If Wal-Bank is the future of banking, what is the future of the Community Reinvestment Act?
Wal-Mart's plan to provide basic checking accounts through an expanded partnership with Green Dot Bank is a bright, flashing red light to regulators, Congress, and the banking industry that the CRA needs to be updated as the industry evolves.
Congress passed the CRA in 1977 in order to stop discrimination against low- and moderate-income neighborhoods by requiring banks "to demonstrate that their deposit facilities serve the convenience and needs of the communities in which they are chartered to do business." Regulators have enforced the law by performing examinations to determine whether banks are meeting the need for loans, investments and services in the areas in which they have branches.
As a strategy to ensure that banks do not discriminate against the communities from which they take deposits, this makes sense but only as long as branches serve as a necessary nexus for banking. Thanks to the Internet and the rise of online banking, banks are far less reliant on branches. Customers can now make electronic deposits and apply for loans from just about anywhere. Meanwhile CRA enforcement remains frozen in time, loyally guarding a business model that is increasingly optional.
Without an updated CRA, banks like Green Dot can continue to use a strained interpretation of "deposit facilities" as a work-around to avoid complying with the intent of the law. While Wal-Mart locations will not be treated as branches, Green Dot customers who deposit money by swiping cards at Wal-Mart cashier stands will be engaging in much the same transaction as bank customers who make deposits at in-store branches and standalone locations.
Wal-Bank is only the latest example in a long string of developments that have highlighted the need for CRA reform. Another example is Capital One's 2012 merger with ING. Though both institutions held relatively few licensed branches across the country, the merger drew such a strong response that regulators held hearings nationwide. At the San Francisco hearing, hundreds testified asking that Capital One have a CRA obligation in California, the state that held and still holds a very high concentration of the bank's credit card, auto and mortgage loans. Regulators responded by requiring Capital One to establish assessment areas around two Capital One cafés located in San Francisco and Los Angeles. But rather than license the cafés as branches, Capital One merely upgraded the technology to facilitate deposits. Thus, while Capital One has CRA assessment areas around its cafes, it can still avoid providing the retail loan services that are offered only through branches.
Regulators have tried other ways to apply the CRA as the industry has changed. The Office of the Comptroller of the Currency requires Schwab's Internet bank to report community development loans, investments and services in the top ten metropolitan areas it serves. That includes an annual summary of the number and kind of loans and investments Schwab makes, and of the geographic locations, income and racial characteristics of the borrowers it serves. The now-extinct Office of Thrift Supervision similarly collected information about ING's community reinvestment in fourteen areas throughout the country.
Now we must begin a broader effort to update the CRA. As to those who argue that the CRA is not worth preserving, arguing that it led to the economic meltdown by encouraging banks to loosen credit standards and make loans to borrowers who could not repay them, there is clear evidence to the contrary. For example, in the run-up to the housing crisis during the years 2005 and 2006, CRA loans accounted for just 6% of subprime mortgage loan originations, according to Federal Reserve research by Neil Bhutta and Glenn B. Canner.
The banking industry is increasingly turning to mobile and online channels and third-party retail distributors as it attempts to modernize. Proponents of this model argue that it will benefit underserved communities by offering people more convenient access to banks. But if branchless banking is allowed to flourish without an updated CRA, those banks will be free to take deposits from any community anywhere in the country, without any commensurate obligation to provide other banking services there. In other words, we could wind up right back in 1977.
Andrea Luquetta is the policy advocate at the California Reinvestment Coalition, a nonprofit organization that advocates for fair and equal access to banking and other financial services for California's low-income communities and communities of color.