The Community Reinvestment Act (CRA) has been an effective tool that has been used over the past 30 years to ensure that banks are meeting all the credit needs of the communities they serve, particularly low- and moderate-income (LMI) communities. It has been used to improve access to low-cost mortgage credit in underserved markets, promote the provision of sustainable financial services tailored to low- and moderate-income consumers, and encourage sound investment in underserved communities who badly need it. However, many questions have been raised about how CRA can be used to meet one of the most pressing needs facing communities today—helping families avoid foreclosure when possible.
One of the most common foreclosure prevention activities is a loan modification. In a loan modification, a bank or mortgage servicer permanently changes the terms of the original loan in order to make the monthly payments more affordable for the borrower. This lower monthly payment can be achieved through reducing the loan principal, lowering interest rates, or extending the maturity date, among other strategies.
Federal banking regulators have publicly stated that pursuing a prudent workout agreement generally benefits both the financial institution and the borrower and could be considered positively for CRA purposes. Financial institutions can report loan modification activity to their examiner under the “other loan data” category in order to show that the institution is responsive to community needs and the examiner can count this favorably towards the CRA lending test. However, since loan modifications are on existing loans, and not new loans, they would not separately count towards the CRA lending or community development tests. There are questions about whether banks that service loans, but do not hold those loans in their portfolios or did not directly originate the loans, can receive favorable consideration under CRA for modifying these loans. According to a contact at the Office of the Comptroller of the Currency, banks who act as servicers can receive the same consideration for modifying loans as do banks that modify their own portfolio loans. However, CRA covered mortgage servicers would only get credit for loan modification if it occurs within their designated CRA assessment area.
The CRA instructs financial institutions to meet the credit needs of their entire communities, and addressing the effects of foreclosure is a top priority for a growing number of neighborhoods. A fully accurate assessment of financial institutions’ performance on meeting community credit needs must include their efforts to prevent foreclosure, such as working with distressed borrowers to provide a sustainable loan modification both on loans in and out of their portfolio. And while it is encouraging that banks can get some positive consideration for foreclosure prevention activities, the CRA still must be modernized to reflect how banks are meeting communities’ needs in a rapidly-changing financial landscape. Necessary changes include the expansion of assessment areas to include all areas where banks make products and services available and not just those areas where banks have branches, the inclusion of non-depository affiliates on CRA examinations, and consideration of lending and services provided to people and communities of color. Such changes will give banks new opportunities to earn CRA credit while also holding them accountable for all of the business they conduct in underserved markets.