in the Community Reinvestment Act? In its initial version, the ARC aimed to cover deposit-taking institutions which, by receiving deposits from the communities in which they were physically based, would “reinvest” a portion of those deposits in those communities. Institutions that do not receive deposits do not accept deposits – there is nothing to “reinvest”. In the spirit, ARC is no more applicable to a mortgage bank than it is to a telecommunications company or any other company providing a service to the community.

In addition, while deposit-taking institutions are generally subject to strengthened regulatory oversight and oversight, it is not without some associated advantages. Depository institutions have access to FDIC deposit insurance, the Fed discount window, and Federal Home Loan Ba ​​advances.nks (FHLB). No– Deposit-taking institutions do not share these advantages, so why subject a telecommunications company or a mortgage bank to the same regulatory constraints?

CRA is based on physical locations

While the banking industry has changed a lot over the past 45 years, the CRA hasn’t changed much at all, and does not take into account online banking services – or eveninterstate bank. ARC relies primarily on an appraisal of LMI loans and other activities in a bank’s “appraisal area” – which in 1977 meant the physical physical locations of a bank. According to this definition, the assessment excludes loans made online, which excludes banks that provide loans partially or totally online via the Internet. If the CRA were to approach a mortgage bank like Quicken, this focus on the physical would seriously hurt the bank in its valuation. Quicken is headquartered in Detroit, but it would not receive any credit for a fair loan because there is no physical location for consumers.

The CRA is otherwise not in great shape anyway

The CRA’s failure to account for online banking is perhaps its most obvious flaw, but it is far from its only problem. The tripartite evaluation system is extremely opaque. Banks have been complaining for a long timethe CRA contribution, which is notoriously ill-defined, expensive, time-consuming, and produces results that are difficult to relate to concrete examples. These regulatory costs are borne by banks, regardless of their size, adding to the financial burden on new or small banks that have to overhaul their systems or collect and report a lot of data, reducing the viability of new entrants. in the banking and mortgage space.

Even federal regulators can’t agree

In December 2019, the OCC published a proposal modernize and overhaul the CRA. At the time, it was considered unusual for the OCC to do this without Fed and FDIC membership since all three administer the ARC; the OCC, and in particular the then OCC Controller Joseph Otting, made it clear that the need for reform was too urgent to wait for a tri-agency approach. While the FDIC ultimately joined the proposal, the Fed never did, and this reluctance to engage ultimately doomed the OCC’s proposal. The Fed’s reluctance is believed to center on the new importance of the dollar value of ARC’s investments in the OCC proposal. Either way, it seems important that there is a perceived need at the federal level to update the CRA, but that the issue is complex enough to have already engulfed a reform effort. For state legislators to extend CRA requirements to institutions not accepting deposits in these circumstances therefore seems hasty at best.

What is the need?

While the goal of state legislators is to promote sustainable lending to LMI communities, it is not clear for these reasons why ARC is the best vehicle to do so. But taking it a step further, it’s not even clear that institutions that don’t take deposits like mortgage banks are lacking LMI communities in their service. Urban Institute research demonstrates that mortgage banks have a higher LMI borrower and acreage share than traditional banks. Mortgage banks make up the majority of origins in government housing programs run by the Federal Housing Administrationon (FHA), the Veterans Association (VA) and the Rural Housing Service (RHS), and these programs are primarily focused on the needs of LMI communities. It is not clear that this loan to IMT communities is an issue that needs to be addressed.


The proposed expansion by state legislators of a credit rating agency regime to non-depository institutions is of concern. It’s not just a matter of forcing a square peg into a round hole. It’s a square peg, almost entirely rotten, forced where it’s not even clear that a hole exists. Worse, since the bill for any new regulation would be paid by the private sector, these costs would inevitably be passed on to the very consumers that these legislators are. seeking to save.

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