Treasury Memo Tackles Redlining, Modernizing Community Reinvestment
Building on the department’s report last summer recommending a number of changes to financial regulations, Secretary of the Treasury Steve Mnuchin sent a memorandum this week to senior officials at the Office of the Comptroller of the Currency, Federal Reserve, and the Federal Deposit Insurance Corporation spelling out the need to modernize the Community Reinvestment Act (CRA) and improve access to capital in underserved neighborhoods.
Bank redlining and credit rationing have taken an unprecedented toll on the ability of low and middle income families to access credit. Redlining occurs when banks intentionally charge higher rates or deny credit to low and middle income borrowers, for example, in inner-city neighborhoods. Instead of evaluating a borrower’s creditworthiness individually, the bank simply rejects outright all applications within certain zones. Coupled with redlining is the practice of credit rationing. Credit rationing is the process by which a bank does not fulfill all the credit needs of a borrower. In its 2013 Report on Economic Well-Being of U.S. Households, the Federal Reserve Board found that in 2012, 15% of the U.S. population did not apply for credit due to the feeling that it would be denied, and 33% of those that did apply for credit were denied or offered less credit than requested.
In 1977, Congress attempted to improve credit access for low and middle income families with the passage of the Community Reinvestment Act (CRA). Under the CRA, banks would now need to expand credit offerings to underserved populations. Unfortunately, the CRA provides little incentive to expand credit and few punishment methods for those that ignore it. In fact, any improvements in credit access to underserved populations may be attributed to the financial incentives instead of CRA regulation. Despite federal legislation, banks continue to abandon low and middle income neighborhoods at an alarming rate. A recent white paper by the U.S. Postal Service that explored offering short term, small dollar loans noted that since 2009, 93% of bank branch closures have occurred in zip codes with a median income below the national average.
Secretary Mnuchin made recommendations in 4 areas: updating the use of geographic assessment areas to account for the rise of online and interstate banking, improving guidance during the review process, time examinations to keep banks accountable, and create better incentives for compliance with the CRA. The recommendations are already receiving support from industry professionals and consumer advocates.
