Mortgage

With the Democrats in energy, will the CRA lengthen to non-banks?

WASHINGTON – The election of President Biden and the turnover in the management of the Bundesbank agencies not only mean a new regulatory approach for the implementation of the Community Reinvestment Act. It could shed a brighter light on Congress, which could potentially extend the law to non-banks.

A legislative effort by Democrats to subdue fintechs and other unregulated institutions that provide banking services for CRA audits would be an uphill battle, and some observers say lawmakers are unlikely to focus on such a proposal anytime soon.

Still, Biden supported a CRA expansion during the presidential campaign to cover non-bank mortgage lenders and insurance companies. A policy brief released by its campaign last February stated that the CRA "is doing little right now to ensure that" fintechs "and non-bank lenders provide responsible access to all members of the community."

Just as banking regulators are weighing fundamental changes in the CRA review process, industry officials and community lawyers have long advocated extending CRA standards to financial institutions other than banks. And some Democrats like Senator Elizabeth Warren, D-Mass., Have advocated legislative approaches to expand the CRA to a wider range of businesses.

"It is time to examine how best to demonstrate that these companies serve their entire community," said Krista Shonk, vice president of regulatory and regulatory compliance for the American Bankers Association.

Others say financial services companies, who generally receive government benefits, should be held accountable for their investments in their respective communities.

Jesse Van Tol, CEO of the National Community Reinvestment Coalition, said it was feasible for Biden and his Democratic allies in Congress to pursue some sort of legislative package that focuses on eradicating racial inequalities, and for CRA-like obligations to be included for non-bank financial firms could be merged with other initiatives.

"I think almost every financial services company is the product, or in some way the beneficiary, of the government infrastructure that regulates it," said Van Tol.

Just as the government can point to deposit insurance and federal charters as exclusive government benefits to banks that warrant greater responsibility, the trillions of dollars the government is distributing to large corporations after the pandemic could come with similar consequences.

"There is much evidence that many financial markets, particularly mortgage markets, are largely government-backed," said Van Tol. "That means there is a reason to charge for it."

Biden's campaign said that the then-candidate would “extend the Community Reinvestment Act to mortgage and insurance companies to require financial services institutions to make a statement showing their commitment to the public interest, and most importantly, fill in loopholes enable these institutions to avoid borrowing and investing in any of the communities they serve. "

However, with everything else on the political agenda – including tackling the brutal economic impact of the pandemic – some are not holding their breath that a rating agency law review is about to take place.

"Realistically, I don't think it will happen in the next few years," said Van Tol.

A legislative focus on credit rating agencies could be combined with broader policy questions on fintech regulation, including whether states or the federal government are better placed to charter and oversee non-banks that increasingly want access to the banking system.

But despite the Democrats' victories who put them in control of Congress, the Senate has razor-thin room with Vice President Kamala Harris holding the tie.

"You have a very tight margin when every single Democrat has to vote for something," said Van Tol.

And some Republican support is required for standalone bills that Filibuster can block. Analysts also doubt that a CRA bill could be attached to any must-pass budget bills that only require a Senate majority.

"In an ideal world, Congress would focus on the fundamental friction with federalism and fintech, which would involve a careful consideration of everything from charter to rating agency requirements," said Isaac Boltansky, director of policy research at Compass Point.

"Needless to say, we don't live in an ideal world and I see the legislation bearishly through regular order," he added.

Since the rating agency was passed in 1977, banks have been required to provide local communities with financial services with “low to moderate income,” a technical term based on census data. However, over the past few decades, banks have lost significant market share in financial services to non-banks, which proponents say has reduced the impact of the rating agency across the country.

Both times, the law was sensibly reformed – first in the 1990s and most recently under the Trump administration. Calls followed to expand the law's obligations to non-banks, including credit unions, mortgage lenders and, most recently, fintechs.

Analysts say the impact of such changes could be significant.

According to the Mortgage Bankers Association, the market share for mortgage origins among non-repository institutions increased from 24% to 58% between 2008 and 2019.

Between 1990 and 2018, the banking sector's share of 1-4 family mortgages fell, according to an analysis by Federal Deposit Insurance Corp. from 40% to 24%. Over the same period, banks' share of multi-family mortgages fell from 44% to 44% 33%, and that of consumer loans fell from 52% to 42%.

"We're talking about how the financial services market has developed and is still developing rapidly," said Shonk of the ABA. "We're not limited to the days of going to the local bank, and more and more assets are being held by non-banks of various kinds."

Boltansky said despite the national focus on eliminating racial inequalities that could affect rating agency empowerment, the still-simmering political divisions in Congress made legislation unlikely.

"The [Community Reinvestment Act] is clearly part of the broader conversation about economic justice, and we should expect headlines and proposals," said Boltanksy, "but I need to see a demonstrable thaw in our political discourse before I become optimistic about such a plan . " move forward.

Other challenges for expanding the rating agency are of a structural nature and go deeper than political will. According to analysts, the law, as it was written in 1977, is a piece of banking law that makes it difficult to simply drag other industries into it.

"The CRA is based on the concepts of deposits and bank branches," said Randy Benjenk, partner at Covington. “When Congress passed the rating agency, it was concerned that banks would take deposits from low-income to low-income communities without returning loans. But mortgage and insurance companies don't take deposits and don't have branches in the rating agency Sinn. "

"Without the concept of deposits, it's not clear how you would measure CRA commitments. You can create a regime that doesn't include these concepts or have a replacement, but you would be starting from scratch," said Benjenk.

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