The Trump White House has made clear it will move to eliminate race-consciousness, a.k.a. “DEI,” in federal policy and regulation. A May Office of Personnel and Management memo to all federal department and agency heads advised that hiring decisions had “overemphasized discriminatory ‘equity’ quotas” and ordered an end to “the hiring of individuals based on their race, sex, or religion.”
A similar change may affect one of the most consequential banking regulations of the past 50 years: the Community Reinvestment Act of 1977. The Trump administration is pushing back against a pending Biden-era change that would have brought race into the implementation of the law, which affects every bank in the country and judges them based on the extent to which they lend to those of low and moderate income. The Trump proposal, first announced July 16, is currently in its 30-day comment period.
Moving to limit the CRA, rather than being viewed as an anti-civil rights measure, is better seen as a means both to spare banks burdensome regulation and to protect lower-income neighborhoods from the sort of foreclosure waves that buffeted them during the 2008 financial crisis.
Indeed, the administration should go further: better to suggest repeal rather than “modernize” the CRA. The act has long since been made obsolete by changes in the banking and mortgage lending industries, and it continues to incentivize risky lending.
The CRA was originally enacted in the name of eliminating “redlining” and other forms of credit discrimination, dating from the era before interstate banking competition and national private mortgage companies. It has required banks to demonstrate that they are serving low and moderate-income neighborhoods and borrowers.
A “satisfactory CRA rating,” based on examinations by the Federal Reserve, FDIC, or Office of the Comptroller of the Currency, has been a prerequisite for bank growth and mergers, crucial in an era of consolidation. Advocacy groups have long used it to extract concessions, such as lending quotas from capital pools they oversee and from banks planning mergers.
Race had always been an implicit aspect of the law, which, per the National Conference, straddles the “intersection of geography and race.” Indeed, as the National Community Reinvestment Coalition has put it, the act “was a response to the nation’s long and painful history of lending discrimination against people of color and the resulting disinvestment and decay in communities of color.”
But race itself was never explicitly mentioned in the law. In 2023, the Biden administration, in an initiative framed as “modernization” of the law, proposed rules that subtly changed that. It is that “final rule,” to date blocked by the courts but still pending, against which Trump is now moving.
To be clear, the proposed Biden “modernization” focused mainly on extending the reach of the CRA, requiring a bank with even one branch in a county, for instance, to demonstrate that it extends credit to low-income households throughout the county.
Biden regulators resisted calls by housing advocates for explicitly including race as part of a bank’s CRA report card. But more subtle changes introduced race into the law. Notably, banks would have been required to report their lending record as tracked by the Home Mortgage Disclosure Act, which does include specific data about the race of borrowers. Federal Reserve Governor Michelle Bowman, in dissenting from her colleagues’ 2023 vote in favor of the Biden proposal, expressed specific concern about such data and how it might be misinterpreted.
“HMDA data also cannot prove unlawful discrimination because it does not contain critical information, including borrower credit history, debt-to-income ratios, or housing prices,” Bowman said. Today, she supports the Trump proposal to rescind approval.
What’s more, the proposed Biden rule would have allowed banks to get CRA “credit” for joint ventures with minority and women’s “depository institutions.” In other words, the race and gender of institutions extending credit were to matter as ends in themselves.
The July announcement, made jointly by the Fed, OCC, and FDIC, moved to reverse such changes by restoring the CRA status quo ante 1995 regulations that included none of the Biden-era proposals. That’s a welcome non-change, but it still does not address the fundamental problems of the law.
The most important flaw lies in the fact that banks are assessed based on the extent to which they provide loans to specific types of households and neighborhoods, but not on how well those loans perform. The danger lies in the possibility that borrowers will not be creditworthy. Those who become delinquent on their loans are not likely to maintain their homes, posing a threat to the property values of neighbors.
The possibility of waves of delinquency and foreclosures became a reality during the 2008 financial crisis. As my colleague Edward Pinto of the American Enterprise Institute found, a crisis blamed on “subprime” and “predatory” lending could be directly linked to bank commitment to CRA compliance.
Banks such as Washington Mutual, which became synonymous with risky lending, were forced out of business. Pinto notes that nine banks, which engaged in subprime risky lending, were “responsible for 96 percent of the $1.169 trillion in CRA commitments announced prior to 1999. … These same nine banks (including banks they acquired) were responsible for 94 percent of all announced CRA commitments through 2008,” including Bank of America’s “$1.5 trillion commitment announced in conjunction with its acquisition of Countrywide in 2008.”
The near collapse of the banking system threatened the national and international economy. Its victims notably included those whom the CRA was meant to help. As tracked by the Boston College Center for Retirement Research, “Black and Hispanic homebuyers were hit hardest by the foreclosures that resulted from unbridled sales of predatory subprime mortgages, which exceeded $500 billion annually at the market’s peak. In the decade since the financial crisis, the stock market has rebounded smartly, but the damage to minority communities remains. At the height of the foreclosure crisis, entire neighborhoods were littered with bank foreclosure sales and realtors’ signs advertising sales of the properties.”
There is no doubt that some shady lenders took advantage of unsophisticated homeowners, encouraging them to borrow against home equity. But there is also no doubt that CRA obligations provided an incentive to extend subprime credit. So, too, did another government initiative, the so-called “affordable housing mandates” of the secondary mortgage giants Fannie Mae and Freddie Mac, which purchased many of the subprime loans to meet goals of increasing homeownership.
Evaluating whether the CRA remains necessary requires comparing the financial industry today to the era in which the law was first enacted. Not only was bank competition for customers limited by regulation barring interstate banking, but the national private mortgage industry had yet to take off. That picture has changed dramatically. An Urban Institute analysis has found that “nonbanks” serve a higher percentage of “borrowers of color” than do traditional banks, regulated by the CRA, 31.3% and 23.2% respectively.
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In other words, a freer financial market is solving the problem the CRA was enacted to address. Indeed, it is hard to understand why creditworthy potential borrowers in the current competitive market, and protected by fair housing and anti-discrimination laws, would be denied credit. Nor, as the 2008 financial crisis made clear, should we want the non-creditworthy to get loans.
The Trump administration’s move away from the Biden-era “final” rule for the Community Reinvestment Act is a step in the right direction. But the fundamental premises of that act and its effect on those it’s intended to help should, like the banks it regulated, be examined. At the very least, the act should be amended to require that banks report on the performance of all CRA-qualified loans. Lenient standards that lead to foreclosures help no one.
Howard Husock is a senior fellow in Domestic Policy Studies at the American Enterprise Institute.