Reform the CRA? Maybe just enforce it, first.

I’m the first leader of the nearly 50-year-old economic equity and anti-redlining advocacy organization Woodstock Institute to come to that position after decades of experience as a regulator and banker.

As a result, I see the failure to provide all Americans equitable access to economic opportunity from multiple perspectives. The timing of a discussion surrounding this failure is important given that the federal bank regulatory agencies are considering how best to reform the 45-year-old Community Reinvestment Act, a law born from activism started in my organization’s home city of Chicago. 

The CRA has a simple goal: reverse the disinvestment caused by redlining. After nearly a half century, you would be hard pressed to find anyone who thinks that the goal of the Act has been accomplished. But are banks the only ones to blame? Research has shown that regulators’ lax standards are, if not the primary cause of the problem, at least major contributors. 

One would think that the various laws passed to prevent discrimination in finance would be enforced in a way that solved the problem Congress aimed to address. Unfortunately, the federal bank regulatory agencies in charge of enforcing these laws have not done so. Even worse, regulators are telling banks that they are doing an outstanding job, in some cases even while the Department of Justice was suing those same banks for Equal Credit Opportunity Act or Fair Housing Act violations.

Our research identified 105 claims of fair lending and consumer protection violations that resulted in judgments, verdicts, settlements, conciliation agreements and consent orders. In 85 of those cases, federal regulators did not consider the violations in the CRA evaluation during the exam period where they occurred.

Of the 47 Fair Housing Act/ECOA mortgage cases identified, only seven were found by regulators during the period when the violations occurred. Of the 21 cases of overt redlining based on the assessment areas, branch locations, and/or racial lending patterns, only 2 were found by the regulators in their exams.

Here are a few “highlights”:
In spite of a collection of cases that made Wells Fargo the poster child of violators, the CRA examination that included the period these violations occurred assigned Outstanding ratings to both the lending and investment tests and a High Satisfactory to the service test on their 2012 exam. This attests to the fact that the agency did not consider the violations to have any impact on the three fundamental CRA examination tests or relevance to the purpose of the Act. Two cities had to sue Wells Fargo Bank before its CRA rating was retroactively downgraded in 2017, only to quickly go back to Outstanding at the very next exam in 2019.

A complaint was filed in 2017 with the Department of Housing and Urban Development asserting that CIT Group, as successor to OneWest Bank, had engaged in discriminatory residential housing lending practices from 2011 until 2017 in violation of the Fair Housing Act. While the matter was settled in 2019, the institution’s CRA performance rating was not lowered as a result of the above-mentioned complaint and settlement by the institution to correct its admittedly poor performance.

That same year, Liberty Bank in Connecticut was assigned an Outstanding CRA rating during the period when the Connecticut Fair Housing Center charged the bank with redlining and loan discrimination when it excluded the city of Hartford from its assessment area and made few loans in any minority census tracts in its entire assessment area.

In 2017, the Department of Justice filed a redlining and lending discrimination case against Klein Bank based on data from 2010 to 2015. This time period coincided with two CRA exams in which examiners “did not identify any evidence of discriminatory or other illegal credit practices” and resulted in two consecutive Satisfactory ratings.

The Fair Housing Center of Central Indiana filed a discrimination lawsuit in 2021 against Old National Bank based on lending data from 2019 and 2020, and branch locations from 2010 to 2020 focusing on Marion County/Indianapolis.

The complaint noted that while peer lenders originated 14.73% of their mortgages to Black borrowers in that market, Old National made 3.86%. In addition, between 2010 and 2020, all branches closed by the bank were in or adjacent to areas that were at least 25% or more Black, and fair housing testers were regularly quoted less advantageous terms than equally qualified white testers.

While the CRA exam admits that the pattern of closing branches had an “adverse effect” on the areas where the branches were removed, the exam team focused on the income level of the branch closure patterns and found the bank in compliance with the law. The lawsuit occurred at the same time as Old National’s request to acquire First Midwest Bancorp. Within a month of the settlement of the lawsuit, the acquisition was approved.

Settling out of court, cutting a large check, and agreeing to a questionably enforceable community benefits agreement are consolation prizes resulting from lax regulatory oversight of financial institutions like those listed above.

While those are egregious examples, we see the consequences of regulators’ low standards in day-to-day lending, as well. From 2000 to 2021, federal bank regulators gave between 96.5% and 99.3% of all banks examined a Satisfactory or Outstanding CRA rating. Here in Chicago, virtually every bank in the area received top marks.

I’m not disparaging the good works of these institutions and individuals. But the slow pace of change to the persistent map of segregation and income inequality that is Chicago is unacceptable.

Home Mortgage Disclosure Act data for Chicago shows us that banks covered by CRA went from originating 79.6% of mortgages in 2000 to 37.8% in 2020.  Fortunately for regulators, mortgage lenders that are not subject to the CRA began serving the need for mortgages in Chicago neighborhoods instead, especially in low- and moderate-income neighborhoods.

While banks make the claim that they do not invest in their conforming mortgage loan process to the same degree as mortgage companies, it has been my experience that the industry chose to invest in the jumbo mortgage process instead. As such, it’s hard to accept the “they do it better” justification for this significant decline in lending activity. Irrespective, there’s hardly any reason to call this dramatic decline Satisfactory, let alone Outstanding compliance with a law meant to ensure equitable access to financial products.

Banks also loaned to fewer people of color from 2000 to 2021. We found the percentage of applications from Black borrowers declined from nearly 22% in 2000 to less than 9% in 2020. Only 7.3% of the mortgages CRA-regulated banks originated in 2020 were to Black applicants, compared with over 11% for non-CRA lenders.

Regulators accepted those trends as Satisfactory or Outstanding from over 95% of banks they examine — and the pattern outside Chicago resembles what happened here.

The CRA can only be effective if regulators enforce the law in a manner that allows it to work. The enduring disparities shown in the HMDA data and 85 discrimination and consumer law cases that the regulators missed (81% of all 105 cases) strongly suggest regulators are not doing the job Congress intended.

Currently, bank regulators are considering a 700-page proposal to reform the CRA. While the proposal is a complex mix of good, bad and ugly, we could see the end of redlining if regulators simply enforced existing anti-discrimination laws effectively.