Over the last year, the division of inequality in America has been revealed through our simultaneous crises of COVID, racial injustice and economic insecurity. Low income and low-wealth households — many of which are Black American, Latino, and Native American — continue to face economic barriers in access to credit, homeownership, capital assets and other means to improve their economic situations.
The scale of racial and ethnic inequality is extreme, including a 30-percentage-point gap in the Black and white rates of homeownership. The median and mean wealth for Black families is particularly stark, but Latino, Native American and Asian families also have lower wealth. Black and Latino families are far less likely to have retirement accounts, own equities like stocks and mutual funds or receive an inheritance or gift. They are less likely to obtain small-business loans and more likely to rely on high-cost nonbank financial services providers, which may not invest in their communities.
The legacy of racism, segregation, housing and credit discrimination known as redlining and multigenerational and community asset poverty are all to blame. One thing is clear: An effective solution to end these inequities requires strong public policies and equally strong private sector investments.
But our public policies haven’t kept up with innovations in the private sector. Laws and rules meant to ensure equity in consumer, home and small-business lending, community development investments and financial services have not been updated to apply to novel lending businesses and financial services providers.
Congress passed the Community Reinvestment Act in 1977 to impose an affirmative obligation on the nation’s banks to lend, invest and provide financial services to low- and moderate-income neighborhoods. It was intended to reverse the legacy of redlining by ensuring that credit for homeownership, small-business growth and community development reached neighborhoods that had previously been intentionally excluded from the American dream.
Banks are crucial to access the credit that is essential to the economic vitality of communities. But traditional banks are no longer the only providers of that credit and other financial services; nor are they the only beneficiaries of federal and other public support. Today nonbanks have emerged with new ways to provide debt and equity capital and a range of financial products and services, including home mortgages. And while the benefit of federal deposit insurance was the justification for limiting CRA to insured banks, nonbanks now reap other federal benefits.
Banks should not be the only financial institutions with an affirmative obligation to ensure that their loans, investments, products and services equitably serve the entire market, including lower-income and lower-wealth communities and families and communities of color. The duty to serve all, and the imperative to do so equitably, should be shared and enforced across the financial services sector.
Many nonbanks take advantage of federal programs that reduce the risk to their institutions and investors and are seeking new federal benefits, and yet, unlike banks, do not have an affirmative duty to serve low- and moderate-income families and communities equitably.
Nonbank mortgage lenders routinely sell their loans to government-sponsored enterprises Fannie Mae and Freddie Mac. They thereby gain the profits from originating a mortgage but shift the risk to GSEs that are supported by taxpayers and hold significantly less capital against that risk than banks. Without those sales to Fannie Mae and Freddie Mac, nonbank mortgage companies would be unable to lend at the volumes they achieve today. In addition, nonbank mortgage companies also make high volumes of government-backed Federal Housing Administration and Veterans Affairs loans. Most oddly, while large credit unions provide many banking services, including deposit accounts, and benefit from federal deposit insurance protection (as well as special exemptions from paying any taxes on their income), they are inexplicably exempt from CRA.
Fintech companies also profit from other government-conferred benefits. For example, some of these companies issue debit cards and then intentionally route the customers’ transactions through smaller banks that aren’t subject to federal price restrictions on interchange (which is the “processing fee”), thereby allowing the fintechs to pocket higher fees through a classic regulatory arbitrage scheme. Some fintech lenders utilize unsavory “rent-a-bank” schemes to co-opt a bank’s legal right to export its home state’s interest rate cap to borrowers in states with lower caps. Lastly, fintechs have benefited from government-guaranteed loans backed by the Small Business Administration and the U.S. Treasury.
Some nonbank financial services providers are committing to financial inclusion and environmental, social and governance standards. But these commitments and claims are voluntary, sporadic and hard to monitor. None are bound by a CRA-type obligation.
Earlier this year, Federal Reserve Chairman Jerome Powell expressed support for application of the CRA or CRA-like requirements to nonbank financial institutions. He argued that “low- and moderate-income communities require credit support, regardless of the nature of the institution.”
He’s right. The three federal agencies that enforce CRA announced in July that they will work together to propose new rules. But that effort will apply only to federally insured banks. Congress needs to step in to extend a similar duty to serve to nonbanks and close this glaring gap in our finance laws.
State models for applying reinvestment obligations to institutions other than banks can serve as guides for designing federal requirements. For decades, the state of Massachusetts has applied CRA obligations to mortgage companies and credit unions, Illinois has recently passed a law to do the same, and other states and localities are considering similar legislation.
As we seek to revive the economy and do so in a way that corrects for glaring and enduring inequalities that were exacerbated during the pandemic, we need to expand the responsibility to achieve equity beyond banks. Now is the time to ensure that all financial institutions have a basic duty to serve all communities and a responsibility to address and solve the nation’s racial, ethnic and geographic divisions.
Jesse Van Tol is the president and chief executive officer of the National Community Reinvestment Coalition. Greg Baer is the president and chief executive officer of the Bank Policy Institute.
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