For release on delivery
9:15 a.m. EDT
May 18, 2018
Keeping Community at the Heart of the Community Reinvestment Act
Remarks by
Lael Brainard
Member
Board of Governors of the Federal Reserve System
at the
Association of Neighborhood and Housing Development
Eighth Annual Community Development Conference
Build.Community.Power
New York, New York
May 18, 2018
I want to thank Ben Dulchin and the Association of Neighborhood and Housing
Development (ANHD) for inviting me to be here with you today. While New York is known
globally as a cultural hub that attracts the world to its doorstep, it is known locally as a city of
neighborhoods. Like other cities across this country, New York's future is bound to the vitality
of its neighborhoods as places to live, work, learn, play, worship, and invest.1
Neighborhoods have been the focus of ANHD's work for over 40 years. The
organization's success is a function of its unwavering focus on preserving and strengthening the
quality of life in low- and moderate-income neighborhoods across the five boroughs. The
mission of each of the members of ANHD is to strengthen these communities. Together, your
organizations are providing capacity building, advocacy, and services for the benefit of your
communities and the city as a whole.
Like many of the nation's metropolitan areas, New York City has rebounded since the
recession and is thriving.2 That, however, has not been the experience for many. Many of the
city's residents have not fully recovered, and some have fallen further behind. Here, as
elsewhere in the country, there remain important gaps in economic opportunity.
Powerful research now demonstrates that persistent gaps in economic opportunity are
connected to the health of neighborhoods. The effects of place on opportunity can stretch from
one generation to the next. Raj Chetty and others have shown that upward mobility can vary
immensely by neighborhood even within the same metropolitan area. The longer a child lives in
a neighborhood of opportunity--a neighborhood that is racially integrated and has a strong
middle class, strong family structures, more social capital, and better schools--the more likely
that a child will do better than their parents economically in adulthood and navigating a path of
upward mobility.3
As I have noted previously, these disparities matter for growth and prosperity. If there
are large disparities in opportunity, such that enterprise, exertion, and investments reap lower
returns in some communities than others, then families and small businesses in these
communities will invest less in the future, and potential growth will fall short.4 Although there
are important implications at the national level for growth and prosperity, to the extent that the
roots of the disparities in opportunity and mobility lie in local communities, an important part of
the solution is likely to be investments in those communities.5
The Community Reinvestment Act
That one powerful insight--the importance of investment in communities--lies at the heart
of the Community Reinvestment Act (CRA). The CRA is one of the principal tools the Congress
has provided for improving investment and development in lower-income communities.
Implementing this law effectively is one of the important responsibilities of the banking agencies
in promoting strong outcomes locally that reverberate nationally. So let me turn to the role of the
CRA in supporting local efforts to strengthen low- and moderate-income neighborhoods and
offer my preliminary thoughts on the opportunity before us to make the regulations even more
effective in this regard.
The CRA was enacted in 1977 to combat the legacy of redlining--literally, the
demarcation in red ink of neighborhoods deemed too risky for lending. Federal lending agencies
used these redlined maps in deciding where to guarantee mortgage loans.6 Not surprisingly, the
resulting deprivation of credit stifled opportunity for the people living in these areas.
Through the CRA, Congress requires the federal banking agencies to encourage banks
and thrifts to help meet the credit needs of the communities they are chartered to serve, including
low- and moderate-income neighborhoods, consistent with safety and soundness. It requires the
Federal Reserve and other agencies to evaluate how well banking institutions help meet those
needs and to assign ratings to their performance.7 The CRA further requires the agencies to
make public both the ratings and their written evaluations of the banks' performance. This
transparency provides an incentive for banks to work with their communities to meet the needs
of low- and moderate-income members and provides important information to enable community
members to engage meaningfully with banks.
Research has demonstrated that the CRA has had a positive effect on low- and moderate-
income neighborhoods.8 The CRA is unique in that it puts decisionmaking about the
6
See http://news.nationalgeographic.com/2016/10/housing-discrimination-redlining-maps/ for details about how
maps created by the Home Owners' Loan Corporation in the 1930s were used to designate areas considered
hazardous for mortgage lending and influenced whether mortgage loans qualified for government guarantees from
the Federal Housing Administration. To view interactive historical maps, see
https://dsl.richmond.edu/panorama/redlining/#loc=10/44.1788/-84.8433&opacity=0.8.
7
See 12 U.S.C. § 2901; the ratings are Outstanding, Satisfactory, Needs to Improve, and Substantial
Noncompliance.
