Congressional attempts to enact banking and financial services reform in recent years have stumbled over the Community Reinvestment Act of 1977. That act was originally meant to deal with “redlining,” the alleged refusal of banks to lend to residents of poorer urban, often racial‐minority areas. The Clinton administration has enforced the act with vigor and wants to strengthen it in current reform legislation on Capitol Hill. But there is no evidence that such discrimination exists, and lots of evidence that the act harms both banks and their customers.
Racial discrimination has unfortunately been part of this country’s history. Lending discrimination was banned in 1968 by the Equal Credit Opportunity Act. The Home Mortgage Disclosure Act of 1975 (HMDA) was enacted because banks and thrifts were charged with “redlining” older central‐city neighborhoods. CRA followed in 1977. That law requires banks and thrifts to report on lending to poorer neighborhoods and minorities. (Mortgage banks were exempt until 1990 and other lenders still are exempt. That gave a distorted picture about the availability of credit in certain neighborhoods.) The idea of HMDA and CRA was to allow the public and bank examiners to see where and to whom mortgage loans were being made. But a bank would face serious potential problems if it had to get approval from regulators for some change in its status, for example, merging with or acquiring another bank. A lending record not considered in the “community interest” could delay or kill such approval. Even if the regulators had found nothing wrong, others could delay approval by filing a complaint, which might be withdrawn after they got what they wanted, such as the banks’ financial support for their preferred projects or organizations.
Try as they might, CRA supporters are hard‐pressed to uncover racially motivated loan discrimination. Many point to a 1992 Federal Reserve Bank of Boston study of 70 FDIC‐supervised banks that found a higher denial rate for blacks (17 percent) compared to whites (11 percent) that could not be accounted for by the 30 variables used by the Boston Fed to examine lending decisions. But FDIC economist David Horn in 1997 reviewed that study and, in addition to finding mistakes in the data, concluded that more relevant measures of a borrower’s credit history, such as past delinquencies and whether the borrower met lenders’ credit standards, explained the difference between lending levels to blacks and whites. In fact, 49 of the 70 banks studied did not reject any minority applicants. Two of the remaining 21 were responsible for half of the denials of black applicants. One of those banks was minority‐owned, and the other had extensive minority outreach programs.
Other evidence of a lack of racially motivated loan discrimination is found in the fact that the FDIC must turn over to the Department of Justice evidence of such discrimination. Of some 8,000 banks and thrifts monitored, DOJ referred only four cases in 1992, 13 in 1993, 25 in 1994 and 10 in 1995. Of those 48 referrals, legal action was taken in only six cases, of which four were settled by consent agreements.
Some supporters claim that stricter Clinton administration CRA enforcement has reduced or ended discrimination. They note that between 1993 and 1997, mortgages made to all borrowers increased by 30 percent, while mortgages made to minority borrowers increased by 63 percent. But Chicago Fed economists Douglas D. Evanoff and Lewis M. Segal found that the increased rates of loans to poorer neighborhoods were about equal before and after 1992. Further, Federal Reserve Board economist Robert Avery found that in 1993 and 1997, institutions both not subject to and subject to CRA made about the same percentage of mortgages to lower‐income borrowers and neighborhoods as they did to all borrowers.
CRA has been costly to banks and thrifts. Direct costs include preparing the required HMDA and CRA reports, hiring compliance officers and dealing with CRA examiners. Indirect costs include those involved by delay in obtaining regulatory approval for mergers, acquisitions and branch changes; legal costs incurred in replying to unfounded complaints; and costs for paying off “community activists” with unprofitable loans.
Anjan V. Thakor and Jess C. Beltz found that, in 1992, CRA cost the 445 relatively small banks that they surveyed 4.5 percent of their pretax income and 0.25 percent of their total assets, on average. Further, suburban banks often make subsidized or unprofitable loans in central cities or to minorities in order to fulfill CRA obligations. This “cream‐skimming” practice of lending to the most financially sound customers draws business (and complaints) from minority‐owned local banks that normally specialize in service to that clientele.
Banking deregulation and improved technology have resulted in a national, indeed, an international, market for home mortgages. In most communities, potential home buyers and real estate brokers can place mortgages, often with hundreds of lenders. Newspapers carry comparative rates. Information and applications can be obtained by telephone or through the Internet. Consequently, it is very likely that all profitable demand for mortgages is met.
CRA is costly and unnecessary red tape that makes it more difficult for financial institutions to serve their customers. Its repeal, not expansion, would help both banks and home buyers.