Why we must modernize CRA: More and more financial activity is taking place at non-CRA-regulated institutions

As bank regulators take a close look at modernizing the Community Reinvestment Act (CRA) through a series of hearings and public comment period, we’re walking you through some key reasons why CRA must be updated. Last week, we explained how assessment areas don’t fully capture where a bank does business (see the discussion at Huffington Post). Today we’ll explain how CRA applies only to a fraction of the financial industry and why communities need a broader CRA to ensure that all financial institutions are offering safe and sustainable products where they do business.

The percentage of assets deposited in banks and thrifts, which have community reinvestment obligations under CRA, has declined dramatically. When the CRA was enacted in 1977, households held 25 percent of their financial assets at CRA-regulated institutions. By 2007, that share had declined to 15 percent.  As financial assets migrate to other types of institutions such as mortgage companies, insurance companies, credit unions, and securities companies, it is critical that we expand the scope of CRA to these types of institutions to ensure that it remains relevant and effective at encouraging financial services providers to meet the needs of low-wealth people and communities.

Mortgage companies and brokers

Where there was once a strong connection between local bank branches and mortgage lending, mortgage lending is now much more likely to occur through large mortgage banking affiliates or mortgage brokers that currently have no community reinvestment obligation—and made the vast majority of the high-cost loans that sparked the predatory subprime lending crisis.  In 2009, Woodstock Institute and a collaboration of similar organizations in three other states reported that, in low- and moderate-income communities, depositories with CRA obligations originate a far smaller share of higher-cost loans than do lenders not subject to CRA.  That report also found that lenders covered by CRA are much less likely to make higher-cost loans in communities of color than are lenders not covered by CRA. Going forward, mortgage companies and brokers that account for such a large share of the mortgage market must be subject to the CRA and the transparency and accountability that the CRA provides.

Insurance companies

Insurance redlining results in disparate access to affordable insurance products in low-wealth communities and communities of color.  For nearly 30 years, Woodstock Institute and others have called for the establishment of a comprehensive insurance disclosure requirement, as well as an affirmative obligation of insurance companies to serve low-wealth communities and communities of color.  Under the Dodd-Frank Act, a new Federal Insurance Office will be established to monitor the provision of insurance and to collect and disseminate data on the insurance industry.  Using these data to inform the process, insurance companies should be subject to community reinvestment obligations similar to other financial institutions.

Credit unions

Despite credit unions’ role in providing financial services to low-wealth people, a 2003 Woodstock Institute report found that credit unions serve a much lower percentage of lower-income households than middle and upper-income households.  Credit union members receive significant benefits in the form of higher interest payments for share accounts, lower rates on loans, and less expensive basic financial services. Those benefits are directly subsidized by federal and state tax exemptions and, as such, the credit unions that receive those benefits should have community reinvestment obligations under the CRA.

Securities companies

Access to stocks, mutual funds and other wealth-building securities provides families with the option to assume a level of risk appropriate to their investment goals and, in many cases, build long-term wealth.  According to the 2007 Survey of Consumer Finances, families headed by white families were more than twice as likely to own stocks as families headed by people of color. Investments in stocks and mutual funds represent a significant portion of most Americans’ retirement savings—an important component of the social safety net.  With nearly 50 percent of workers lacking access to retirement savings through their employers, securities companies, which derive substantial profits from managing retirement savings, should have a community reinvestment obligation to address this persistent gap in access and opportunity.

In today’s complex and rapidly changing financial marketplace, CRA-regulated banks and thrifts are far from being the only institutions where families keep their money. The predatory subprime lending crisis demonstrated what can happen when financial institutions fail to lend consistent with safety and soundness, which CRA requires. Ensuring that mortgage brokers, credit unions, insurance companies, and securities companies are  obligated to meet the financial service needs of all communities to will help us avoid another crisis and set the stage for recovery by ensuring equitable access to fairly-priced products.