California Reinvestment Coalition Recommendations on Updating the Community Reinvestment Act

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Fact Sheet: Community Reinvestment Act Recommendations

To truly meet community needs, CRC members believe the CRA should be improved and strengthened. In a recent survey, 100% of members said that the level of CRA activity in their community needed improvement and that there was considerable room for banks to do more.

CRC recommends that CRA be reformed so that:

1. CRA implementation encourages, not discourages, reinvestment in rural areas. California is home to numerous rural reinvestment deserts, where a lack of lending and investment prevents communities from thriving economically. And yet, many of these areas already have bank branches and are included in bank CRA assessment areas. Regulators subject bank CRA activity in these areas to a lower level of scrutiny, as banks are able to denote these areas as subject to only “limited scope” review. For example, Bakersfield, California, has numerous bank branches, and those banks have CRA obligations in the city. However, these same banks are examined for their CRA activity far more closely in other, more urban areas of the state. This creates fierce competition, for example, for housing tax credit deals in urban areas, while rural projects struggle to find financing. Instead, regulators should ensure that the banks with the largest deposits in a given MSA are subject to a full scope review in that MSA.

2. Regulators should encourage banks to develop transparent, multi-year CRA Plans that reflect significant public input and that include measurable goals, such as tying reinvestment activity to a percentage of bank deposits. Banks are supposed to help meet community credit needs. And in many bank merger applications, banks must demonstrate that the merger will provide a community benefit. The public input process is critical to this assessment.

However, community input has been diluted, and is not sufficiently sought and considered under current CRA implementation, as an example, very few mergers will even have public hearings. Mergers most often lead to diminished resources for communities as 1 + 1 rarely equals 2 in terms of reinvestment. That is why a comprehensive review of mergers is so important, complete with strong community input and mitigation of any harm the merger may cause in the form of decreased reinvestment or reduced access to banking services or branches.

Regulators should encourage CRA plans, particularly in the context of mergers that must show a clear public benefit to the community. Strong and meaningful CRA plans reflect community input about community credit needs, motivate banks by setting strong goals for lending, investment and services, and allow communities to work in partnership with banks to ensure that they are treated equitably and fairly by financial institutions. CRA plans are a best practice that have resulted in significant gains for communities in the past few years. Strong CRA plans can help demonstrate that a merger will have a public benefit.

3. Banks should be downgraded for causing, enabling, or financing harm in communities, taking into account discrimination, and equity stripping conduct and transactions that lead to displacement. The CRA calls for an assessment of how well or poorly a bank is meeting community credit needs. This analysis must include an assessment of fair housing and related factors. Regulators should conduct a comprehensive review of a bank’s community impact. Wells Fargo is but the most recent example to demonstrate that simply investing in the community is insufficient- banks must also not cause harm or break the law.

For a regulator to give a bank a passing CRA grade while the bank engages in discriminatory lending would be to endorse discrimination. Further, a high CRA rating for a discriminatory bank could result in consumers being directed to a bank with an inflated CRA rating, only for the bank to potentially overcharge the consumer or deny that person a loan. In this way, regulators would abuse the public’s trust in its ratings.

Bank regulators should consider expensive overdraft programs and excessive reliance on fee revenue generated at the expense of the most economically vulnerable consumers as a basis for downgrading a bank in a CRA service test evaluation. Similarly, banks should be downgraded for financing high cost, predatory lenders, and for contributing to gentrification and displacement. Banks should also suffer CRA rating downgrades as a result of any involvement in the REO to Rental craze, which results in first time homebuyers being outbid by cash investors, tenants being displaced by Wall Street landlords, and neighborhoods losing long term residents as well as racial and income diversity.

4. Encourages banks to open and maintain branches in LMI and rural areas. Bank branches remain a critical part of how banks serve communities, and inequitable distribution of branches must be considered as part of the CRA service test. Critically, regulators cannot allow the industry’s preference for technology to result in fewer branches and shrinking CRA assessment areas, footprints, and obligations in LMI communities. Additionally, many LMI neighborhoods and communities of color not only lack access to bank branches, but also to a wide range of banking products and services, including ATMs.  Regulators should analyze whether banks are meeting the banking needs of all communities in their assessment areas.

Regulators should also consider how banks can better reduce the number of unbanked or underbanked consumers within their assessment areas. Moreover, banks should quantify the extent to which LMI bank customers are able to keep their accounts open and in good standing over time, or if their customers are pushed out of the bank by overdraft fees or other barriers. Low cost bank accounts should be offered and accessible to LMI consumers, including through bank acceptance of municipal identification cards and other accessible forms of ID.

5. Assessment areas should include areas where banks have branches, or where a significant number of their customers and depositors live. Regulation has lagged behind market innovation. Requiring reinvestment only around retail branches makes much less sense today, when internet, credit card, and fintech banks operate nationally but reinvest only in Salt Lake City or another headquarters location.

Assessment areas should be expanded to include areas where a substantial portion of a bank’s depositors and borrowers reside. At the same time, banks should not be allowed to receive additional CRA credit for lending or investing outside of the bank’s CRA assessment area, beyond the accommodation made to banks by regulators during the last CRA Questions and Answers review. This will only lead to a dilution of investment in LMI neighborhoods that are most in need of reinvestment. The primary purpose of the CRA is to serve communities where the bank is doing business, not to encourage reinvestment where it is easiest to do. Banks should not be able to circumvent obligations to serve the communities in their assessment areas. The focus of bank CRA should remain on LMI individuals and communities.

