The Right Way for Trump To Fix the Redlining ‘Shakedown’ of Banks

The Trump administration has an opportunity to radically reform regulations on what’s called redlining — discrimination against minority borrowers, often in urban areas — as mandated by the Community Reinvestment Act of 1977. That law, though, has famously sparked unintended consequences, and faces new scrutiny from Republican lawmakers who say it is being misused to pressure banks to fund left-wing activist groups.The alleged original sin of mortgage banking has long been seen as cutting off low-income minority neighborhoods from credit. So the nearly half-century-old law required banks to make loans and open branches in neighborhoods that would, it was thought, otherwise be cut off. In the years since, though, the CRA has become a dead weight around banks, as regulators have forced lenders to fund activist groups in order to get a good CRA “score,” crucial to allowing mergers to go forward. In the past I’ve described this as a “trillion-dollar shakedown that bodes ill for cities.”Now, President Trump’s Office of the Comptroller of the Currency is proposing the most consequential rollback ever of the CRA — but even its proposal does not go far enough to ameliorate the distortions of a law that has long since become superfluous.Republican legislators praise the Trump plan for discouraging banks anew from earning high CRA grades by making grants to “community development” groups, often left-leaning activists. Congressman Andy Barr of Kentucky gripes that the Act has been “weaponized” to fund such groups, effectively bribed to endorse mergers and acquisitions. The National Community Reinvestment Corporation, long the lead defender of the law, is calling the Trump plan an “assault on working class communities,” by limiting the number of banks subject to the most rigorous scrutiny. The Comptroller of the Currency, Jonathan Gould, defended the proposal to limit the ways banks can gain favorable CRA ratings, often crucial for their business plans: “Banks are going to actually have to rely upon their record (of) meeting the credit need.”All parties miss a key point on which they should agree: it’s crucial to know whether the loans made to comply with the CRA actually perform well. In short, do the home buyers and small business borrowers pay them back or fall into delinquency or foreclosure? Those questions that have never been included in the CRA “exams” faced by banks to demonstrate they are “meeting the credit needs of their communities.” The focus, instead, is the extent of lending and other investments — inputs rather than outputs, as business jargon might put it.Performance is the missing link. What regulators don’t ask or know is crucial for the health of the communities the CRA aims to help. Consider a residential neighborhood of working class homeowners of relatively low-income — a core target for the CRA. If lending standards are too generous — if those with low credit scores get the benefit of the doubt to help a CRA score — the risk of delinquency rises. There’s nothing worse for a neighborhood than a house that’s been abandoned after foreclosure or is poorly maintained because a buyer is overextended. The values of nearby properties are undermined.We saw this scenario unfold during the 2008 financial crisis — when “low doc” and “no doc” mortgage lending became common. Meeting CRA goals — as well as the “affordable housing mandates” required of secondary mortgage giants Fannie Mae and Freddie Mac by the Federal Housing Finance Agency — contributed to the debacle, which disproportionately harmed working-class minority neighborhoods.Easy credit, in other words, is not a benefit for those hoping for a stable, well-maintained neighborhood. Better for banks to be tough.The question of performance is one all sides of the CRA debate can agree on. That means financial institutions would identify CRA-eligible loans they’ve made — and might not have made otherwise — and report on their performance. If lenders would have made these loans anyway — based on the creditworthiness of borrowers — that would demonstrate the CRA has become superfluous.Indeed, there’s a serious case to be made that the factors that originally inspired the CRA have been overtaken by events. When CRA was first passed, only local savings and loan banks were in the home mortgage business, not giants like JP Morgan Chase. Competition was limited.Today, in an era of national firms like Rocket Mortgage, there’s no rationale for a law that assumes creditworthy customers will be redlined out of the market. Banks compete for such customers.If any administration were to propose outright repeal, it’s Trump’s. Yet the CRA appears to be ensconced — by the combination of advocates and bureaucrats — making incremental improvements the order of the day.

The Right Way for Trump To Fix the Redlining ‘Shakedown’ of Banks

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