Proposed update to Community Reinvestment Act could support neighborhood recovery

The Community Reinvestment Act (CRA) is a U.S. federal law designed to encourage commercial banks and savings associations to help meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods. Congress passed the Act in 1977 to reduce discriminatory credit practices against low-income neighborhoods, a practice known as redlining.

Historically, the idea of CRA and its required activities really centered around ensuring that available credit and general banking opportunities went unimpeded in communities in which they operate, including low-and moderate-income (LMI) neighborhoods. The association between CRA and CRA activities and community blight was not a consideration in the original language from 1977.

The national housing crisis and recession introduced us to terms like “zombie foreclosures” (properties that sit vacant and abandoned with inability to identify owner or responsible party). The housing crisis led to a significant increase in foreclosures and bankruptcies, causing great concern for neighboring properties and municipal leaders.

While the original intent and need for the CRA existed, there was an even more pressing need. Communities were faced with significant increases of vacant and abandoned pre-foreclosure and REO (bank-owned) properties. The numbers kept on rising even with concerted collaborative efforts to stem the flow through greater foreclosure counseling and loss mitigation tools. Despite the additional tools, organizations and resources working to reduce foreclosures and vacancy, the negative impact on many communities was immense. Communities needed banks to take accountability for the well documented causes for the foreclosure crises.

I may not have a crystal ball, but I do have a good memory, and history does repeat itself.

There is perhaps one option and now may be the best time to implement it, a proposal drafted at the height of the crisis back in 2010. Federal regulators recently announced proposed significant changes to the Community Reinvestment Act and is seeking public comment through August 5, 2022. The changes look to offer detailed guidelines and clearly defined public benchmarks for evaluation, while allowing smaller banks to continue operating under the former rules.

These are the first significant changes in 25 years. With CRA undergoing an update to language, now is the time to bridge gaps and build policy to curb negative impacts to communities should there be a surge in foreclosures and vacant properties in the future.

I have always been a believer in not re-inventing the wheel. In 2010, researchers at the Federal Reserve Bank of Cleveland put forth a proposal to modify the CRA rules to increase banks’ incentives to provide community groups with loans, services and investments that support neighborhood recovery efforts.

Banks would still need to fulfill a certain number of lending requirements, but they could amass extra points, a clear incentive, for lessening the vacancy and abandonment problem.

At the time, the proposal recommended regulators adopt several changes until the stock of foreclosed properties in the nation no longer exceeds a predetermined threshold. Just as critical, the proposal also included the recommendation to return these changes back into effect if the foreclosure threshold is exceeded in the future. Among the recommendations:

• Provide CRA consideration under the investment test for REO dispositions (REO donations or sales to qualified community development organizations) outside a bank’s assessment area as long as the investment needs of the assessment area are satisfactorily met.
• Provide CRA consideration under the service test for the provision of technical assistance to qualified community development organizations in developing guidelines and standards for REO acquisition and rehabilitation programs outside the assessment area as long as the service needs of the assessment area are satisfactorily met.
• Provide CRA consideration under the lending test for community development loans to qualified community development organizations engaged in REO rehabilitation programs outside the assessment area as long as the credit needs of the assessment area are satisfactorily met.
• Redistribute the weight of the lending, investment and service tests to emphasize investment and service activities. Lending should still be an important component, but an intensified focus on investment and service activities will address the immediate needs for community stabilization and longer-term reinvestment.

Soon after the regulators announcement of the proposed significant changes to the CRA, the White House announced their Housing Supply Action Plan. The stated goal is “to ease the burden of housing costs over time, by boosting the supply of quality housing in every community.” The plan includes “legislative and administrative actions that will help close America’s housing supply shortfall in five years, starting with the creation and preservation of hundreds of thousands of affordable housing units in the next three years.”

Included in the Housing Supply Action Plan are strategies to direct REO properties to owner-occupants and mission-driven entities and away from large investors. An aspect included in the Federal Reserve Bank of Cleveland proposal. Here too, an opportunity exists to incentivize banking entities to deliver what a community needs—homeowners and owner occupied properties.

While the original intent of the CRA should always be in the forefront, updating CRA regulations to bridge gaps and consider lessons learned during the foreclosure crisis should also be of top priority. Learning from the past is critical to mitigating negative consequences in the future. The regulators should re-visit the 2010 proposal and give it strong consideration.

Furthermore, the housing needs of Americans are changing in respect to location, amount to spend and type of home, as evidenced with the President’s proposal. Allowing communities and banks flexibility to extend financing to meet the new needs of homeowners and communities will certainly reduce the vacant and abandoned properties in many communities across the nation.

Michael Halpern is president of MuniReg LLC an administrator of registration programs for municipal governments. Prior to founding MuniReg, he spent 18 years at Safeguard Properties, the nation’s largest mortgage field services company, where he served as director of community initiatives. Halpern is a well-known expert in the various aspects of “zombie foreclosures,” abandoned properties and neighborhood blight, and has presented at more than 20 different state code enforcement association events along with presentations to national organizations like National League of Cities, National Housing Conference, Center for Community Progress and the American Association of Code Enforcement.