The ongoing regulatory emphasis on enforcing the anti-discrimination provisions of the Equal Credit Opportunity Act and Fair Housing Act has had an unintended and counterproductive consequence. It is undermining the legislative rationale of the Community Reinvestment Act and threatening its effectiveness.
In regulators' push to root out lending discrimination based on race or ethnicity, they have co-opted the CRA as a fair lending enforcement tool. The last several years have seen a spate of banks with downgraded CRA ratings based solely on evidence of inadequate compliance with other laws. Many of these banks performed well on traditional measures of CRA compliance-that is, on the loans, investments and services provided to their communities, particularly to lower-income individuals and neighborhoods. But evidence of discriminatory or other illegal credit practices overrode even outstanding traditional CRA performance.
Using the CRA to enforce fair lending laws ignores the fact that the CRA makes no mention of race, ethnicity or any other prohibited factor. Nor does it outlaw lending discrimination based on prohibited factors.
Unlike the Equal Credit Opportunity Act or the Fair Housing Act, the CRA is colorblind. Its explicit purpose is to require regulators to encourage banks "to help meet the credit needs of the local communities in which they are chartered." To achieve that purpose, Congress directed the regulators to assess a bank's "record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with the safe and sound operation."
Notwithstanding Congress's unambiguously stated purpose and direction, the CRA is increasingly and perhaps primarily morphing into a means of enforcing fair lending laws. In addition to rating downgrades that have nothing to do with how well a bank performed on traditional measures of CRA compliance, the regulators' fair lending examination guidelines also ignore that the CRA is colorblind. These guidelines direct examiners to use a bank's CRA compliance record in their analysis for redlining based on racial or ethnic characteristics. The Consumer Financial Protection Bureau's examination procedures instruct its examiners to review a bank's CRA evaluation for "any information related to fair lending risk."
As a result, the CRA is at risk of losing its unique, non-race-based rationale. This rationale acknowledges that lower-income individuals and neighborhoods come in all races and ethnicities, and that banks must serve those people and communities whether or not they are predominantly minority. Conflagrating the CRA with the fair lending laws diminishes the uniqueness of the CRA and risks reducing banking services in certain lower-income communities.
Poverty is not only an issue in inner cities, where people who are members of protected races and ethnicities are seen as most likely to live. It is also an issue in rural America. According to the Institute for Research on Poverty at the University of Wisconsin-Madison, the inner city poverty rate is 19.7% and the poverty rate in rural areas and small towns is 16.5%.
The CRA compels banks whose communities include small towns and rural areas to serve the credit needs of those communities' lower-income neighborhood and residents and grades them on that service. Banks are required to receive a minimum satisfactory CRA rating in order to merge with or acquire other institutions, or even open a new branch. But if that grade can be diminished by allegations of unrelated illegal credit practices, the incentive to expend resources to serve those communities is also diminished. After all, if banks that meet CRA standards still risk having their ratings downgraded due to unrelated activities, the ratings lose their meaning and utility. Banks at risk of a downgrade on unrelated grounds will have no reason to strive to meet satisfactory CRA standards.
Keeping the CRA colorblind is in the interest of both the industry and community advocates. Banks must be able to plan to address the CRA's mandate that they help serve community credit needs, including the needs of the lower-income people and neighborhoods in their service areas.
Community advocates should be supportive of such efforts because the CRA's mandate is in addition to, not instead of, a bank's obligation to extend credit in a non-discriminatory manner. Put another way, community advocates should recognize that the fair lending laws in and of themselves are sufficiently strong to combat discrimination on the basis of race, ethnicity, age and sex. They should also recognize that the CRA is necessary to ensure that all lower-income communities and individuals, whether or not they are minorities, are adequately served by their local banks.
In sum, co-opting the CRA for fair lending enforcement is inconsistent with its congressional purpose. The law's primary objective of encouraging banks to offer credit-related services to lower-income individuals and communities is undermined if CRA ratings are determined by other factors.
The CRA should be restored to its original mission before its colorblind uniqueness is fully lost in a misguided effort to repurpose it. If regulators respect the CRA's uniqueness, the rule can complement fair lending laws' focus on racial or ethnic discrimination in large metropolitan areas with a parallel focus on banking services to lower-income individuals and neighborhoods-wherever they may be and whomever may live there.
Warren W. Traiger is counsel in the New York office of BuckleySandler LLP.