Mortgage

Three keys to profitable CRA reform

The Community Reinvestment Act is about to undergo its first significant modification since 1995. A notice of proposed rulemaking was recently issued by the three federal agencies responsible for CRA enforcement — the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp. and the Federal Reserve.

Here are three issues that should be addressed in the new rule. Some of these issues have been noted and emphasized by some observers. Others have been virtually ignored. But to take full advantage of the opportunities that are presented by this rulemaking process, all need to be highlighted.

Houses in Westchester County in Larchmont, New York, U.S., on Monday, July 5, 2021. Contracts to buy suburban New York homes have scaled back from their frenzied pace at the height of the pandemic. Westchester County saw 20% more contracts last month than in June 2020.

Stephanie Keith/Bloomberg

First, as many have long argued, race must become a more central focus to maximize the impact of the CRA. The notice of proposed rulemaking that was released suggests steps in this direction, but more should be done. Service to nonwhite consumers and predominantly nonwhite communities should be a more explicit metric in determining CRA ratings.

While there are legal and political challenges to explicit race-based policies, more assertive actions can be taken that are consistent with the equal protection clause of the Constitution and other prohibitions against racial discrimination.

For example, courts have ruled that any race-conscious remedy must meet the “strict scrutiny” test, meaning that there must be a compelling interest and the policy must be narrowly tailored to meet that interest. Eradicating longstanding discrimination in mortgage markets where it continues to be documented would constitute such a compelling interest and flexible racial targets as part of CRA exams would be narrowly focused on those practices.

Second, the CRA needs to be expanded to cover nondepository mortgage bankers who now originate more than half of all mortgage loans. This may require legislation. If so, this should be noted and the three major CRA enforcement agencies should detail steps they will take to secure passage of the appropriate legislation. Calling for more detailed, transparent and effective CRA rules that apply only to those financial services firms that originate a declining share of loans, now less than half, will not lead to stronger and more effective CRA compliance and enforcement.

Third, the new rules should address the issue of appraisal bias that has, appropriately, attracted much attention in recent years.

Mortgage lenders should be encouraged to utilize appraisers who have a track record of serving diverse communities. Several recent reports have documented that appraisals for nonwhite sellers and for properties in diverse communities are more likely to understate property values relative to actual sale price than is the case for white sellers and communities.

The CRA update provides an opportunity for these agencies to significantly contribute to the amelioration of that bias. The new rules should call for a HMDA-like disclosure requirement for appraisal firms.

Such reports could include information on the number and share of appraisal firms provided by census tract, the number where appraised value is less than the contract sale price, and related information. This would enable local actors, such as cities, counties, hospitals, universities and nonprofits to identify and utilize preferred appraisal firms similar to the way they create lists of minority-owned, women-owned and veteran-owned contractors. A July 27 report issued by the Philadelphia Home Appraisal Bias Task Force calls expressly for such action in that city and cities around the nation.

CRA reform has been a long time coming. It is likely there will not be another opportunity to address any shortcomings for perhaps another 27 years. Now is the time to create the rules that will maximize the intended impact of this law.

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