Enterprise, along with many of our partners and industry and community stakeholders, submitted feedback this August on an extensive set of proposed changes to the 1977 Community Reinvestment Act. The landmark law was intended to undo the long, pernicious legacy of racism in housing and communities, requiring banks to better serve low- and moderate-income individuals and communities.
This year marks the first major rulemaking revisions since 1995, and if done right, could respond to changes in the banking landscape while encouraging the lending and investment needed to address the nation’s persistent and growing affordable housing crisis, particularly for communities of color.
Since its enactment, the CRA has spurred billions of dollars in investments into communities, particularly through tax credits that enable the creation and preservation of affordable housing and neighborhood-serving retail and services, as well as through philanthropic activities. The CRA, however, has to adapt to a world that no one could have anticipated in 1977 or even 1995. Climate change, skyrocketing rents, the digitization of financial services – they all demand a more robust CRA for 2022 and beyond.
Here are three changes regulators have proposed that we think are on the right track:
- Automatically making Housing Credit and community development financial institution support CRA-eligible. The Low-Income Housing Tax Credit, or just the Housing Credit, is one of the most powerful government tools to incentivize investment in the production and preservation of affordable housing. Regulators have proposed automatically making any bank’s Housing Credit equity investments and loans CRA-eligible, as well as fully crediting investments in community development financial institutions, or CDFIs. We think that’s the right approach.
- Recognizing the risks of climate change. The number of billion-dollar climate disasters is growing at an extraordinary rate. Low-income communities and communities of color are often hardest-hit and last to receive assistance. Regulators are right to identify climate risk as a major challenge ahead – and we urge them to explicitly require financial institutions to focus those investments on low- and moderate-income communities of color.
- Expressly including activities that address the unique challenges for Native communities. Regulators’ proposed changes note that “tribal communities face significant and unique community development challenges.” Focusing on Native communities is an important step in addressing critical housing needs and persistently-high poverty rates that impact Native groups disproportionately.
Here are three places we think regulators could do better:
- Don’t conflate lending and investments. Regulators’ proposed changes consolidate banks’ lending and investment activities into one community development financing test. We think that’s misguided. Traditional lending and equity investments play differing roles in supporting communities. Banks almost inevitably prefer making loans over equity investments for multiple reasons. Yet without the equity investment, Housing Credit activity—the primary source for producing and preserving subsidized affordable housing—will drastically diminish. Bank support via the two types of capital should be evaluated separately.
- Increase the focus on communities of color. The CRA was established as a consequence of redlining, the historic denial of loans to communities of color. Rather than just give credit to banks for their activities in low- and moderate-income communities, changes to the CRA should give credit for new products and outcomes that better serve communities of color that have struggled under the weight of disinvestment for generations.
- Encourage more meaningful impact. The new proposed rules aim to put more quantitative measures on CRA activities in general, which is good. But while the regulators recognize that different activities bring more impact, they must also recognize that the terms under which capital is made available matter tremendously. It's great for a bank to offer a line of credit, for example, but if the interest is so high that it's only tapped as a last resort, that credit is far less impactful than if interest rates were lower and thus more readily used to grow a business, develop new affordable homes, or build a local organization's capacity.
Financial institutions play a crucial role in spurring the production and preservation of affordable homes nationwide, with roughly 85 percent of equity investment in Housing Credit properties coming from banks. With the crunch on housing tightening and rents still on the rise, overhauling the CRA presents an opportunity to create more sustainable, more affordable and more equitable communities for the long haul. With modest changes to the proposed rule, that’s possible.