Jan 28, 2020 - Economy & Business

Tug-of-war over how banks should give back to poor communities

Illustration of two hands pulling a money rope in a tug-of-war.

Illustration: Eniola Odetunde/Axios

Washington, Wall Street and Main Street are at war over regulatory changes based on a law that requires banks to invest in needy neighborhoods and lend to lower-income consumers.

Why it matters: A lot of money is at stake, and neighborhoods across the country could suffer or prosper depending on how (or if) the regulations are changed.

  • Per one regulatory agency, bank loans and investments worth $500 billion went to low-to-moderate income communities in 2017 because of the current rule.

Driving the news: A showdown over the Community Reinvestment Act (CRA) will take place Wednesday in a hearing hosted by the House Financial Services Committee. It's led by Maxine Waters (D-Calif.), who opposes the overhaul.

On the hot seat will be the banking regulator who proposed the changes — Joseph Otting, the Trump-appointed head of the Office of the Comptroller of the Currency.

  • Otting says that the changes he wants — which would be the most extensive overhaul of CRA since it became law in 1977 — will increase lending to poor communities by $500 million a year, but legislators and others are skeptical.
  • Some skepticism may stem from the fact that Otting is the former CEO of OneWest Bank, the institution founded by Treasury Secretary Steven Mnuchin.
  • Both men have cited their personal history with CRA as motivation for the changes — something community activists pointed out at a separate congressional hearing earlier this month.

The big picture: Nearly everyone agrees that CRA needs updating. What's dividing lawmakers, bank regulators and community groups is whether Otting's proposals — which the OCC says will "clarify and expand the type of activities that qualify for CRA credit" — will funnel more or less money into projects that benefit poor communities.

  • In a statement to Axios, the OCC says the proposed changes to CRA would close a loophole that currently lets banks get "credit for loans to wealthy borrowers who buy homes in [low-to-middle income] areas."
  • One powerful opponent of the changes, Fed governor Lael Brainard, said the proposals could encourage banks to meet CRA expectations "through a few large community development loans or investments rather than meeting local needs."

A chief architect of the current rules, Eugene Ludwig, who was Comptroller of the Currency during the Clinton administration and led the last major CRA overhaul, warns against making changes that could hurt the law's intended beneficiaries.

  • "Mistakes made in this area will have a disproportionate, negative impact on the people who can least afford it," Ludwig tells Axios.

The backstory: The law mandates that banks can't just take deposits from lower-to-middle income communities — they have to put money back into these neighborhoods, by way of home loans and other types of investment.

  • When the law passed in the 1970s, redlining practices were rampant: banks were cutting off these communities because it was deemed "too risky" to lend there.
  • There's no consistent amount of money banks must lend in each community. Rather, regulators grade banks on how well they're meeting the needs of the community — a somewhat subjective measure that's pushed banks to want more clarity.

Of note: It's rare that banks fail the CRA evaluation. In the past three years, about 97% of the banks examined passed, according to a report by the Congressional Research Service.

Community groups argue that if Otting gets his way, there will be more focus on how much banks spent on CRA-qualifying activities, as opposed to the quality of the investment and whether or not it would directly benefit low-income residents.

  • For instance, one question on the table: Should financing projects in Opportunity Zones count toward CRA credit? Some banks have been doing so aggressively, thinking the answer is "yes," but the Opportunity Zone program has been criticized for giving out big tax breaks for projects that don't benefit the needy.

One thing about the Otting proposal that makes banks happy: It would establish a list of what qualifies for CRA credit.

  • One potentially qualifying activity that's stirred controversy: investments to finance an athletic stadium in an opportunity zone.
  • An OCC spokesperson points out that banks already get CRA credit for funding sports stadiums.

What to watch: Otting says he wants to push the new changes through by May, with or without the Fed’s cooperation.

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