Treasury Department Attempts to Prevent Discriminatory Lending “Redlining”

Inside Subprime: Aug 28, 2018

By Holly Kane

A Treasury Department bureau wants public feedback on how to update federal lending guidelines, but some groups worry potential changes won’t bode well for consumers.

In an August 28 press release, the Office of the Comptroller of the Currency announced it will seek “stakeholder comment” on how to improve enforcement methods for the Community Reinvestment Act, a decades-old statute designed to discourage discriminatory lending by monitoring banks’ community lending activities.

“Unfortunately, the operation of the current CRA regulation can result in restricted resources,” said OCC comptroller Joseph Otting in the release. “It is time for a national discussion on how we can make the CRA work better.”

Some advocacy groups have warned, however, that the potential changes could make it easier for banks to skirt the regulations. The Center for Responsible Lending warned against a “big bank giveaway,” urging the department to ensure that any new regulations have meaningful results.

“Banks could meet their CRA requirements by choosing the easiest, most lucrative activities … instead of actually serving the financial needs of their communities,” the CRL said.

Enacted in 1977, the Community Reinvestment Act encourages financial institutions to extend credit and other services equally throughout the communities in which they are located, including low- and moderate-income neighborhoods, as a way to combat racially biased lending. Regulatory agencies – including the OCC – evaluate how well banks comply with the CRA and consider that evaluation when approving applications for new bank branches, mergers or acquisitions.

The CRA aims to prevent practices like “redlining.” In the 1930s, the Home Owners’ Loan Corporation assessed city areas based on their potential for lending and mortgages, resulting in a series of color-coded maps that typically put minority neighborhoods into less desirable red zones. The maps persisted into the latter half of the 20th Century, affecting lending and, according to a Chicago Fed study , could have led to Chicago’s notorious neighborhood segregation.

(Debt trap products like payday loans and title loans also predominantly target minorities and minority areas.)

Following the OCC’s announcement, the National Fair Housing Alliance released a statement calling on the agency to remember the effects of redlining when reevaluating the rules.

“The Community Reinvestment Act is an important fair lending law created in response to redlining practices that are still too common in low-to-moderate income communities and neighborhoods of color,” NFHA said. “The OCC must actively engage the civil rights community in this process to ensure no harm will be done to the people that need the CRA the most.”

The American Bankers Association issued a  statement praising the action, saying “outdated rules, a lack of transparency and inconsistent examinations” has prevented bankers from investing in their communities. “The current framework is holding back investment in communities the law is intended to serve, while failing to account for significant innovations in the banking sector.” 

Advocacy groups’ concerns arise in part because, even though the CRA and other housing regulations have helped combat racial bias in lending, there remains a discrepancy. A February 2018 Center for Investigative Reporting story found that “African Americans and Latinos continue to be routinely denied conventional mortgage loans at rates far higher than their white counterparts,” despite decades of CRA implementation. Even though 99 percent of banks receiving satisfactory across the country, the report found that in 48 cities, people of color were far more likely to be denied loans than white people.

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