8
CRA-related mortgage loans had delinquency rates lower than the average across all 2006-vintage mortgages and
sharply lower than those of subprime loans; see Neil Bhutta, and Glenn B. Canner, "Mortgage Market Conditions
and Borrower Outcomes: Evidence from the 2012 HMDA Data and Matched HMDA-Credit Record Data," Federal
Reserve Bulletin 99 (November 2013). In addition, a study of mortgage loans originated between 2003 and 2006 as
part of a CRA targeted, low- to moderate-income homebuyer program found that they performed nearly as well as
community's needs and priorities in the hands of local stakeholders: financial institutions that
lend and invest, community organizations that deliver services and develop real estate, and state
and local governments that direct incentives and subsidies. The enactment of other laws around
the same time supported the CRA's success, including the Home Mortgage Disclosure Act,
which requires lenders to report the location of their home mortgage lending and the race and
income of borrowers.
Much has changed in the years since the CRA was enacted, including technology-driven
changes in the delivery of financial services, and it is high time to consider corresponding
improvements to the regulations. Both banks and community organizations have offered a
variety of suggestions for improving the CRA regulations and their implementation in the last
several years. We are undertaking discussions with the Office of the Comptroller of the
Currency and the Federal Deposit Insurance Corporation, with which we have traditionally
issued joint rulemakings on the CRA. The Federal Reserve has long been interested in engaging
in an interagency review of the CRA regulations, so we are pleased to participate in this process.
In addition, the Treasury Department recently completed an extensive outreach effort related to
modernizing the CRA regulations.
CRA is a vital tool to address the credit needs of low- and moderate-income
communities, and I believe the time is ripe for a refresh to make it even more relevant to today's
challenges. There are five principles that can help guide our efforts.
The Importance of Place
First, we should update the area in which the agencies assess a bank's CRA activities
while retaining the core focus on place. This is the most important aspect of refreshing the CRA,
and also the one that will require the most care. As our Federal Advisory Council noted, "...a
bank's ability to engage in meaningful community development efforts continues to require a
meaningful knowledge of and presence in local communities."9 A significant strength of CRA
evaluations is that a bank's performance is evaluated taking into account the demographics of its
communities, the types of housing and businesses they serve, and the other financial institutions
serving those communities.
The current regulations use branches and deposit-taking ATMs as a proxy for the
communities the bank serves because these were the primary mechanisms for delivering services
when the CRA was enacted and for many years subsequently. This reflected an environment
where interstate banking was not allowed, and physical branches were necessary for deposit
taking and lending. Today, changes in technology and consumer preferences have made it
possible for banks to serve customers far beyond their physical branches and deposit-taking
ATMs--via online and mobile platforms.
Even so, as much as technology has made banking transactions more convenient for
customers, it has not eliminated the need for branches. For large parts of the country, branches
and deposit-taking ATMs remain an important way that banks engage with a community.
Branches and ATMs are still necessary for depositing and withdrawing cash. Branches also
provide personal service and assistance to consumers and business customers. They provide a
presence for lenders to get to know borrowers and the communities in which they live, lend, and
invest. As our Community Advisory Council recently emphasized, "[f]or many rural and LMI
populations, bank branches remain critical for the provision of bank loans, investments, and
services."10
Recent studies measuring the impact of branch closures on credit availability in
neighborhoods demonstrate that branches still matter, particularly with respect to accessing small
business credit.11 The Federal Reserve Bank of New York found that access to small business
credit declines and the rates for small business loans increase as the distance between the bank
and the borrower grows.12 Similarly, the large majority of mortgage lending continues to be
located in one or more of a bank's delineated assessment areas--that is, near a physical branch.
This research also found that people in low-income census tracts were more than twice as
likely to live in a banking desert--an area without a branch within 10 miles--than those in higher-
income tracts.13 When they are cut off from mainstream banking institutions, some consumers
rely on more expensive alternatives that include payday loans, auto title loans, pawn shops, and
check cashing services.
Banks vary widely in terms of the types of services they offer and the mechanisms they
use for reaching their customers. On one end of the spectrum, many community banks still rely
10
Federal Reserve Board Community Advisory Council, Record of Meeting, May 4, 2018,
https://www.federalreserve.gov/aboutthefed/files/cac-20180504.pdf.
11
See Hoai-Luu Q. Nguyen, Do Bank Branches Still Matter? The Effect of Closings on Local Economic Outcomes,
October 2015. The reason is the information-intensive nature of the underwriting process. Even in areas with plenty
of bank branches, declines in small businesses lending because of the loss of the relationship between a small
business owner and their loan officer were significant. Once broken, the study found that those relationships take
years to replace. The impact of branch closures were found to be more severe in tracts with lower median income, a
higher fraction of minority households, and where firms were, on average, closer to their lending.
12Donald Morgan, Maxim Pinkovskiy, and Bryan Yang, "Banking Deserts, Branch Closings and Soft Information,"
Liberty Street Economics blog, March 7, 2015,
http://libertystreeteconomics.newyorkfed.org/2016/03/bankingdeserts-branch-closings-and-soft-information.html.
