Op-Ed: Fearing Proposed Changes to Community Lending Regulations Would Re-Legalize Redlining

Staci Berger, John E. Restrepo | January 28, 2020 | Opinion
Trump administration’s revamp of Community Reinvestment Act’s rules would harm neighborhoods and investment in New Jersey
John E. Restrepo and Staci Berger

Redlining and discriminatory lending practices continue to stifle our most vulnerable communities, and yet the Trump administration wants to weaken federal regulations even more.

It is not surprising that this administration, which has already moved to make qualifying for basic necessities like food stamps and housing vouchers as well as data collection to prevent discrimination in housing more difficult, wants to loosen these rules. Our elected officials must oppose these changes and ensure that the Community Reinvestment Act (CRA) remains a strong tool in the hands of nonprofits and neighborhood leaders.

Discrimination in lending is still widespread and devastating for New Jersey families and communities. Despite the fact that minority-owned firms have led a significant portion of the nation’s small business growth, 79% of it from 2007-2017, these same firms have a much harder time accessing small business loans than their white counterparts.

CRA is one of the few mechanisms available to encourage and monitor lending to low- and moderate-income communities, businesses and individuals. This law, passed in 1977, requires banks to provide loans, investments, and services to low- and moderate-income people and places in areas where they have branches.

Adopted in response to redlining, CRA outlawed the systematic, racist practice of government agencies and banks literally using a red pen on a map to mark off low-income and neighborhoods of color where banks wanted to forego lending and investing. More than 40 years later, we can say with confidence that this law has made significant nationwide improvements in access to credit. CRA has fostered collaboration between lenders and community organizations, working together to make billions of dollars of loans and investments in underserved communities for affordable housing, small businesses, economic development, and community service facilities.

A new definition of affordable housing?

A Federal Reserve study found CRA agreements among stakeholders increased bank lending to minorities and low- and moderate-income borrowers by up to 20%. CRA has an incentive structure that can encourage banks to originate or purchase loans to underserved borrowers they would have otherwise considered too risky. While there were irresponsible lending practices that contributed to the Great Recession and the foreclosure crisis, CRA loans were not among them.

While CRA and other regulatory actions have made significant progress in addressing discriminatory lending practices, banks have nevertheless found ways to continue de facto redlining and our lower-income communities and residents of color continue to suffer. For example, minority-owned firms are already much less likely to be approved for small business loans than their white-owned counterparts.  When their loans do get approved, minority-owned businesses are more likely to receive lower amounts and higher interest rates.

The Trump administration’s proposed regulatory changes to CRA will harm community development and the investments made in our region. In the Trump proposal, “essential infrastructure” is one of the items added as an activity that would be eligible for banks to receive credit. Similarly, funding stadiums and other large-scale projects located in Opportunity Zones (some of which are currently under investigation) will also be eligible activities. There are other specific changes that concern us, including the changes to the definition of affordable housing to include middle-income housing, and even luxury housing, in high-cost areas.

The only reason the Trump administration wants to change CRA — despite its claim that the new rules will address online banking — is to allow financial entities that caused the Great Recession to be less accountable. It’s the same story with the same victims, just a new name. Trump is circumventing Congress by using the rule-making process, and we need our congressional leaders to hold him and his Cabinet accountable for this disastrous proposal.

Members of the Housing and Community Development Network of New Jersey and our partner organizations continue to negotiate agreements with financial entities that commit billions of dollars in dedicated CRA spending here in the Garden State. Because of this, we strongly urge members of Congress, particularly those who serve on the House Financial Services Committee and the Senate Banking Committee, which oversee the CRA, to oppose Trump’s proposal that will gut CRA.

CRA has a proven track record of promoting fairer and more equitable distribution of banking services in all of our neighborhoods. We cannot forget that. Let’s make sure our lawmakers remember too.