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A Better Way to Bring Lending to the Underserved

December 23, 2019 in Economics

By Diego Zuluaga

Diego Zuluaga

Regulations aimed at increasing low-income Americans’ access to credit are getting a long-overdue revamp. Two of the three agencies responsible for enforcement of the Community Reinvestment Act issued a proposal earlier this month to change the way they assess how banks lend to underserved communities. The proposal is modest, but it includes some important changes to CRA regulations that will focus on lending to low-income households and recognize that banks are increasingly going branchless.


The CRA, enacted in 1977, applies to banks but not credit unions or fintech lenders. It requires banking regulators — the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Federal Reserve Board — to ensure banks “meet the credit needs” of the communities where they operate, without sacrificing bank safety and soundness. Regulators give banks a rating based on their performance. If banks do not perform well, regulators may block their future expansion and merger.

When the CRA came into being, competition between banks was limited: most states prohibited branching and no states allowed out-of-state banks to enter their markets. The Fed also capped interest on deposits, giving banks cheap access to funds. These barriers to competition have gradually disappeared since the 1980s, ushering in rapid consolidation, a near-doubling of the number of bank offices, and a wider set of banking options for consumers.

At the same time, non-banks such as Quicken and Kabbage have taken up a growing share of the mortgage and small-business lending markets on which the CRA focuses. These non-banks often lend to low-income communities as much as or more than banks.

It has long been time to update CRA regulations to reflect these structural changes to the U.S. banking landscape. Yet the CRA has not undergone meaningful change for nearly 25 years. That’s why the OCC and FDIC reform proposal, without being ambitious, can better address the credit needs of vulnerable households.

For example, under the proposal, loans to high-income borrowers would no longer earn banks CRA points. By counting both loans to low-income borrowers and loans made in low-income areas toward their CRA evaluations, regulators presently reward banks for extending mortgages to prosperous professionals who do not need help from the government. My research shows that, from 2012 to 2017, between 65 and …read more

Source: OP-EDS

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