13
See, again, Morgan, Pinkovskiy, and Yang, March 7, 2015; between 2009 and 2014, the fraction of low-income
tracts that were also banking deserts increased 0.17 percentage points compared to a 0.06 percentage point increase
in higher-income tracts.
primarily on branches and ATMs to reach their customers, with mobile functionality offered
primarily to enhance the customer experience. In the middle of the spectrum, regional and
national banking organizations are using online and mobile app capabilities to attract and retain
customers well beyond their physical footprint. At the other end of the spectrum, online banks
employ business models that reach customers across much or all of America without relying on
branches. Although these online banks may provide the same retail products and services as a
traditional bank with a branch network, because they have only one location, they are evaluated
for CRA purposes in the area around that location, rather than in the many areas where they have
customers.
Still other banks offer a limited set of credit products or wholesale services. Take, for
instance, the example of Industrial Loan Companies (ILCs), which have CRA obligations as
state-chartered insured depository institutions. ILCs are owned by corporations rather than bank
holding companies and are typically chartered to provide credit cards or other forms of financing
related to their parent company's business. Many large ILCs are chartered in Utah and are
evaluated on their CRA performance in Salt Lake City, even though they lend nationally. The
result is a saturated market for community development lending and investment in Salt Lake
City. At the same time, other areas in Utah and beyond have important community development
opportunities that may go unmet. At a minimum, revised CRA regulations should allow banks
with this type of business model to expand CRA activities beyond the area surrounding its
branch so that the community and economic development needs of more underserved
communities can be met.
Branches are important vehicles for reaching small business customers and low-income
consumers, but they are not the only way. In considering ways to revise the CRA regulations,
the agencies should be thoughtful about how to make the areas in which we evaluate CRA
performance more meaningful to both banks and low- and moderate-income communities. For
community banks that rely on branches to serve their customers, the current assessment area
approach may need only small adjustments. For banks that serve their customers through a
variety of approaches, assessing their broader deposit-taking and loan-making footprint might
make sense. For large wholesale banks, it might make sense to evaluate CRA activity in a
broader area and to encourage them to spread their investments and services to underserved
areas.
The CRA regulations should be updated in a way that is appropriate for different business
models. To the extent that banks are able to serve the needs in low- and moderate-income
communities through additional channels, it is important they receive due consideration, while
CRA revisions should also continue to recognize the importance of sustaining branches in
communities where they are needed.
Opportunities in Underserved Areas
The second, and related, principle guiding our CRA refresh is that the regulations should
encourage banks to seek out opportunities in underserved areas. As I noted earlier, the CRA
recognizes that banks make a unique contribution. Banks are able to make targeted and valuable
investments because of their stake in the local community and their knowledge of it. As a long-
term stakeholder in a community, a bank's efforts to finance housing, small businesses, and
community services are not just good business short-term, but also good investments long-term
as residents improve their economic standing and use more banking services. Streamlining the
CRA regulations and clarifying the performance measures could create stronger incentives for
banks to pursue the less obvious, but potentially more impactful, projects that low- and
moderate-income neighborhoods need the most to become areas of opportunity.
We will want to update the CRA in ways that reduce the distortions that lead to some
areas becoming credit "hot spots" and others credit deserts. Where there is a high density of
banks relative to investment opportunities, the result of too many banks competing for too few
CRA-qualified investments can be declining returns. Meanwhile, other areas have a difficult
time attracting capital not because the social return on investment is low, but rather because they
are not in a bank's major market, if they are served by a bank at all. However we define a bank's
assessment areas in the future, the regulations need to be designed and implemented in a way
that encourages banks to direct their community investment activities productively.
Tailoring
The third guiding principle is that the CRA regulations should be tailored to banks of
different sizes and business models. We should set standards that are flexible enough to evaluate
the CRA performance of a $100 million bank no less effectively than a $2 trillion bank. Banks
seek clearer, simpler rules that result in more CRA activity with less burden. We believe this can
be done while retaining the flexibility to evaluate a bank's CRA performance in light of its size,
business model, capacity, and constraints as well as its community's demographics, economic
conditions, and credit needs and opportunities. Regulatory revisions that do not contemplate
evaluating CRA performance in context could arguably undermine the CRA's greatest attribute--
its recognition that banks are uniquely situated to be responsive to the most important
community and economic development needs in their communities.
The typical small community bank focuses on serving its community through deposit and
credit products and may not have the capacity to finance a major community development
initiative. But as banks grow in size or specialize in different types of lending, they may have
greater capacity to invest through additional channels. We should be sensitive to the ways in
which a bank's business model, in addition to its size, influences the types of activities it
undertakes to meet its CRA obligations. We will want to maintain the flexibility to ensure that,
no matter the business line, a bank can meet its CRA obligation by doing what it has the
expertise to do well. And as we look to improve our CRA evaluations, the agencies will need to
determine what kind of data will be necessary to evaluate a bank's CRA performance based on
the activities it chooses and which banks should collect and report that data based on their scale
and business model.
