How about a ‘Presumption of “Needs to Improve?’”

The views and opinions expressed in this article are those of the author and do not necessarily reflect the views or policy positions of NCRC.

Prioritizing racial equity is the most important CRA reform the Fed can tackle, said CEO Horacio Mendez at the New York City-Based Association For Neighborhood And Housing Development Annual Conference in October. His modest proposals: Enforce Equal Credit Opportunity Act and Fair Housing Act better, and flip the ‘Presumption Of Satisfactory’ rule on its head.

ANHD is a member organization of community groups across New York City that uses research, advocacy, and grassroots organizing to support members in their work to build equity and justice in their neighborhoods and city-wide with the mantra “housing justice is economic justice is racial justice.”

Horacio joined a panel along with Emmanuel Martinez, Investigative Data Journalist with The Markup, Kerry McLean, Vice President of Community Development at Women’s Housing and Economic Development Corporation, and Jacob Udell, Research and Data Coordinator, University Neighborhood Housing Program.

Here are his remarks:

From the many speeches and presentations that the Fed has made since they released their proposed rulemaking document, it seemed fairly clear to us that they had four main goals in mind as it relates to our priorities:

1. See how race can play a bigger part in the regulation. The goal here is to help in the aim of promoting some form of financial inclusion with the end-result being some sort of measurable reduction in the racial wealth gap.
2. Update the regulation to better reflect the realities of what banking looks like today. This ranges from things like the utility and importance of physical branches to the implications of deposit and lending activity being completely virtual. It’s not as easy to  define a market in this current environment as it was in the mid 1990s when the CRA regulation was last updated.
3. Ask for help from practitioners, bankers and community organizations on ideas that can move the needle as it relates to the type of community-based lending banks do (or are supposed to do). Absent that, to ask whether there are ways to create incentives for banks to work through CDFIs in a way that makes them financial sustainable.
4. Finally, the Fed is hoping to update the regulation in a way that makes the rules consistent and clear, and the process for evaluating performance transparent and easy to understand.

The one thing I want to see from CRA reform … Racial Equity and CRA

The most effective way to ensure real compliance with any law or regulation is to make the punishment associated with non-compliance much more expensive than the cost to do it well.

So far, the two versions of the CRA’s implementing regulations have fallen  short of this goal, as has implementation associated with laws like the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA).

Prior to the recent revision of the CRA regulation in the mid-1990s, two of the twelve CRA Assessment Factors had a direct connection between Fair Lending and the CRA; one in the creation of what was then called Service Areas and the other with regard to overall lending activity.

The revision of the regulation from the twelve assessment factors to the three tests (Lending, Investment and Service) watered down this connection due to wishful thinking that if the exam focused more on lending and investment data, everything would fall nicely into place. What we have now are two concurrent realities that represents the worst of all options:

1. The first is that it’s entirely possible for a bank to check off all of the boxes associated with CRA compliance, get an Outstanding rating, and not do a damned bit of good to low- and moderate-income or minority markets. Which is one reason why Woodstock decided to take a look at 4 decades of CRA lending in Chicago to see if anything got better as a result. Maybe things could have gotten worse without the CRA, but our findings showed that the map hasn’t changed–struggling communities in the early 1980s are struggling just as much today.
2. The second is that, as it stands today, a financial institution can be found in violation of either or both the ECOA and FHA, settle with a monetary fine without admitting guilt, and continue to be found “Satisfactory” in its CRA performance.

We have two pretty simple ideas we think will move the needle:

First, enforce ECOA and FHA like you actually want them to work. City Bureau and our local NPR station should not be the first to expose fair lending and equal credit violations by regulated financial institutions like they did in Chicago in June 2020.

Second, implement a bookend to a proposal the Federal Reserve made regarding what they call a “Presumption of Satisfactory,” where a bank needs to meet a couple of basic numerical thresholds before being given a starting point of a Satisfactory CRA rating, with further analysis determining whether the rating goes up from there, or down from there.  

Our idea is similar: If a bank is found to have substantively violated any civil rights, equal protection or consumer protection laws, and irrespective of whether they settle without admitting guilt or if the violations are old but were just recently surfaced, they should be immediately downgraded to “Needs to Improve.”

The combination of effective enforcement of consumer protection laws with the “Presumption of Needs to Improve” should create a strong incentive for banks to help solve the problems these laws and regulations were meant to address.

This article was previously published by Woodstock Institute.