For release on delivery
3:00 p.m. EDT
October 20, 2020
Modernizing and Strengthening CRA Regulations:
A Conversation with the Housing Community
Remarks by
Lael Brainard
Member
Board of Governors of the Federal Reserve System
at the
National Housing Conference
National Advisory Council Meeting
October 20, 2020
I want to thank David Dworkin for inviting me to participate in this discussion. I
am pleased to be with you to talk about Community Reinvestment Act (CRA)
modernization and how this process can help address the housing challenges facing
minority and low- and moderate-income (LMI) communities around the country.1 The
National Housing Conference (NHC) is an important voice in housing and community
development policy, so I look forward to hearing from you.
During the mortgage foreclosure crisis, many families around the country suffered
the devastating loss of their home through no fault of their own, and homeownership
rates have not recovered to pre-crisis levels for the affected groups. Now, the COVID-19
pandemic is raising a new set of housing challenges for renters and the rental market.
The current crisis is hitting LMI households with limited financial resources the hardest,
and this is especially true for Black and Latinx households. Data from the Census
Household Pulse Survey indicate that 25 percent of Black renters and 22 percent of
Hispanic renters were behind on their rent payments as of September, along with 12
percent of White renters.2 Among homeowners, Black and Hispanic households have
been "significantly more likely to miss or defer monthly mortgage payments and
experience uncertainty about making next month's payment than white households"
during the pandemic.3
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Coronavirus Aid, Relief, and Economic Security (CARES) Act emergency
payments and supplemental unemployment benefits provided vital support to households
in the initial stages of the crisis, and the mortgage forbearance period of up to 360 days in
the Act and eviction moratoriums at the federal, state, and local level have provided vital
stop-gap stability for many families. There is growing concern about what will happen to
individuals who may be behind on their rent or mortgage payments as a result of job loss
or reduced hours when eviction moratoriums and mortgage forbearance programs come
to an end, especially given uncertainty about whether there will be further fiscal support.
The housing challenges resulting from the COVID-19 pandemic are layered on
top of existing challenges in both the homeownership and rental markets. Affordable
housing is essential to providing low-income households the stability necessary to engage
in employment and schooling, provide for essential needs, and accumulate some financial
cushion for emergencies. However, the need for affordable housing has grown at a faster
pace than the supply.4 With limited supply of lots and other challenges, new construction
in many places has been oriented to higher-end units, leaving more limited supply for
households with lower incomes, especially in higher cost cities. Many households have
been unable to purchase a home since the last financial crisis due to a confluence of
4
Joint Center for Housing Studies, State of the Nation's Housing 2019 (stating "[j]ust as the recent housing
downturn was longer and deeper than any other since the Great Depression, the residential construction
rebound has been slower. Since reaching bottom in 2011 at just 633,000 new units, additions to the housing
stock have grown at an average annual rate of just 10 percent. Despite these steady gains, completions and
placements totaled only 1.2 million units last year-the lowest annual production, excluding 2008-2018,
going back to 1982... according to Joint Center for Housing Studies estimates, annual construction should
now be on the order of 1.5 million units, or about 260,000 higher than in 2018."),
https://www.jchs.harvard.edu/sites/default/files/reports/files/Harvard_JCHS_State_of_the_Nations_Housin
g_2019%20%281%29.pdf.
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factors, including higher home prices and stricter lending standards.5 For those who have
purchased a home, higher home prices have translated into higher debt levels relative to
household income.
For renters, available subsidies or programs for affordable housing have fallen
short of the need, particularly in higher cost cities, while new higher-end rental housing
has increased significantly since the financial crisis. The high cost of renting leaves
many families paying a higher share of their income for housing. American Community
Survey data from 2019 show that 45 percent of renter households spend more than 30
percent of their monthly income on rent.6 While 22 percent of renters pay more than half
of their income toward rent, this figure jumps to nearly 38 percent for renters earning
below $50,000.7 This leaves families with little to no room to save for emergencies, such
as the COVID-19 pandemic.
This growing shortage underscores the importance of the incentives provided by
the CRA for the production and rehabilitation of affordable housing. With the demand for
affordable units significantly exceeding supply, it is essential to strengthen the incentives
for these loans and investments as part of CRA modernization.
