Banking

Expand CRA to include nonbanks

“It’s easier to get a loan in Albania than on the West Side of Chicago.”

That quote delivered by an indefatigable community organizer, Gale Cincotta, before a Senate panel in 1977 illustrated a central challenge facing the finance industry: Americans of limited means, particularly members of minority communities, did not have adequate access to bank loans.

Despite being outlawed by statute nine years earlier, redlining — the process of denying credit to entire (predominantly Black) neighborhoods — still existed in practice. And so, Sen. Bill Proxmire, D- Wis., then sitting atop the Senate Banking Committee, shepherded the Community Reinvestment Act of 1977 into law, ordering the regulators to ensure that banks began lending to their entire communities.

In the decades since, many banks, often prompted by the CRA, have worked effectively to address the impact of systemic racism. They have opened branches in marginalized neighborhoods, offered loans to applicants who were once turned away and invested in new developments in previously forgotten corners of the country.

But as the world of finance has changed, the CRA’s reach has failed to keep pace. Of most concern, large portions of the lending marketplace have been claimed by nonbank lenders that are not subject to the CRA’s regulations. Today, that disparity threatens to undermine the spirit of equality the CRA intended nearly a half-century ago.

To be sure, some data suggests that some nonbank financial institutions are already doing their part in neighborhoods that banks have, for too long, failed to serve.

New financial-oriented tech companies may be lending more in underserved communities than their CRA-compliant competition. But without subjecting each of these nonbank lenders to the same regulations, there’s no telling whether they are treating low- and moderate-income borrowers equitably.

To that point, the absence of a level playing field may be incentivizing nonbank lenders to look past marginalized communities in search of more comfortable margins they can accrue by lending in higher-income locales.

Whether or not a lender maintains insured deposits, financial institutions of a certain size are likely to benefit from the taxpayers’ largesse in moments of turmoil. The CRA ensures that chartered banks live up to the attendant responsibilities that come with that assurance.

It’s only right, then, that the nonbanks that may benefit from many of the same protections serve their whole communities as well.

Some executives and lobbyists will counter that nonbanks shouldn’t be weighed down with additional regulations if, on the aggregate, they are already serving these communities. But if that’s the case for any individual lender, executives need not change their business strategy at all — they can just open their books.

Others will argue that new regulations will somehow reduce innovation. But innovation that does not address what is among the most pressing challenges of our age — entrenched disparities in opportunity — represents a step in the wrong direction.

Fortunately, the CRA’s expansion should not be a drag for nonbanks and fintechs. Bankers who were largely averse to the CRA when it was established — and who remained antagonistic when Congress’s mandate was translated into more specific regulatory language — continue to do well economically.

There is no evidence that the CRA has been a material drag on bank earnings. Perhaps more to the point for lenders who already serve the underserved, a CRA expansion is likely to bring more stability and prosperity in the very locales that would otherwise be vulnerable to broader economic turmoil.

Furthermore, any concerns about upending innovation could spur policymakers to apply the CRA only to nonbank lenders that have gone beyond the startup mode.

Fundamental questions about the CRA’s expansion center on a broader sense of fairness. After all, the CRA was meant to be a broad fix to a financial market dominated by banks at the time.

Today, as nonbank lenders have emerged to claim a larger share of that same marketplace, the underlying rules need to be remolded.

The CRA remains a crucial tool in the fight to ensure that every American has an equal opportunity to claim a piece of the American Dream. To the degree that its impact is circumscribed, policymakers need to update the underlying laws and regulations and bring nonbank lenders into the fold.

Editor’s note: This op-ed is the first in a monthly series called “Deposits and Withdrawals” offering a point and counterpoint on a key topic. The second in this series will be published Wednesday.



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