6. CRA examinations should consider and reflect new small business lending data that the CFPB will be overseeing. Small businesses are the lifeblood of our economy, prime job creators, and bulwarks of the community. Yet small business owners benefit from fewer protections than homeowners. HMDA data has been collected for years, and used to inform CRA examinations, without problem or incident. Small business owners should also benefit from a comprehensive and unified lending data collection system.

CRC members strongly support Congress’ charge in Dodd-Frank that §1071 small business lending data be collected in order to facilitate enforcement of fair lending laws and enable communities, governmental entities, and creditors to identify business and community development needs and opportunities of women-owned, minority-owned, and small businesses. Such data collection and dissemination will surely make affordable credit more accessible to all small businesses, and will inform CRA examinations.

A recent CRC survey of our CDFI, community lender and technical assistance provider member organizations revealed that small business clients still face discrimination; are pushed by banks towards higher priced credit cards; are frequently targeted for nonbank credit products (like Merchant Cash Advances), and are in need of greater access to affordable, safe, and transparent credit.

7. Banks serve all segments of the community, including the immigrant community. Banks can and should serve the immigrant community by directly providing loans and investments to immigrants, and by supporting community lenders and other organizations that serve the immigrant community. Immigrant community members have significant unmet credit needs, whether it is a safe place to save money, a loan to buy a house, purchase a car, start a businesses, or pursue a citizenship application.

Banks should ensure that employees represent the diversity of their service areas, and make translation, interpretation and related language access services available to all potential clients. Banks should make loans and investments accessible to all community members, and invest and support community lenders and other organizations that serve the immigrant community.

8. The bank examination process can be improved so that years do not go by after an examination before the pubic rating is released. The regulators should hire additional examiners and provide enhanced training to ensure that there is consistency in the examination process across agencies and examiners. CRC believes that a primary reason behind the delay in the public release of CRA ratings is the propensity of banks to challenge and appeal initial CRA ratings by regulators. This process should be reformed to limit the circumstances in which a bank can challenge a rating, and the public should be given an opportunity to comment on the appeal when a bank invokes this otherwise opaque process. It is of critical importance that regulators set high standards of review.

To make CRA meaningful, regulators have to end the long history of CRA grade inflation so that poor CRA performance will be reflected in CRA ratings. Streamlining the process while lowering the examination bar will only lead to less investment, more harm to communities, and potentially, to greater risk in the US financial system. We saw this happen in the years leading up the financial crisis, when regulatory agencies competed against each other to attract banks to their charters, fueling a regulatory race to the bottom, and leading ultimately to the failure of several savings and loans and the end of the Office of Thrift Supervision.

CRC Speaks about Small Biz Owners and Financing Challenges at CFPB CAB Hearing

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Paula Tejada, owner of Chile Lindo, speaks to CFPB Director Cordray and Assistant Director Grady Hedgespeth about being a small biz owner in the Mission District of San Francisco. Learn about the CFPB’s tour here.

Today, Paulina Gonzalez, the executive director of the California Reinvestment Coalition, will be speaking at the Consumer Financial Protection Bureau’s Consumer Advisory Board meeting about the challenges that Small Business owners face in obtaining safe, transparent loans to start and grow their businesses.  CRC is strongly supportive of the CFPB’s effort to implement the 1071 data collection called for under the Dodd Frank financial reform bill.

Gonzalez’ presentation highlights how loans to smaller small banks have decreased; how small business owners are being pushed to credit cards (instead of small business loans); and how some predatory lenders are filling in the gaps.

CRC has been monitoring access to loans for small business owners in California for a number of years, and the results have been especially disappointing:

2007-2009: According to CRC’s analysis and report (The Little Engine that Could), SBA lending to California’s minority-owned businesses dropped by 81 percent for African American-owned businesses and 84 percent for Latino-owned businesses. See report: Small Business Access to Credit

2007-2013: According to CRC’s analysis of SBA data, small business lending, especially to African Americans and Latinos dropped dramatically from 2007 to 2013.

Report Finding Include:

Bank Loans Guaranteed by the U.S. Small Business Administration Fall Dramatically:

  • There was a 60% drop in the number of small business loans made from FFY 2007 to FFY 2013.
  • In FFY 2013, only 2% (96 loans) of SBA 7a loans were made to businesses owned by African-Americans, 11% to Latinos (634 loans), and 14% to women (846 loans).
  • Credit needs of the smallest small businesses are being ignored: the average SBA 7a loan tripled in size from $165,723 in 2007 to $498,971 in 2013.

Conventional Small Business loans decline for 4 of the 5 largest banks

  • For conventional small business loans, four of the five major banks decreased the amount of loans they were making in 2012 by about 2/3 as compared to 2007 in five key counties (Alameda, Fresno, Los Angeles, Sacramento and San Diego).
  • US Bank increased its overall small business lending by more than 17% in these counties, while JPMorgan Chase, Wells Fargo, Bank of America, and Citibank all made far fewer loans in 2012.

Practitioners Report Difficulties in Getting Loans, Esp. for Smallest Businesses 

  • CRC polled our member organizations who work directly with small businesses. Seventy-three percent of respondents stated that banks are doing less lending to small businesses (revenue of less than $1 million annually) in 2013 than 2012.
  • Ninety-two percent of them stated that banks are not doing significant lending at the $150,000 or less level.