Increasing access to affordable housing is critical to creating opportunities for
homeownership for LMI households and with it the chance to build wealth through home
5
See Elliot Anenberg, Aurel Hizmo, Edward Kung, and Raven Molloy, "Measuring mortgage credit
availability: A frontier estimation approach," Journal of Applied Economics, 34(6), 865-882; Laurie
Goodman, Jun Zhu, Taz George, "Four million mortgage loans missing from 2009 to 2013 due to tight
credit standards," Urban Wire: Housing and Housing Finance (blog), Urban Institute, April 2, 2015,
https://www.urban.org/urban-wire/four-million-mortgage-loans-missing-2009-2013-due-tight-creditstandards.
6
United States Census Bureau, American Community Survey (2019 ACS 1-year estimates, Table:
B25074),
https://data.census.gov/cedsci/all?q=ACS%20Table%20B25074,%201year%20data%20for%202019.
7
See United States Census Bureau, American Community Survey in note 6.
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equity. Here too, CRA plays a role, not only in providing incentives for the provision of
affordable housing, but also in encouraging access to credit for homeownership for LMI
households and communities. Indeed, mortgage lending has long been at the center of
evaluating CRA performance.
The challenges facing LMI and minority renters and would-be homeowners
underscore the importance of getting CRA modernization right. The Federal Reserve
Board unanimously voted to approve an Advance Notice of Proposed Rulemaking
(ANPR) about CRA modernization on September 21, 2020.8 The ANPR was published
yesterday in the Federal Register, and the comment period will end on February 16,
2021.9 By providing a 120-day comment period, we hope to receive comments from a
wide range of stakeholders and build on the already robust feedback that informed the
development of the ANPR.
Throughout this process, NHC has provided the Federal Reserve with valuable
insights into the unique role and needs of affordable housing providers. Your members
support community development projects in communities throughout the country, and we
have benefited from the engagement of NHC and its members both in the form of
detailed comment letters and through meetings to discuss different aspects of CRA
reform.
The CRA is a critical law, enacted along with other complementary federal civil
rights laws during the late 1960s and 1970s. The intent of these laws was to address
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redlining and systemic inequities in access to credit and other financial services for LMI
and minority communities. The core purpose of CRA remains as important as ever,
especially given the national conversation we are having about racial equity in our
society and the disproportionate impact that COVID-19 is having on LMI and minority
communities.
Even with these critical laws, the wealth gap remains stubbornly wide.10 The
Survey of Consumer Finances for 2019 found that the typical White family has eight
times the wealth of the typical Black family.11 For many American families,
homeownership is the single most important component of their wealth. In 2019, the
homeownership rate for Black households was 42.1 percent, as compared to the 73.3
percent for White households.12 This homeownership gap of 31.2 percent is 3.1
percentage points wider than a decade ago.
The Board's ANPR seeks to advance the law's core purpose of addressing
unequal access to credit for LMI and minority communities and disinvestment in
underserved communities. A modernized CRA should help move the needle on credit
access, wealth building, and the availability of community development financing. This
includes strengthening the regulations to ensure that a wide range of low-income and
minority banking needs are being met. It also includes promoting financial inclusion by
proposing incentives for further bank investments in Minority Depository Institutions,
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Community Development Financial Institutions (CDFIs), and community development
activity in designated areas of need outside of assessment areas, such as Indian Country.
The ANPR also seeks to provide greater certainty, tailor regulations based on
bank size and business model, and minimize burden. For example, the ANPR introduces
a metrics-based approach that would separately evaluate retail lending and community
development financing activity. The use of standardized metrics would provide greater
clarity and transparency on how lending and investment activity is evaluated. These
proposed metrics would also use thresholds that are tailored to local market conditions,
while also retaining a focus on targeted performance context factors.
Lastly, we hope the ANPR will provide a foundation for the agencies to converge
on a consistent approach that has broad support among stakeholders. Stakeholders,
including the NHC, have expressed strong support for the agencies to work together to
modernize CRA. By reflecting stakeholder views and providing a long public comment
period, we believe that the ANPR provides the basis for the agencies to establish a
consistent approach that has broad support.
