Why the Community Reinvestment Act Is Back in the News – Again

This analysis was published as part of The Bottom Line, my weekly newsletter reflecting on the challenges of addressing affordability, inclusive economic growth and access to capital. Subscribe to keep up with what I’m writing, thinking and reading every week.

It’s been a wild few weeks in the banking world. And it all has something to do with that landmark, though at times frustrating, Community Reinvestment Act of 1977.

Let’s start with what feels like the most frustrating. Previously, as Comptroller of the Currency, Joseph Otting was in charge of one of the nation’s main bank regulatory agencies. The obscure Office of the Comptroller of the Currency charters and supervises banks, which includes being one of three federal bank regulator agencies that share responsibility for enforcing the Community Reinvestment Act.

The Community Reinvestment Act says banks have “a continuing and affirmative obligation” to meet the credit needs of the communities where they do business, consistent with “safe and sound operation of such institutions.” It gives regulators the authority, for example, to deny bank applications to open or close branches, or to acquire or merge with another bank, if regulators believe the bank is not meeting those obligations.

From nearly day one of the previous Trump administration, as I’ve covered previously, Otting made it a personal mission to gut the rules and regulations under the Community Reinvestment Act. He was so brazen about it that even the banking industry wasn’t entirely sure it wanted to go along with him. He very nearly did gut those rules, but after coming into office, the Biden Administration rescinded his planned changes.

Well, last week, Otting made another splash in the banking world being named as the new CEO of New York Community Bank, as part of a plan to rescue that bank from imminent failure with an infusion of a billion dollars in private equity money.

Despite its name, New York Community Bank is no longer technically a community bank, as it operates in too many different states and metropolitan areas. The bank is struggling mostly because it made a large number of loans that depended on landlords jacking up rents after flipping rent-stabilized housing into market-rate housing. Tenant-led New York State housing reforms in 2019 essentially put a stop to that model, and now the chickens have come home to roost.

The billion-dollar infusion from private equity comes with an additional twist. The investment was led by Steven Mnuchin, former Treasury Secretary under the Trump administration, who now becomes board chair at New York Community Bank.

It keeps going. After the Biden administration rescinded Otting’s attempt at gutting Community Reinvestment Act regulations, it re-booted the process of overhauling those regulations. It’s been two decades since those regulations were last given a major overhaul, a time that has seen many changes in the banking industry — from the rise of online and mobile banking to the unprecedented banking industry consolidation over these past few decades.

The newly updated Community Reinvestment Act rules attempt to address these changes by creating what it calls “retail lending assessment areas,” which are effectively a way to evaluate banks’ obligations under the law in places where they don’t have physical branches but are making loans anyway. (Check out our webinar breaking down the recent overhaul to the CRA.)

Earlier this month, in a widely expected move, industry lobbyists led by the American Bankers Association and the U.S. Chamber of Commerce filed a lawsuit against the new regulations (in the infamously Republican-friendly Northern District of Texas). The lawsuit specifically calls out the “retail lending assessment areas” as overstepping the authority granted under the law.

In response, the Opportunity Finance Network, a trade association of community development lenders, issued a statement opposing the lawsuit and specifically calling out the retail lending assessment areas as helping to “drive bank reinvestment in the communities in which they operate, regardless of their physical presence.” More to come on that over the next few months, potentially years. Even if the lawsuit fails, the new Community Reinvestment Act rules aren’t scheduled to come into effect until 2026.

The Community Reinvestment Act is also tied up in other big news that’s been brewing: the announced (but not yet consummated) merger of consumer credit banking giants Capital One and Discover.

Capital One is already much larger than Discover, but Discover has something Capital One wants: its own payment processing network. Capital One wants to challenge the dominance of Visa and MasterCard, which are not credit card companies or banks but payment processing companies that essentially have a duopoly on payment processing. American Express is another bank that owns its own payment processing network, but it’s focused on high-end consumers and businesses, while Discover was created by Sears in 1986 as a broader consumer alternative to Visa and MasterCard.

Over at Fast Company, financial journalist James Surowiecki writes that the Capital One-Discover merger could be a boon for consumers and business owners, who could see lower swipe fees with the addition of a larger competitor to Visa and MasterCard. But bank watchdogs, consumer rights, and civil rights groups remain unconvinced, with 18 signatories so far to a letter detailing numerous concerns that include what they view as violations of the Community Reinvestment Act as well as potential violations of federal anti-trust laws.

But let’s wrap up on some hopeful notes.

The Community Reinvestment Act was passed at a time when banks made the vast majority of loans. It was also passed as a race-neutral law because that was the only politically feasible way to get it passed at the time. Rather than waiting for the federal law to change, some states have been taking things into their own hands.

Today for Next City, racial and economic justice advocate Paulina Gonzalez-Brito has penned an op-ed calling for California to pass a state-level Community Reinvestment Act that would expand coverage to include credit unions and independent mortgage companies (like Rocket Mortgage or Guaranteed Rate), which account for much more of the lending market today than they used to. In so doing, California would join Massachusetts and Illinois in expanding their state-level community reinvestment laws to credit unions and mortgage companies (see our previous coverage of that here). New York also expanded its state-based community reinvestment act to mortgage companies in 2021.

Gonzalez-Brito also wants California to take race into account when evaluating institutions for compliance with the proposed state-based community reinvestment act. Illinois advocates are still fighting to make their state the first to do that under its expanded state-based community reinvestment laws passed in 2021.

Which brings us to one final piece: It was a big weekend for Arlo Washington, the Black barber-turned-credit union founder. Even with the existing Community Reinvestment Act’s shortcomings, as Washington often says the law has helped fuel his work by giving him leverage to garner support from larger financial institutions for the work he’s doing building a much smaller financial institution. As I covered last year, Washington made history by obtaining the first new credit union charter in Arkansas since 1996.

Obtaining a credit union charter was just the latest step in Washington’s longer story of economic justice and empowerment for his community in Little Rock, now immortalized on screen in “The Barber of Little Rock.” The film was nominated this year for an Oscar in the category of Best Documentary Short. Although it didn’t win, Washington and his wife were interviewed on the red carpet on their way into the Oscars on Sunday evening.