By Candace Milner and Bartlett Naylor
On October 24, 2023, federal financial regulatory agencies approved a sweeping update to the Community Reinvestment Act. The Community Reinvestment Act serves amongst a constellation of laws aimed at combatting discriminatory lending.
Perversely, it was personnel within the federal government itself that built discrimination into the loan-making process during the 1930s. In response to the many foreclosures during the Great Depression, Congress established the Home Owners’ Loan Corporation in 1933 (HOLC). This entity provided government support for loans. While Congress didn’t actually mandate discrimination against minorities in the HOLC statute, agency leaders and staff worked prodigiously to create discriminatory maps, drawing red lines around minority neighborhoods, which became “no-loan zones.” A rigorous historical analysis of the pervasive nature of redlining highlights the role of Richard Ely. He generally attempted to make real estate valuation more science than intuition. But he brought a profound prejudice: “Ely thought in terms of a hierarchy, of races, with African Americans at the bottom,” the scholars noted. Ely, an active organizer, populated the academies and government with his proteges. His most famous student was President Woodrow Wilson. Subsequently, racism infested many prongs of the government’s loan-making apparatus. For example, a 1938 Underwriting Manual emphasized the negative impact of “infiltration of inharmonious racial groups” on credit risk. Again, the policy approved by Congress didn’t mandate discrimination; but without forbidding discrimination, the personnel implementing it caused immense damage.
The harmful impact of that policy and the associated regulations has persisted for decades, with predominantly Black, Latinx, Asian, and Indigenous neighborhoods suffering lower mortgage approval rates.
Congressional Responses to Decisions in Lending
Congress began to attempt to address these problems beginning in the 1960s, with the 1968 Fair Housing Act and the 1974 Equal Credit Opportunity Act. In 1975, Congress approved the Home Mortgage Disclosure Act (HMDA) to quantify where and to whom banks made loans. The law required banks to make their annual loans public, delineated by recipients’ neighborhood, income, and race.
In 1977, Congress built on these existing laws and approved the Community Reinvestment Act, a law authored by Sen. William Proxmire, (D-Wisc.), chair of the Senate Banking Committee at the time. Sen. Proxmire explained: “By redlining, let me make it clear what I am talking about. I am talking about the fact that banks and savings and loans will take their deposits from a community and instead of reinvesting them in that community, they will actually or figuratively draw a red line on a map around the areas of their city, sometimes in the inner city, sometimes in the older neighborhoods, sometimes ethnic and sometimes Black, but often encompassing a great area of their neighborhood.”
Barr is now the Vice Chair for Supervision on the Federal Reserve Board of Governors.
The CRA advanced beyond data collection by adding an additional mechanism to promote fair lending. As the law states, banks must demonstrate “a continuing and affirmative obligation to help meet the credit needs of the local communities in which they are chartered.” If banks fail to demonstrate such a record of fair lending, regulators will “take such record into account in its evaluation of an application for a deposit facility by such institution.” (The regulators are the Federal Reserve Board, the Comptroller of the Currency, and the Federal Deposit Insurance Corp.)
The Evolution of the CRA
Since its creation, Congress has modified the CRA several times. In 1989, as part of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), banks were required to prepare a written evaluation, which includes a public section as well as a confidential section. In 1994, as part of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, Congress required banks to provide separate analysis for each metropolitan area where the bank maintains a branch. It also required a report for each state where it operated and an overall report for the entire region of a bank’s operation. In 1995, the regulators implementing that law issued a rule designed to emphasize performance, as critics contended that the CRA previously overemphasized process.
Over its history, the CRA led to important investments. Since 1996, banks have issued more than $1 trillion in loans for community development and $1 trillion for small businesses located in low- and moderate-income census tracts. Between 2009 and 2020, banks made more than $2.58 trillion in home loans to low- and moderate-income borrowers or in census tracts considered as low-and moderate-income. They made $856 billion in loans to small businesses with revenues under $1 million. During one recent year, CRA lending included: 2,762,600 small business loans totaling $172 billion; 723,822 home mortgage loans totaling $108 billion; 26,397 community development loans totaling $96 billion; 12,971 multifamily housing loans totaling $33 billion; and 108,255 small farm loans totaling $10 billion.
The 2023 Rulemaking
In 2023, The CRA received yet another update in the form of a new rulemaking. The new rule assesses a bank’s loan-making where it makes loans, not simply where it accepts deposits. In the age of the internet, loan-making can cross county and even state borders, not simply a radius around a bank branch. The new regulation will lead to a more granular assessment of whether banks truly meet the credit needs of all applicants in their service area. Furthermore, the rule includes updates that take a step forward in addressing the needs of low and moderate-income people navigating the severe impacts of climate change. These are welcome updates that begin to address lingering issues in lending that were formed by technological innovation and the climate crisis.
When formulating the new rule, the agencies considered expressly measuring race when judging a bank’s compliance with the CRA, but explained that “constitutional considerations”, grounded in textualist interpretations, led them “not to include additional race- and ethnicity-related provisions.” This is a stark turn from the legislative history of the CRA which is clearly intended to grapple with the racialized history of lending. While recent Supreme Court decisions have targeted the express use of race in rulemaking, history, (and common sense), suggests that the most effective policies to combat racism at the very least, name race in its provisions.
Personnel is policy. While the HOLC policy didn’t call for discrimination, personnel who were disciples of a racist real estate scholar drew those red lines when they interpreted the law. By contrast, those who approved this new rule, such as Vice Chair Barr, hold enlightened views on the need to combat the legacy of racist lending. The Federal Reserve Board is no longer populated exclusively by white males. However, the legacy of racism in lending is not eradicated simply by diversifying decision-makers. Congress should revisit the language of the CRA, expressly add a race provision that aligns with the legislative history of the law and repair the gap between the legislative history and the current interpretation of the CRA. Interrupting the bias and prejudice that personnel brings to the implementation of policy requires a policy that is written with its intentions and impact being undoubtedly clear.