WASHINGTON — The election of President Biden and turnover in leadership of the federal banking agencies not only means a new regulatory approach to implementing the Community Reinvestment Act. It could shine a brighter light on Congress potentially expanding the law to nonbanks.
A legislative effort led by Democrats to subject fintechs and other unregulated institutions that offer banking services to CRA exams would be an uphill battle, and some observers say lawmakers are not likely to focus on such a proposal anytime soon.
Yet Biden supported a CRA expansion during the presidential campaign to cover nonbank mortgage providers and insurance companies. A policy brief released by his campaign last February said the CRA currently “does little to ensure that ‘fintechs’ and non-bank lenders are providing responsible access to all members of the community.”
Just as the bank regulators weigh fundamental changes to the CRA exam process, industry representatives and community advocates have long argued for extending CRA standards to financial institutions other than banks. And some Democrats such as Sen. Elizabeth Warren, D-Mass., have pushed for legislative approaches expanding CRA to a broader array of companies.
“It’s time to look at how those entities can best demonstrate that they serve their entire communities,” said Krista Shonk, vice president of regulatory compliance and policy of the American Bankers Association.
Others say financial services companies that generally receive benefits from the government should be held accountable for their level of investment in their respective communities.
Jesse Van Tol, CEO of the National Community Reinvestment Coalition, said it is feasible that Biden and his Democratic allies in Congress may pursue some kind of legislative package focused on addressing racial inequities, and that the inclusion of CRA-like obligations for nonbank financial companies could be folded in alongside other initiatives.
“I think almost every financial services company is the product of, or in some way the beneficiary of, the government infrastructure that regulates them,” Van Tol said.
In the same way that the government can point to federal deposit insurance and chartering as exclusive government benefits for banks that warrant greater responsibilities, he said, the trillions of dollars distributed by the government to large companies in the wake of the pandemic could come with similar strings.
“There’s a lot of evidence that many financial markets, especially mortgage markets, are essentially propped up by the government,” Van Tol said. “That means a rationale is there for requiring something in return.”
Biden’s campaign said the then-candidate “will expand the Community Reinvestment Act to apply to mortgage and insurance companies, to add a requirement for financial services institutions to provide a statement outlining their commitment to the public interest, and, importantly, to close loopholes that would allow these institutions to avoid lending and investing in all of the communities they serve.”
However, with everything else on the policy agenda — including fighting the brutal economic effects of the pandemic — some aren’t holding their breath that a legislative overhaul of the CRA will happen anytime soon.
“I don’t think, realistically, that it will happen in the next couple of years” said Van Tol.
A legislative focus on CRA could be combined with broader policy questions about fintech regulation, including whether states or the federal government are better positioned to charter and supervise nonbanks that increasingly want access to the banking system.
But despite Democrats’ victories that gave them control of Congress, the margin in the Senate is razor thin with Vice President Kamala Harris holding the tie-breaking vote.
“You’ve got a really tight margin when you need every single Democrat voting for something,” Van Tol said.
And some Republican support is necessary for standalone bills that can be blocked by filibuster. Analysts also doubt a CRA bill could be attached to any must-pass budget bills that only require a majority in the Senate.
“In an ideal world, Congress would focus on the fundamental frictions with federalism and fintech, which would include a thoughtful consideration of everything from chartering to CRA requirements,” said Isaac Boltansky, director of policy research at Compass Point.
“Needless to say, we do not live in an ideal world and I am bearish on legislation via regular order,” he added.
Since the passage of the CRA in 1977, banks have been required to provide financial services to local communities with “low-to-moderate income,” a technical term based on Census data. But in recent decades, banks have lost significant market share of financial services to nonbanks, which advocates say has diminished the impact of the CRA nationwide.
Both times the law has been meaningfully reformed — first in the 1990s and most recently under the Trump administration — calls followed to expand the law’s obligations to nonbanks, including credit unions, mortgage lenders and most recently, fintechs.
Analysts say that the impact of such changes could be significant.
According to the Mortgage Bankers Association, the market share for mortgage originations among nondepository institutions grew from 24% to 58% between 2008 and 2019.
Between 1990 and 2018, the banking sector’s share of 1-4 family mortgages dropped from 40% to 24%, according to analysis by the Federal Deposit Insurance Corp. In that same period, banks’ share of multifamily residential mortgages dropped from 44% to 33%, and in consumer credit, the figure fell from 52% to 42%.
“We’re talking about how the financial services marketplace has evolved and is still evolving at a rapid pace,” said Shonk of the ABA. “We’re not limited to the days of having to go to the local bank, and more and more assets are being held by nonbanks of various sorts.”
Boltansky said despite the national focus on ending racial inequities, which could address strengthening the CRA, the still-simmering political divisions in Congress make legislation unlikely.
“The [Community Reinvestment Act] is clearly part of the broader economic justice conversation, and we should expect headlines and proposals,” said Boltanksy, “but I need to see a demonstrable thaw in our political discourse before becoming bullish on” such a plan moving forward.
Other challenges to expanding the CRA are structural and go deeper than political will. As written in 1977, the statute is a piece of banking law, analysts stress, making it difficult to simply drag and drop other industries into it.
“The CRA is built around the concepts of deposits and bank branches,” said Randy Benjenk, a partner at Covington. “When Congress passed the CRA, it was concerned that banks were taking deposits from low-to-moderate-income communities without lending back in. But mortgage and insurance companies don’t take deposits, and they don’t have branches in the CRA sense.”
“Without the concept of deposits, it’s not clear how you would measure CRA obligations. You can create a regime that doesn’t include those concepts or has a substitute, but you’d be starting from scratch,” Benjenk said.