Key Takeaways:
- A Maryland CRA law would apply to banks and credit unions with about $46 billion in assets. It would cover mortgage companies that made more than 68,000 loans in three years. The assets and lending activity are considerable resources that should have a CRA obligation for reinvesting in underserved neighborhoods.
- A state CRA law would help narrow racial and equity gaps in lending. In Baltimore City, for example, 33% of the loans went to African Americans whereas they constituted 62% of the population.
- State law can plug gaps in the federal law. Federal CRA applies to banks whereas other state laws in Massachusetts and Illinois also apply to mortgage companies and credit unions.
Executive summary: strong deeds but gentle words – the case for a Maryland CRA
Maryland’s state motto is strong deeds but gentle words.[1] This maxim is a good way to approach the need for Maryland to enact a state Community Reinvestment Act (CRA). The strong deeds would be significant increases in loans, investments and services in communities of color and modest-income neighborhoods across the state – in both urban and rural areas. The gentle words would be the law’s carefully balanced incentives which are not overly punitive or onerous but nonetheless provide effective motivation for banks and non-bank financial institutions to better serve overlooked communities.
A state CRA law is well worth the effort. It would apply CRA to institutions with tens of billions of dollars which offer tens of thousands of loans. State-chartered banks have about $38 billion in assets and state-chartered credit unions have almost $8 billion in assets. The top ten independent mortgage companies issued almost 68,000 home purchase loans in Maryland from 2018 through 2020.
Applying CRA to institutions with these sizable resources would channel significant increases in loans and investments to Maryland’s neglected communities. Moreover, a state CRA law is needed to address sizable racial and income disparities in access to loans. In the state as a whole, lenders made 20% of their single-family loans to African Americans from 2018 through 2020 while 29% of the population was African American. The gap is even wider in Baltimore, a city that is 62% Black but where just 33% of loans went to African American borrowers.
While some gaps have narrowed modestly, underserved communities continue to be overlooked. For the state as whole, lending institutions made 32% of their loans to low- and moderate-income (LMI) borrowers during 2018-2020 while 31.6% of the population was LMI. A significant disparity, however, emerges in the City of Baltimore where LMI borrowers received 58% of the loans but were 73% of the residents.
A state law is not duplicative of federal law, but rather complementary, as other state CRA laws have demonstrated. It has the potential to address needs and neighborhoods not explicitly addressed by the federal CRA. A state law could authorize Maryland’s Commissioner of Financial Regulation to conduct separate exams for counties. This provision would enable examiners to assess performance more rigorously in Baltimore City and underserved rural counties. In contrast, federal CRA exams usually rate performance on a metropolitan level that hides poor performance, which most often occurs in the underserved counties. In addition, a CRA law could instruct the examiners to consider the sustainability of lending by considering default and delinquency rates. This is particularly important for vulnerable and underserved communities and is often overlooked by federal CRA exams.
A state law could contain provisions designed to counter CRA ratings inflation and that would motivate improvements in performance to communities of color. On a federal level, banks pass their CRA exams about 98% of the time. A state law should counter this inflation by introducing a fifth rating and by requiring examination in underserved neighborhoods, which are disproportionately communities of color. Banks that fail their exams cannot receive deposits from a state agency. The Commissioner could also adjust fees based on ratings received.
CRA is one of the most effective economic development strategies a state can undertake. Studies have shown that the federal CRA has increased lending and banking services in modest income communities. A state CRA law could build on this success.
The gains in wealth a rigorous CRA would foster, driven by homeownership and small business ownership, would benefit the state many times over in terms of higher gross domestic output, higher tax revenues and reduced dependence on the state safety net. The founding ideals of this country include the pursuit of life, liberty and happiness. CRA expands the number of citizens that can achieve these aspirations. The joy of someone being the first in their family to own a home or start a small business cannot be overestimated. A state CRA law would enable stakeholders to pursue these great deeds with gentle words.
[1] Maryland Manual On-Line: A Guide to Maryland and Its Government, https://msa.maryland.gov/msa/mdmanual/01glance/html/symbols/reverse.html
