California Reinvestment Coalition Recommendations on Updating the Community Reinvestment Act

Community reinvestment act 2

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.

ThrowBack Thursday: The Roots of the Mortgage Crisis

CRC recently stumbled across a copy of a 2007 report entitled “Sustainability, not attainability: An Examination of Nontraditional Residential Mortgage Lending Products and Practices.” The report included testimony from some companies like New Century Mortgage, who caused billions of dollars in damage to the economy, to say nothing of the individual impact on families who lost their homes. You can order a copy of the report from the CA Senate for $11.75.

Below, we include some choice quotes about the valuable services that companies like New Century Mortgage were providing, or that community advocates didn’t know what they were talking about when they asked for stronger consumer protections. Of course, it turned out the advocates were right, these mortgage would go bad, and our economy would implode as a result. Perhaps smart regulation isn’t so bad after all?  Especially when it comes to the largest asset that many American families will ever own?

Want to learn more about the cost of this crisis?  Check out some other CRC posts below:

NEW CFPB MORTGAGE RULES: WHY DO WE NEED THEM? PART 1

CITY OF LOS ANGELES LAWSUIT AGAINST CHASE, WELLS FARGO, CITIGROUP, AND BANK OF AMERICA

ONEWEST BANK FORECLOSURE TRACKER: HOW MANY FAMILIES ARE LOSING THEIR HOMES?

 

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Learn How Wall Street and Cash Investors Are Outbidding First Time Homebuyers, Displacing Tenants, and Changing Local Communities  

Bloomberg Picture of REO

Cropped version of Bloomberg News graphic of REO to Rental. See the full picture here: http://www.bloomberg.com/infographics/2013-12-20/blackstones-big-bet-on-rental-homes.html

Have you been following the news about the approximately 200,000 homes that Wall Street investors have purchased to create portfolios and then securitized the income and sell bonds?  Does that sound alarmingly familiar to the “create portfolios of mortgages and securitize the payments and sell bonds” profit scheme that brought our economy to its knees?  Are you also worried about the impact this is having on communities?

If so, tune into The Power is Now show on September 23rd at 8:30AM to hear host Eric Lawrence Frazier, MBA as he discusses this issue with two experts.  Click on this link to hear the show and join the conversation.

Maeve Elise Brown is the executive director of Housing and Economic Rights Advocates (HERA), a nonprofit law firm in Oakland, California.  Kevin Stein, associate director of the California Reinvestment Coalition, a nonprofit coalition that advocates for better access to banks.

They will discuss how all-cash investors have elbowed first-time homebuyers out of the market, displaced long-term tenants, and changed the fabric of local communities.

If you’re interested in learning more about this problem and what possible solutions are, check out the resources below.  The letter below was drafted by Maeve Elise Brown at HERA and Kevin Stein at CRC, with input from other allies and CRC members.  The letter outlines the problems created by the REO to Rental scheme, how the government is exacerbating the problem through mass sell-off’s of delinquent mortgages to investors, and how the problem could be addressed by regulators and policymakers.

80 Organizations Ask Federal Gvt. to Address Investor Cash Flooding Into Neighborhoods

Regulators Should Act Now to Protect First-Time Homebuyers, Renters, and Communities

March 4, 2014-California: Eighty organizations are calling on federal regulators to address first-time homebuyers being outbid, tenants being displaced, and neighborhoods undergoing dramatic changes as private equity and investor cash continues flooding into local housing markets, buying up homes. These problems have been worsened by banks withholding REOs from the market and federal housing agencies conducting bulk sales of foreclosed homes and distressed mortgages. One portfolio of single-family rental homes was securitized this fall, though both Fitch Ratings and Standard and Poor’s refused to grant AAA ratings to the securitization, citing numerous uncertainties with this new business model.  Read the rest of the press release here.

 Some more recent press coverage you might be interested in:

Another Shadow in Ferguson as Outside Firms Buy and Rent Out Distressed Homes (NYT: Sept. 3, 2014)

Federal Program Helps Keep Some Delinquent Borrowers in Their Homes (NYT: Sept. 2, 2014)

And press coverage about the letter signed by 80 organizations, urging regulators to act now:

 

Game of Homes The letter sent by 80 organizations expressing concerns about issues with private equity landlords is cited.  Rebecca Burns, Michael Donley, and Carmilla Manzanet. In These Times. March 31, 2014.

