Congress has an opportunity to spur job creation and recovery from the foreclosure crisis -- and at little cost to the taxpayer.
How is this possible? The American Community Investment Reform Act of 2010 (H.R. 6334), introduced last week by Luis Gutierrez (D-IL), would promote safe, sound, and sustainable lending to all communities by updating the Community Reinvestment Act (CRA). CRA, originally passed in 1977, incentivizes banks to meet the basic banking needs of communities through safe and sound financial products where they have branches, including low- and moderate-income communities.
This obligation to serve creditworthy low- and modest-income persons and communities prevented the economic downturn from being worse than it could have been. By incentivizing mainstream lenders to serve these neighborhoods with sound loans, it helped curb discrimination and mitigate the effects of predatory loans from non-bank lenders not covered by CRA. Most importantly, it proved that the type of loan product often correlated with whether or not a borrower would default. A responsible loan often amounts to a responsible borrower.
CRA's effectiveness has diminished over the years as the financial landscape has changed, however, and the proposed changes could not have come at a better time. Communities hit hardest by the recession need sound investment. These improvements will prevent CRA from becoming antiquated and ensure that it can respond to the acute challenges brought on by the crisis. While modernizing CRA will take time, today's initial proposal is encouraging and includes significant advances in sound lending to underserved families. The National Council of La Raza and Woodstock Institute believe there are three particularly standout additions:
• CRA would require non-bank financial institutions to serve the needs of all communities where they do business. The vast majority of the risky high-cost loans that started the foreclosure crisis were made by non-bank lenders with no obligation to judiciously serve the credit needs of their communities. The American Community Investment Reform Act would extend CRA to independent mortgage lenders, bank affiliates and subsidiaries, and securities companies, creating an obligation to invest responsibly in the communities where they make money. Woodstock Institute has advocated for expansion of CRA's scope for years.
• CRA would encourage investment in minority-owned, women-owned, or community development financial institutions. Earlier this year, NCLR proposed that CRA-covered institutions receive credit for making responsible investments in institutions with special expertise in offering sound lending to low- and moderate-income communities. This new provision invites banks and finance companies to experiment with innovative and sound practices, including new delivery channels, underwriting criteria, product development, and community projects.
• CRA-covered lenders would invest in revitalizing or stabilizing low- or moderate-income geographies, designated disaster areas, and underserved rural areas. CRA could play an important role in shortening recovery time after a disaster, saving entire neighborhoods. This provision would extend CRA's reach to enable nontraditional borrowers, including many Latinos, to gain services and benefit directly from investments made by large mainstream banks that might otherwise have left the community underserved.
CRA has a 30-year track record of success and, thanks to these proposed provisions, it will evolve with the needs of the new economy. CRA will extend its influence and continue to direct mainstream banks to underserved communities to ensure that families are not excluded from a fair lending market. By generating more models of affordable lending tools, CRA will continue to serve the public interest and help revive neighborhoods suffering from economic fallout. Contact your representative and ask them to support H.R. 6334.