Consistency and Predictability
The fourth principle is that the revised regulations should promote greater consistency
and predictability in evaluations and ratings, both within and across the agencies. The members
of our Federal Advisory Council have recommended that the regulations "need to be consistent
across the [a]gencies and provide for all regulated financial institutions to be subject to the same
14
CRA 'crediting', examination, and remedial standards." Banks have expressed understandable
concern regarding the variation they see in evaluations. Banks seek greater clarity in advance
about what activities will qualify for CRA consideration. They want to understand how the
qualitative criteria--those measuring the impact and responsiveness of loans, investments, and
services--will be factored into their ratings.
This concern is not limited to banks. The community organizations and local
governments that are trying to attract bank financing to their projects need this clarity, too.
Regulatory streamlining can help to promote consistency, as would regular examiner training.
Fair Credit Access
The fifth and final principle for CRA modernization is to ensure that revised CRA
regulations support its position as one of several mutually reinforcing laws designed to promote
an inclusive financial services industry. The central thrust of the CRA is to encourage banks to
ensure that all creditworthy borrowers have fair access to credit. For banks to be successful in
meeting the credit needs of their entire community, it follows that they must guard against
discriminatory or unfair and deceptive lending practices. Ensuring fair access to credit is
difficult and requires ongoing vigilance.15 For this reason, taking a holistic view of closely
related issues is likely to be the best way to fulfill the purpose of the CRA, as one of several
important laws intended to promote fair financial access.
Affordable Housing and the CRA
I want to briefly connect the dots between the high priority we put on strengthening the
CRA and the pressing challenge of affordable housing that is a key focus of the work that you all
do. Access to affordable housing connects families concretely to place and can be a source of
strength or fragility. Pew just released a study showing that 38 percent of renter households in
America are spending more than 30 percent of their pretax income on rent, representing a 19
percent increase from 2001.16 The percent of renter households that are spending half or more of
their pretax income on housing increased by 42 percent during the same period.
Households that spend a high fraction of their income on rent often may find themselves
unable to pursue proven strategies to achieve financial security and invest in their family's
future. They may need to turn to costly short-term sources of credit to cover emergency
expenses. Some may experience eviction if there is an unexpected expense or loss of income.
To manage the high cost of housing, workers may be compelled to live far from where
they work, rent substandard units, or resort to overcrowding. Research shows that households
that live far from work often pay a large share of their budget in commuting costs.17 As a society,
we need to do better in ensuring that affordable housing is available where it is needed.
The supply of affordable housing is a good example of a problem of national scope
whose solution must be tailored to local needs and economic conditions. This audience knows
better than most about the complex dynamics that affect housing at the local level. Local
decisions on land use, zoning, taxes, and leveraging of federal funding, and whether community
needs are prioritized, are at the heart of whether neighborhoods thrive.
I'm not going to suggest that there are any easy answers to housing affordability. Still,
the CRA is one of the important policy levers that can make a difference by encouraging
solutions that are tailored to local needs and circumstances. It does this by encouraging banks to
provide affordable and sustainable mortgage products to qualified low- and moderate-income
families. This helps those families have a chance to purchase homes sustainably and build equity.
In addition, by encouraging banks to work with the community to identify tailored rental and
homeownership investment opportunities, the CRA helps encourage the construction of
affordable housing where it is needed most.
The Path Forward
In our effort to refresh the CRA regulations, we will continue to honor the purpose of the
CRA by encouraging banks to engage in local community and economic development initiatives.
I am confident that there are ways to update the areas where we evaluate a bank's CRA
performance without losing the core focus on place. We should do more to encourage banks to
offer deposit and credit products designed to help rent-burdened customers save for
homeownership and build strong credit scores that will enable them to succeed in obtaining
mortgage credit on favorable terms. We should do more to encourage banks to lend to the
underserved entrepreneurs and small businesses that hold the promise of providing jobs and
growing local economies. Even as the economy looks strong overall, significant challenges
remain for low- and moderate-income areas, making the CRA and its focus on local credit needs
more important than ever. I look forward to hearing from you over the next several months to
help inform our interagency effort to refresh the CRA regulations.
This conference is an opportunity for ANHD members to envision the future for New
York's neighborhoods and discuss critical actions to achieve that vision. I know you have a full
agenda today, replete with pressing conversations on the compelling challenges that face your
neighborhoods. I want to applaud your work to ensure that all of New York's neighborhoods are
communities of opportunity. Thank you.