Stakeholders on all sides of the issues sounded off on the proposed changes to the federal redlining statute in comments to the banking agencies marshaling the changes.
Some of the nearly 360 comments came in late on Thursday, a day before the deadline imposed by the Office of the Comptroller of the Currency, the Federal Reserve and the Federal Deposit Insurance Corporation. Those agencies oversee banks, and are tasked with ensuring banks do not redline, by enforcing the Community Reinvestment Act.
In the days before the deadline, trade associations preparing their comments were still “deep in the weeds,” scrambling to get their members to agree on details big and small.
In theory, agencies have to read the comments and respond publicly, especially to issues raised by multiple commenters. The agencies don’t have to heed criticisms, however.
Much of the feedback that trade associations, fair housing groups and community advocacy groups submitted had common threads. Numerous organizations criticized the agencies for not proposing to grade banks based on data about their minority lending.
The nearly 50-year old statute curiously never included language about race, although it was intended to address redlining. The National Community Reinvestment Coalition has argued that putting race in the implementation of the law would not violate the constitution.
“But regulators are wary of going anywhere near that line,” said Jesse Van Tol, CEO of NCRC.
“Above all, we are extremely disappointed to see the lack of the explicit consideration of lending by race in a lender’s CRA rating,” wrote the St. Louis Equal Housing and Community Reinvestment Alliance.
Some think that the proposed rule already addresses concerns that including race more explicitly would draw a legal challenge. The National Housing Conference, a trade association that represents mortgage lenders, was one of the few industry stakeholders that suggested the banking agencies push the boundaries a bit more.
“NHC recommends that the CRA regulation develop a process for collecting and reporting baseline data on investment and lending to people of all races,” wrote David Dworkin, the National Housing Confeence’s CEO. “This same data reporting should be used in assessing performance and establishing performance context in CRA evaluations as well.”
While the regulators did not propose using data on race in community reinvestment exams, the banking agencies floated the idea of giving community development credit for special purpose credit programs. Among commenters, there was broad support for that idea, including from the Urban Institute, fair housing groups, and numerous trade associations, including the Mortgage Bankers Association and the Housing Policy Council.
In its letter, the MBA said it was supportive of the banking agencies giving credit for special purpose credit programs.
The Housing Policy Council, which represents large bank and nonbank mortgage lenders and servicers, recommended that the agencies consider special purpose credit programs “favorably” in community reinvestment exams.
“Such a specific positive reference to SPCPs in the rule would likely encourage more banks to utilize SPCPs – a result that would benefit more LMI borrowers and neighborhoods,” wrote Ed DeMarco, president of the Housing Policy Council. Doing so would dovetail with other efforts by regulators to encourage mortgage lenders to make targeted lending programs.
The Housing Policy Council also suggested some tweaks to how CRA credit is given for loan purchases from Ginnie Mae pools, to avoid discouraging lender participation in programs backed by those securities. The trade association recommended that the banking agencies allow a loan purchased from a Ginnie Mae pool to qualify as a loan to a low- or moderate-income borrower, as long as the borrower was low- or moderate-income at the time of origination.
The MBA also recommended the banking agencies weigh retail and community development tests equally in CRA exams, rather than the proposed weights of 60% and 40%, respectively.
Multiple commenters, including HPC and MBA, asked the banking agencies to allow more time to adjust to the revisions. The proposal would give banks a year to implement the changes.
Comments received by the agencies were not limited to those representing banks who, in theory, must pass CRA exams in order to be allowed by the regulators to grow larger. (That rarely, if ever, happens.)
Those representing nonbanks also took the opportunity to weigh in, amid the proliferation of CRA-like requirements for nonbanks at the state level. The expansion of those regulations stems, in part, from support from top Federal Reserve officials.
In 2021, Fed Chair Jerome Powell said he supported subjecting nonbanks to CRA requirements, saying, “Like activities should have like regulation.”
The Community Home Lenders Association, which represents small and mid-size nonbank mortgage lenders, in its letter to the banking agencies, said that CRA requirements for nonbanks were “inappropriate.”
The CHLA pointed out that most loans that nonbanks make are backed by federal agencies, and subject to their underwriting guidelines, loan pricing and upfront fees for borrowers. Nonbanks make up the greater share of Federal Housing Administration mortgages, which are the mortgage of choice for first-time homebuyers and borrowers of color.
The trade group also argued that nonbanks, which are not subject to the federal CRA, continue to outperform banks when it comes to minority borrowing. Their letter cites findings from the Urban Institute, that for nonbank originations, median credit scores are consistently lower, and median debt-to-income ratios are consistently higher than those of banks.
But the Urban Institute also found that, whether subject to the CRA or not, mortgage lenders overall are not keeping up with even current levels of homeownership in majority-minority areas.
In its letter to the banking agencies, the Urban Institute found that predominantly minority neighborhoods have a 10% homeownership share, but receive only 8.1% of mortgages and 5.9% of bank loans.
“In all cases, overall lending is lower than the current homeowner share, and nonbanks consistently outperform banks,” the Urban Institute wrote.