Updating The Community Reinvestment Act Is Fraught With Disagreement
The Trump administration is engaged in an ongoing effort to roll back or eliminate a long list of regulations...some that are new or pending.
And some that have been around for a long time.
Take the Community Reinvestment Act. It was enacted in 1977 to stamp out redlining by banks. And banks must pay close attention to it when deciding where to locate, whether opening new branches or closing old ones.
Banks and community groups agree the 40-year-old law needs to be modernized, but they don't agree on how to do it.
A lot has changed since the Community Reinvestment Act was last updated. Like your phone. You can now deposit money with it, make transfers, contest transactions.
Wayne Hood, general counsel for SouthEast Bank in Tennessee, says physical banks aren’t as important as they used to be.
“There are so many technologies that are completely separate and not dependent on the branch network, and yet CRA continues to focus on where are your branches.”
CRA, the Community Reinvestment Act, says that if banks are federally insured, they can’t just cherry pick the rich customers. They have to serve the entire community.
The community is defined as the area around a bank’s brick and mortar branches. Now, there are banks that don’t have branches, like online banks, and so-called limited purpose banks. Hood’s bank specializes in student loans.
“Our student loan customers would be scattered throughout the country, and that’s one reason why CRA is a challenge for us.”
Regulators are currently updating the CRA to focus less on how many branches a given bank has in a certain area, and more on how that bank serves its communities. Some of these “modernizations,” however, alarm community groups. They worry that if banks winnow their physical presence, people with low and moderate incomes will be excluded from the financial system.
“So we are going to drive around for a little while longer, and we won’t see bank branches.”
Rashmi Rangan runs the Delaware Community Reinvestment Action Council. Delaware is interesting because the state’s corporate laws encourage banks to put their headquarters there. But Rangan says the low-income parts of the state are bank deserts, places where people end up using more expensive services like check cashing or payday loans. And Rangan says if banks escape the CRA’s existing requirements, there will be more bank deserts and more poor people will be excluded from the financial system.
In fact, she says, banks should go in the opposite direction if they really want to help the community. That’s what she’s doing. A few years ago she started Stepping Stones Credit Union. One of their “branches” is a cargo van.
“This is where we open accounts. We have some security stuff up there.”
They drive the van to where the people are.
“Banking and money is all about trust. And you have to be seen.”
Rangan and other community groups worry that the Trump administration’s push to modernize the CRA will give banks an excuse to only serve rich people.
For their part, regulators say community groups are focused too much on hanging on to physical branches and are missing larger opportunities in the process.
“Pennywise and pound foolish,” according to Jo Ann Barefoot, a former bank regulator and current regulatory consultant. She says the CRA can do more than bank branches to serve low- and moderate-income communities.
“We could be giving banks credit for teaching people in moment. Having a great app that asks “what if” questions. What if I paid off faster or what if I had a smaller down payment.”
Barefoot says the Community Reinvestment Act could be used to encourage banks to develop cheaper short-term loans integrated into bank accounts. Or even smart bank accounts that shuffle bills around so struggling consumers can avoid overdraft fees.