Single-family rental home giants form trade group in Washington The letter sent by 80 organizations to federal regulators, including HUD, SEC, CFPB, OCC, Federal Reserve, and FHFA about issues created by private equity and other investors is cited. Tim Logan. Los Angeles Times. March 26, 2014.

Consumer groups seek bond oversight The letter sent to 80 regulators about single family homes being purchased by private equity firms and other investors is cited. Yahoo Finance Australia. March 24, 2014.

Blackstone’s Home Buying Binge Ends as Prices Surge: Mortgages The letter signed by 80 organizations expressing concerns to national housing and bank regulators is cited. John Gittelsohn and Heather Perlberg. Bloomberg. March 14, 2014.

Ninja loans reborn in similar form The concerns outlined by 80 organizations about private equity and investor landlords is cited in this article.  Kevin Stein from the California Reinvestment Coalition is interviewed, as is Maeve Elise Brown, from Housing and Economic Rights Advocates.  Radio New Zealand News. March 10, 2014.

Could a Wall Street firm be your landlord? The letter sent by 80 nonprofit organizations to federal regulators is cited on a show that also includes an interview with Representative Mark Takano about his concerns with the REO to rental model.  A new report from the Center for American Progress about rental securitizatoin is also featured. Ari Melber. The Melissa Harris-Perry Show. March 9, 2014.

First-Time Buyers Being Shut Out In Growing Numbers First-time homebuyers are prevented from purchasing homes when they are forced to compete with all-cash investors. The letter from 80 organizations to the SEC, HUD, CFPB, Federal Reserve, OCC, and FHFA is cited. Mike Wheatley. RealtyBizNews. March 7, 2014.

Want to buy a foreclosure? You may have to compete with a hedge fund Maeve Elise Brown, Executive Director at Housing and Economic Rights Advocates (HERA), outlines the concerns housing advocates have with private equity groups and other investors purchasing large numbers of single family homes.  Brown cites a letter sent by 80 organizations to federal regulators, asking for their assistance in addressing the impacts on tenants, homeowners, and communities. Mark Huffman. ConsumerAffairs. March 6, 2014.

Shut Out of the Housing Market? First-Timers Dwindle The letter sent by 80 organizations to federal regulators is cited. RealtorMag. March 6, 2014.

REAL ESTATE: Where are the boomerang buyers? A letter that 80 organizations sent to the SEC, HUD, CFPB, Federal Reserve, OCC, and FHFA is cited.  The letter calls on regulators to address the impact of private equity firms and other investors flooding into local housing markets and buying up homes. Debra Gruszecki. The Press-Enterprise. March 5, 2014.

Housing Activists: Rental-Property Bonds Might Herald Next Housing Bust The letter outlining concerns by 80 organizations about investor and private equity money pushing out first-time homebuyers, displacing long-term tenants, and changing communities is cited. Dan Weil.MoneyNews. March 5, 2014.

Regulate Wall Street home buying, consumers plead Eighty organizations signed onto a letter, expressing concerns about the impact on first-time homebuyers, long-term tenants, and communities as private equity and investors purchases large numbers of homes with the intention of securitizing the rents from these single family homes. Kim Miller. The Palm Beach Post. March 5, 2014.

78 Groups Urge Scrutiny of Wall Street Cash in Local Housing Markets The letter sent by the California Reinvestment Coalition, Housing and Economic Rights Advocates, and 78 other organizations is cited at approximately 14.25 into the program. Amy Goodman. Democracy Now. March 4, 2014.

California advocates want to put the brakes on REO-to-rental A letter sent by 80 organizations to the SEC, HUD, CFPB, Federal Reserve, OCC, and FHFA outlining concerns about private equity groups and investors buying up homes is cited, as are specific concerns and recommendations to the regulators. Trey Garrison. HousingWire. March 4, 2014.

Wall Street Has Found Its Latest Dangerous Financial Product, Activists Warn A letter sent by the California Reinvestment Coalition, Housing and Economic Rights Advocates, and 78 other organizations is cited.  In the letter, the nonprofit organizations ask federal regulators for help with investor and private equity cash pushing out first-time homebuyers, displacing long-term tenants, and changing communities. Benjamin Hallman and Jillian Berman.HuffingtonPost Business. March 4, 2014.