Expanding CRA Would Boost Ownership Society

Although the CRA applies only to depository institutions, debates over this long-contested statute have involved the property-casualty insurance industry and current discussions may foreshadow more concrete implications for insurers.

Thanks in part to the 1999 Financial Services Modernization Act, insurers are getting much more involved in mortgage lending, with some creating their own banking arms that are covered by this law.

Consumer advocates have long argued that the CRA should be applied to all mortgage lenderscredit unions, mortgage bankers and brokers, insurersand even some bankers concur to "level the playing field." Insurers may well be directly affected by future changes in the law.

Unfortunately, recent regulatory changes portend problematic consequences for communities targeted by the lawand, possibly, for the entire metropolitan regions of which they are a part.

The CRA has triggered $4 trillion in loans and investments for low- and moderate-income communities, according to the National Community Reinvestment Coalition, which monitors banking policies and practices.

Between 1993 and 2002, (the CRA was most vigorously enforced in the mid-to-late 1990s), loans to African-Americans increased by 79 percent, to Hispanics by 185 percent and to whites by 30 percent. At the same time, loans to low- and moderate-income borrowers grew by 90 percent and to middle-income buyers by 51 percent.

Researchers at Harvard, the Federal Reserve Board, the Treasury Department and various academic institutions report that CRA has worked for lenders and communities alike. Traditionally underserved neighborhoods are getting more loans, these loans are profitable, and CRA has been instrumental in leveraging them.

In addition, several urban researchers have found that suburban and regional growth is linked to the health of the central cities. Where city/suburban income inequalities are greatest, regional economic growth has been slowest.

Our own research has found that one outcome of such reinvestment has been a reduction of crime, which should be music to the ears of homeowner and auto insures.

In a case study of Seattle, Wash., we found that each $10,000 increase in a neighborhoods average mortgage loan amount led to a reduction of 1.25 violent crimes per 1,000 residents even after accounting for poverty, unemployment, population turnover and other factors commonly associated with crime. For a typical Seattle neighborhood this translates into a reduction of 6.25 violent crimes each year, and the effects were even stronger in our analysis of lenders covered by the CRA.

But the law is under attack. Initially CRA required federal financial regulatory agencies to examine the lending, investment and service activities of all covered institutions with assets over $250 million. Smaller lenders had a more streamlined review focused just on their lending activity. However, under President Bush the Office of Thrift Supervision raised this threshold to $1 billion for all thrift institutions.

In addition, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Federal Reserve Board issued proposed rules in mid-February that would dilute enforcement for lenders they supervise with assets between $250 million and $1 billion. For example, these lenders would be subject to a two-part lending and development test rather than the current lending, services and investment tests, and they would no longer have to publicly report where they make small-business or community development loans.

In a more sweeping rollback, OTS subsequently eliminated the mandatory investment and service tests, making these voluntary for large lenders. These changes threaten to cut the number of branch banks in low- and moderate-income communities, reduce financing for affordable housing development, undercut a range of housing and business development reinvestment activities, and make city streets more dangerous.

Particularly at a time when predatory lending has emerged as the most critical consumer finance issue and financial wrongdoing is surfacing across a range of financial service providersincluding several insurance industry players, such as Marsh & McLennan, Aon and AIGmore transparency rather than less is in order. CRA should be strengthened, not weakened.

For example, as several consumer groups and some financial service providers have long suggested, the law should cover all mortgage lendersinsurers, mortgage brokers, securities firmsand not just depository institutions.

Lender CRA evaluations should be downgraded for those engaged in predatory lending. Such practices include charging far more in fees than can be justified by the risk, lending based on the value of the property with no regard to the borrowers ability to repay (which often leads to foreclosure and loss of a familys life savings), targeting minority and elderly households (as is currently the case) who are most vulnerable to high-pressure sales tactics, and other exploitative tactics.

In addition, CRA-like requirements should be established for non-lending activities, including insurance underwriting, investment and other financial services as was proposed in the Community Reinvestment Act that was introduced in the previous session of Congress.

The Bush Administrations attacks on cities and distressed rural communities undercut efforts to achieve the "ownership society" it purports to endorse. CRA has been a vital tool for creating and increasing access to capital for many who have long been locked out of the economic mainstream. Expanding its reach serves the vital interests of all of us.

Gregory D. Squires and Charis E. Kubrin teach in the Sociology Department at George Washington University in Washington, D.C.

Reproduced from National Underwriter Edition, April 1, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.