According to Forbes, Reports that the Trump administration planned a big revision to the 1977 Community Reinvestment Act came out in January. The CRA is a long-standing attempt to push back against lender redlining of minority neighborhoods and a lack of equal mortgage lending to equivalent borrowers.
Now there’s news from the Wall Street Journal that the Office of the Comptroller of the Currency (OCC), one of the major bank regulatory bodies, has suggested a major change in lending rules that help the poor. It’s a continuing pattern of an attempt to roll back regulations in an area that, as history has shown, badly needs them.
Elimination of Geographic Considerations
Banks and other mortgage lenders currently report on their lending efforts in areas where they have physical branches. A large bank could not have branches in minority areas, take deposits, do other business, and yet not offer mortgages. Those that didn’t provide mortgages would receive lower CRA markings, which affect the ability to receive permission for mergers, acquisitions, and expansions.
The change the OCC has floated is elimination of “assessment areas” when undertaking CSA reviews. An assessment area is a geographical region “that includes the geographies in which a bank has its main office, branches, and deposit-taking automatic teller machines, as well as the surrounding geographies in which a bank has originated or purchased a substantial portion of its loans,” according to the Federal Reserve Bank of Kansas City. In other words, current regulations consider banks to have a responsibility to the geographical areas in which they do business.
The argument for a change has been that banking rules have failed to keep up with technology and industry changes. Many people do business with banks online and some banks have no physical offices at all. There are purely online lenders, as well. The financial services industry argues that the focus on geographic location should no longer be a major consideration.
There are two problems under this premise. One is the unstated assumption that poorer people have the same levels of internet access as the rest of the U.S. population. Even as access increases in theory, costs are more prohibitive for those with lower incomes. About 23% of households have no broadband internet access at home. Nearly 28% of households making $25,000 to $49,000 annually have no internet access at all. With an average cost of $4.18 per megabit per second download speed in 2014, even mediocre performance can result in charges that are significant to lower-income households.
Most smartphones don’t have the screen space needed to walk through the complexities of a mortgage application, so in the case of home loans, phones aren’t a substitute for a desktop or laptop computer with a good internet connection. In that same $25,000 to $49,000 household income group, 27.5% have no desktop or laptop. Using a public computer, in a library, for instance, becomes a personal information security risk. Moving to the $50,000 to $99,000 annual income range households, 12.7% don’t have a computer and 13.8% have no internet connection. Even if a phone were enough, 24% have their service cut off because they can’t afford the bills.
Back Door to Discrimination
The other problem is the potential to mathematically game the results when ignoring geography. One of the other changes proposed by the Trump administration is to move more toward numbers-based compliance rather than include subjective judgments by regulators.
On the surface, that may sound reasonable. But the problem with strict numeric analyses is the ability organizations have to construct results that seem fair under definitions but aren’t. An example is the gerrymandering of voting districts in states. Both Democrats and Republicans have done this. They construct districts that seem to have comparable numbers, but which are drawn in such ways as to maximize the political advantages of the party currently in power while minimizing the representation of the opposition.
The same could happen with lender reporting. Given the greater access to internet of wealthier households, an institution could minimize the apparent percentage of low-income population. Or it could ignore geography and offer loans over a much broader area without addressing the needs of minority communities on the whole, essentially diluting minority or low-income spending over a broad area.
This would become easier given that bankers continue to push for inclusion in the calculations of more types of lending. A property development loan might count. What if the owner and the construction firm aren’t from that area? This could easily turn gentrification development into an official minority or low-income community investment.
Blacks and Hispanics Priced Out of Many Markets
It’s not as if blacks and Hispanics are on equal ground when it comes to home ownership to start with. Real estate information company Zillow did a recent analysis and found that a “white American household could reasonably afford a home almost two-thirds more expensive than a black household in 2017, giving them significantly more flexibility to find an affordable home last year in an incredibly competitive housing market marked by low inventory.”
When comparing median incomes of whites, Asians, blacks, and Hispanics, whites collectively can afford 77.6% of homes listed for sale. Asian households, 85.2%. For blacks and Hispanics, the numbers respectively were 55.3% and 64.9%.
A change in lending rules to make business easier and more attractive for bankers at the potential loss of minority and lower-income communities would only exacerbate wealth inequality and home ownership. (Erik Sherman)
