Amid the large volume of comments on the proposed revision of the Community Reinvestment Act regulations, we may be losing sight of the fact that CRA is serving its original purpose less and less effectively as time goes on. Nothing in the proposed regulations will reverse that trend.

This is not to deny that the proposed changes are important and will affect the way banks and thrifts do business, or that bankers have expressed very legitimate concerns with the regulations. The fact is simply that a steadily larger share of home mortgages is completely outside the boundaries of CRA.

It's worth remembering that the original purpose of CRA was to help people in lower-income communities gain access to the mortgage market by making sure that banks and thrift institutions served the communities where they were located.

CRA was concerned with residential communities, where the economic and social base was the family living there. The most important economic activity in these residential neighborhoods is buying and selling homes. If mortgages aren't available, the community cannot prosper.

Changes Since 1977

The home mortgage market has changed since CRA was enacted in 1977. Commercial banks and thrifts then provided the funds for three-quarters of U.S. mortgages originated. Today, over half of mortgages are originated by mortgage bankers, who aren't covered by CRA because they don't take deposits. They sell most of their loans to the secondary market agencies, also not covered by the law.

The result can be seen in the Home Mortgage Disclosure Act data released and analyzed recently by the Federal Reserve Board. In the February 1994 Federal Reserve Bulletin, the Fed reported that independent mortgage companies make a smaller share of loans to low-income home buyers than do depository institutions and their affiliated mortgage companies. That applies to both FHA/VA and conventional mortgages.

The Fed also found that the secondary-market agencies purchase less than a proportionate share of the conventional loans made in low-income and moderate-income neighborhoods. Given the conforming loan limit, that's surprising. (The Fed doesn't report information on neighborhoods for mortgage companies and depository institutions, but low-income home-buyers are certainly likely to lie in low-income neighborhoods).

A Better Explanation

The Bulletin article attributed the difference to the underwriting standards of the secondary market agencies. A better explanation is that CRA applies to commercial and savings bankers but not to mortgage bankers. In my experience, banks and thrifts take their CRA responsibilities seriously even as they wrestle with its regulatory complications. Mortgage bankers and secondary market agencies don't have to keep CRA in mind on a daily basis.

So CRA's coverage is increasingly too narrow. In fact, it may be covering the wrong part of the mortgage market. Since mortgage bankers now originate most fixed-rate loans and thrift institutions specialized in adjustables, we now have a situation where CRA applies most often to loans that carry the risk of a payment shock.

This is likely to be particularly serious for low-income and moderate-income home buyers. But CRA applies less often to the level-payment type of mortgage that is likely to be least risky for the people it is intended to help.

An added irony is that fixed-rate mortgages were almost the only mortgages offered when CRA was enacted; Congress can hardly have expected that eventually such loans would be excluded from CRA.

It is not sensible to apply CRA to the secondary-market agencies. They are national organizations. They raise their money in the national capital markets and have no community presence.

It does make sense to apply CRA to mortgage bankers. The structure of the mortgage industry is very much like that of the commercial banks and thrift institutions. It should not be hard to define a service area for a mortgage banker on the same basis as for a commercial bank or thrift. The standards proposed by the administration are one way it could be done, and there are probably several others.

The important point is that tighter regulations on banks and thrifts are not going to help lower-income neighborhoods much if CRA continues to exclude more than half of the mortgage market.

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