Before concluding, I want to highlight a few proposals in the ANPR that have
particular relevance to affordable housing. First, the ANPR proposes two separate tests
for evaluating the CRA performance of large retail banks-a Retail Test and a
Community Development Test-in response to the overwhelming stakeholder feedback
we heard about the vital importance of both retail and community development activities.
In the ANPR, each of these tests would have a subtest that focuses on financing and a
subtest that focuses on services, resulting in four overall subtests for large retail banks.
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Second, the ANPR proposes evaluating a bank's retail lending in its major
product lines using metrics that measure the number of loans a bank makes, not the
dollar-value of these loans. As a result, a larger mortgage loan would count the same as a
smaller-dollar mortgage under the proposed metrics. We think this is important to avoid
providing incentives to serve borrowers seeking to finance higher-priced homes at the
expense of lower-income borrowers seeking finance for lower-priced homes.
Third, the ANPR proposes combining consideration of community development
loans and qualified investments, including originations and purchases, into one metrics-
based Community Development Financing Subtest. We believe this could encourage the
provision of patient capital because both new originations and those already on the
balance sheet would be included in the evaluation metric.
Fourth, stakeholders have emphasized the critical importance of CRA-motivated
capital as a source of funding for affordable rental and single-family housing for LMI
populations. Given the significant unmet need for affordable housing, the ANPR
provides an opportunity to carefully reconsider how we define affordable housing in the
CRA regulations and how we can strengthen existing provisions for the creation and
preservation of affordable housing, both rental and owner-occupied.
The ANPR proposes new regulatory language that would specify that a housing
unit would be considered affordable if it is purchased, developed, rehabilitated, or
preserved in conjunction with a federal, state, local, or tribal government affordable
housing program or subsidy, with the bona fide intent of providing affordable housing.
This definition is intended to capture a wide variety of subsidies, including tax credit
programs (such as the Low-Income Housing Tax Credit), federal government direct
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subsidies, and state and local government direct subsidies for the production or
preservation of affordable housing. These programs could be for rental housing or
homeownership. The suggested language is also intended to capture programs that do not
provide monetary subsidies, but that have the express intent of producing or preserving
affordable housing, such as a loan in support of a land bank program.
In addition, many stakeholders have noted the importance of preserving
unsubsidized housing that is affordable to LMI households and ensuring units retain their
affordability in gentrifying areas. In response to these concerns, the ANPR seeks to
clarify the criteria under which banks can receive CRA consideration for investing in
unsubsidized, or naturally-occurring, affordable housing. We are also considering other
options to ensure that housing-related community development financing activities
maintain long-term affordability, limit displacement, and encourage affordable housing
located in all communities. As experts in this field, we look forward to receiving your
feedback on what specific data sources and criteria we should consider to promote the
preservation of naturally-occurring, affordable housing.
Fifth, the ANPR seeks feedback on the appropriate CRA treatment of mortgage-
backed securities (MBS) that are backed by loans that finance subsidized multifamily
rental housing, loans for mixed-income housing that includes affordable housing for LMI
families, or loans to LMI borrowers. While issuance of qualifying MBS can improve
liquidity, and thereby increase capacity for lenders that make home mortgage loans to
LMI borrowers, some stakeholders have expressed concern that MBS purchases may be
undertaken in lieu of other more impactful community development financing activities
that may require greater effort.
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Finally, the ANPR seeks feedback on extending to CDFIs the status that is
extended to Minority Depository Institutions, women-owned financial institutions, and
low-income credit unions. Such an approach would effectively give banks CRA
consideration for loans, investments, or services in conjunction with a CDFI anywhere in
the country. Additionally, the ANPR discusses granting automatic CRA community
development consideration for qualified activities in conjunction with U.S. Department of
the Treasury-certified CDFIs for activities in a bank's assessment area(s).
We hope that you will provide us with feedback on how to modernize the CRA in
a way that supports affordable housing and promotes housing-related credit and
investments to LMI and minority individuals and communities. We thank you for your
engagement and look forward to hearing more from you and your members through the
rulemaking process.