Revision of Community Reinvestment Law Rules May Increase Small Home Loans



Congress passed the Community Reinvestment Act (CRA) in 1977 to encourage local financial institutions to help meet their communities’ credit needs, especially in low- and middle-income areas. The Federal Reserve Board is currently considering ways to modernize CRA rules to reflect the sector’s performance in the 21st century.century, creating an opportunity to reverse the multi-year reject with mortgage loans up to $ 150,000.

Under the CRA, regulators assess specific banking and lending services such as mortgages in certain underserved areas where banks have branches; financial institutions receive CRA credits or points for these activities and products. However, most banks pass these tests, making it difficult to assess the overall effectiveness of the CRA.

Perhaps more importantly, the industry today bears little resemblance to what it was nearly 45 years ago when the CRA was adopted: Banks increasingly do business online and offer a wider range of products and services. In September, the Federal Reserve issued modernization proposal CRA to reflect these changes and redefine the ways in which banks can earn loans to lend to people in low- and middle-income areas and underserved communities. On February 16, Pugh sent letter confirming the purpose of the board updating the law, but noted room for improvement.

CRA Encourages Access to Mortgage Loans

Single family mortgages make up the bulk of CRA loan earned banks. This positive contribution to the total number of mortgages, however, did not compensate for the shortage of small mortgages, even in areas of the country where there is a lot of inexpensive real estate.

The lack of small-scale mortgage financing makes it difficult for some creditworthy households to buy affordable housing and start climbing the home ownership career ladder. It can also have important implications for the ability of borrowers to achieve economic stability and create intergenerational wealth. Although there is alternatives to conventional mortgagesthey have less consumer protection and often require higher costs. The proposed CRA reforms could help improve access to low-dollar mortgages for families looking to purchase low-cost homes.

Expanding valuation areas can stimulate lending in low-cost housing areas.

Low- and middle-income families are more likely to live in low-cost houses. Lending to these borrowers is usually above in the so-called CRA valuation areas – geographic points that the bank can reasonably serve and for which it will receive a loan. However, the current rating system limits the rating to those areas where banks have offices, branches or ATMs. This means that banks will then have little incentive to lend outside of these locations, which could lead to a concentration of lending activity.

While geo-referenced scopes continue to be a key driver of CRA lending, many critical banking functions are or are being relocated to the Internet. Hence, it makes sense to re-evaluate the valuation areas and include significant activity outside of the areas around the branches, as well as lending by online banks that do not have a physical location.

Any decision as to whether new areas of assessment should be based on deposit and lending levels or should be nationwide will require further research. Regardless of the final decision, the approach should not encourage lending hotspots or deserts

CRA proposal helps incentivize small mortgages

For decades, CRA mortgage loans have been based on total dollar loans, which tends to encourage banks to focus on larger loans at the expense of smaller ones that could serve many low- to moderate-income households. Thus, the board’s proposal to count mortgages based on the number of loans rather than the total should encourage banks to lend more small mortgages.

This could help discourage banks from offering only those products that generate the most dollars and encourage them to serve more people. In addition, regulators can use this approach in determining what to include in the CRA assessment in the first place, considering only those banking products that provide a large number of loans.

Home mortgages that banks buy from other lenders must also be assessed for CRA credit. These “secondary market” purchases help boost liquidity, freeing up funds so that banks and other lenders can provide new loans to low- and middle-income borrowers. Loans purchased, however, should not be eligible for CRA credit more than once, so that banks are rewarded for providing new loans to poorer families and underserved communities, but not for reselling existing loans multiple times.

The CRA loan can be expanded to include areas with low mortgage rates.

Banks also receive CRA loans to lend to community development projects. But these projects are sometimes implemented outside the banks’ appraisal areas, albeit in areas where they are needed, such as communities with low mortgage rates. By providing CRA credit for lending in areas of need, regulators could increase the volume of small mortgage lending to better meet demand.

Regulators will need to focus on the small mortgage shortage as the CRA continues to be used as a tool to encourage lending to low- and middle-income underserved communities. They can update the CRA’s regulatory framework to foster a more resilient small mortgage market and provide a path to home ownership for many creditworthy families looking to purchase affordable homes.

Nick Burke is a director and Tracy Maguz is an employee of the Pew Charitable Trusts housing finance project.


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