A Phil Hall Op-Ed: In 1977, President Carter signed into law the Community Reinvestment Act (CRA), which created new compliance requirements for commercial banks and savings associations related to the needs of markets where they had a depository and lending presence, particularly low-income neighborhoods and predominantly minority communities. At the time, the legislation was created to address a history of redlining and discrimination by the banking industry.
That was then. Fast-forward nearly a half-century later and the financial services market is a completely different environment. Nonbank lenders are formidable rivals to the depositories, especially when it comes to courting homebuyers – these companies accounted for nearly two-thirds of mortgage originations in the first half of 2024. These institutions are not covered by CRA, even though they serve the same markets as the banks.
Back in 1977, no one predicted the financial services industry would evolve into its current state. As a Carter-era legislation in Trump-era America, CRA creates an impediment on banks competing against nonbanks – especially those that only exist online.
This is especially acute when it comes to branch banking. Having branches located in specific communities is a prerequisite of CRA. But branches have been shuttering at a rapid pace as mobile and online banking has gained in popularity. Retaining brick-and-mortar locations have become a drain on the profits of many banks.
Still, banks have been strong-armed for years by the federal government to keep branches open. A St. Louis Fed report from 2019 warned: “While profitability is certainly an important factor to consider, banks should also seriously consider the possible negative effects a branch closure could have on the development of local communities and the ratings assigned during CRA examinations.”
Uh, what? “While profitability is certainly an important factor to consider”? According to the Federal Deposit Insurance Corp., there were 569 bank failures since 2001. And let’s not get started on mergers and acquisitions that consolidated the number of banks – including the rising number of credit union acquisitions of banks. (For the record, credit unions are not required to comply with CRA.) Businesses don’t exist to lose money – that’s the federal government’s job.
Perhaps it is time to take a long and hard look at CRA to determine its viability. The socioeconomic injustices of past generations have been assigned to the history books, so it makes little sense to continue punishing today’s banking industry for the malice and mistakes from an increasingly distant past. And in view of the current state of the financial services industry, CRA creates an uneven playing field by hobbling one corner of this industry without requiring the same demands of the rest of the landscape.
The Trump administration promotes itself as an enemy of onerous regulation. Now is the time for the administration to revisit CRA and determines if it needs a rewrite or a repeal.
Phil Hall is editor of Weekly Real Estate News. He can be reached at phil@wrenews.com.
