WASHINGTON–A new study published by the Cato Institute suggests the Community Reinvestment Act (CRA) has become “obsolete,” and that it would be a mistake to bring credit unions under its compliance umbrella.
“When the CRA came into force in 1977, banks were the main source of loans for home buyers and small businesses, and restrictions on bank branching posed a high barrier to competition,” the Cato Institute said in its report. “Today’s competitive environment is much changed. The removal of branching restrictions has allowed banks to expand and consolidate — leading to a 77% increase in the number of bank offices since the CRA’s passage. Furthermore, a growing share of mortgage and small-business lending now comes from financial institutions that are not subject to the CRA. In fact, LMI borrowers represent a larger share of these institutions’ borrowers than they do for banks, which are subject to the CRA.”
‘Mounting Evidence’
The Cato Institute, a conservative think tank, said there is “mounting evidence” CRA is either ineffective or damaging, and that empirical research also shows banks’ risk taking increases ahead of their CRA evaluations — “contravening the CRA’s requirement that lending be consistent with bank safety and soundness.”
In cases where CRA lending is not riskier, evidence suggests that banks may be “skimming the top” — lending to high-income residents of low-income communities, thus meeting their regulatory mandate but failing to reach the people the CRA intends to help, according to the Cato Institute.
The report calls for repeal of CRA in favor of alternative policies that better achieve its goals.
As for credit unions and fintechs being brought under the CRA umbrella, the Cato Institute called such a move a “mistake,” saying credit unions already serve lower-income people “better than” other lenders.
Need for Change
“If the CRA remains in place, its regulations should change to allow banks to trade their CRA obligations in order to encourage lender specialization and efficiency,” the report states.
The report can be found here.