Banks Still Need a Nudge to Be Colorblind
More than 40 years ago, Congress adopted the Community Reinvestment Act to ensure that banks would serve everyone in the areas where they do business, regardless of race or class. Now, the Trump administration is considering how it might reform this long-controversial law.
There’s reason for concern about the administration’s intentions. Done right, though, an update could actually be a good idea.
Together with the Equal Credit Opportunity Act and the Fair Housing Act, the CRA was designed to address a market failure: Racial and other prejudices can prevent financial institutions from pursuing profitable business. It requires banks to make efforts to lend, invest and serve customers in lower-income communities (which remain disproportionately black and Hispanic). The evidence is mixed, but on the whole it suggests that the law has boosted credit without harming safety and soundness.
Nonetheless, the law leaves a lot to be desired. The CRA demands compliance only from traditional deposit-taking banks, putting them at a disadvantage to the non-bank lenders that account for an increasing share of mortgage and business loans. Examiners assess performance primarily in areas where banks have physical branches, an approach that makes little sense in the age of internet lending. Transparency is lacking: Public evaluations typically don’t provide enough detail to say whether the additional investments are any good.
So the Treasury is right to consider reform. Unfortunately, the Trump administration seems more interested in weakening the law than in making it work better. Mick Mulvaney, the acting director of the Consumer Financial Protection Bureau, has started a reorganization that seems likely to loosen fair-lending enforcement. And the Office of the Comptroller of the Currency, one of the agencies that examines banks, issued guidance in October calling for leniency toward institutions that have violated fair-lending laws.
The Treasury should stick to its stated aim of improving the CRA. Apply the law to all relevant lenders, conduct assessments in areas where those lenders actually do business, and publish examination reports that identify specific community-development investments, to show where the money is going and how it is being used.
Banks alone can’t reverse the effects of racism, and shouldn’t be asked to. But the credit disparities that made the CRA necessary haven’t gone away. Lenders’ actions during and after the subprime crisis showed that discrimination still happens. The law is still needed. It should be improved, not undermined.
--Editors: Mark Whitehouse, Clive Crook.
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