CRA changes will impact LMI borrowers and communities

CRA changes will impact LMI borrowers and communities
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Study: Proposed Rule Changes to CRA Would Let Banks Lend Less to LMI Borrowers and Communities

Nearly all banks that earned passing marks under current rules would be able to reduce their mortgage lending to low- and moderate-income (LMI) borrowers and communities under new rules proposed for the Community Reinvestment Act (CRA), a new study found.

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LMI borrowers and communities

The analysis, from the National Community Reinvestment Coalition (NCRC), found that banks that earned a Satisfactory or Outstanding rating on their CRA exams since 2011 - which is about 98% of the nation's 5,265 banks - could lend less to LMI borrowers under new rules proposed in January by the Office of the Comptroller of the currency (OCC) and the Federal Deposit Insurance Corporation (FDIC).

CRA Changes Could Lead To Less Loans Issued To LMI Borrowers

The study found that under the proposed rules banks could issue as little as 5% of their retail loans to LMI borrowers or communities and still "pass" their CRA exams with Satisfactory ratings. That compares to the industry aggregate of 13% of home purchase loans to LMI borrowers over the last four years.

LMI borrowers and communities

NCRC estimated percentages of retail lending to LMI borrowers or communities banks would need to pass based on Call Report data, which consists of loans held on bank balance sheets. This is vital because banks could keep these same loans on their balance sheets for several years and not have to make any additional retail loans to LMI borrowers or communities and still pass. In other words, the paltry percentages derived from NCRC’s calculations could be overestimated.

For most of the nation, the new rules would clearly lead to less LMI lending, not more, the study found. That's not what regulators have claimed or implied in public statements and testimony before Congress. But the agencies have also not provided to the public any data to back up those claims. NCRC has filed a Freedom of Information Act request for the agencies to release data referenced in the proposal but not published with it.

LMI borrowers and communities

The Financial Impact Of The New Rules

Bankers have also expressed concern about the short public comment period for the proposed rules because they want more time to analyze the financial impact of the new rules, including new data collection requirements.

In addition to earning passing marks while lending less overall, the new rules would allow banks to lend dramatically less and even fail their CRA exams in some areas but still earn an overall Satisfactory grade. So banks would have a new option that isn't one under current rules: they could intentionally reduce or stop lending in some communities and instead concentrate their lending in others. That is precisely the practice that the law was intended to forbid when it was enacted in 1977.


Reduced Home And Small Business Lending

“While the OCC and FDIC say that their CRA reform proposal is all about increasing CRA activity, when we ran the numbers on the new scoring system, we found it would most likely result in reduced home and small business lending for underserved borrowers,” said Jesse Van Tol. NCRC's CEO. “These are such low bars that it becomes clear what this new proposal is really about. It's a complex and confusing scheme to gut the CRA and help banks get away with doing less."

This study estimated the percentage of retail lending for LMI borrowers or communities at the enterprise level, consisting of lending for all of the geographical areas in which banks operate A forthcoming analysis will examine the impact of the proposed rule changes in specific metropolitan areas.


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Jacob Wolinsky is the founder of, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at) - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver

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