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Federal Reserve Bank of Dallas Community Development Community Outlook Series The CRA at 40: Law Remains a Cornerstone of Community Development Community Outlook Series Emily Ryder Perlmeter COS ISSUE 2, December 2017 Federal Reserve Bank of Dallas Community Outlook Series Launched in 2016, the Community Outlook Series features analysis on a rotating set of community development topics. The series uses surveys and qualitative interviews paired with secondary data to assess the needs, successes and challenges of low- and moderate-income families across Texas as well as the organizations that serve them. The topic of this report is the Community Reinvestment Act and perceptions of it among CRA officers working for financial institutions. Federal Reserve Bank of Dallas The Community Reinvestment Act 2 Introduction 2 The Financial Impact of the CRA 4 CRA Banker Poll Findings 7 Introduction 7 Bank-Specific CRA Perceptions 8 CRA Barriers and Impact 9 Barrier Specifics 10 Changes and Recommendations 11 CRA Impact 12 Banker Interviews and Project Highlights 13 Conclusions 14 The Community Reinvestment Act What monetary benefit does the Community Reinvestment Act bring to Texas? The Dallas Fed analyzed the performance evaluations of Texas banks and polled bankers to assess how much the 40-year-old law is contributing to communities in need and whether it should be modified. Introduction Federal Deposit Insurance Corp. (FDIC) and Office of the Comptroller of the Currency (OCC)— currently examine This year marks the 40th anniversary of what many banks on an ongoing basis to enforce this law. consider an essential community development tool: the The CRA has faced its share of criticism. Detractors Community Reinvestment Act (CRA). The CRA, passed have charged that the act pushes risky lending and was in 1977, is a federal law encouraging banks to help meet even responsible for the Great Recession’s housing the credit needs of all borrowers in the communities crisis (Box 1). they serve. Even ardent supporters question the contributions of Prior to the CRA, credit access was often unavailable the CRA in a modern era and whether some of its regula- for residents of low- and moderate-income (LMI) com- tions are burdensome. Furthermore, community-based munities, and the discriminatory practice of redlining organizations are often uncertain how much community was common. Redlining refers to the practice of denying development money is available from banks and what or severely restricting credit to residents based on qualifies as an eligible investment. where they live or their race/ethnicity, regardless of In light of these questions and the CRA’s 40-year their qualifications. This restricted access to capital history, the Dallas Fed launched a study into the com- contributed to the decay of these communities and to munity impact of the CRA in 2017. Focused exclusively urban blight. on Texas, the following analysis consists of two parts: 1) 1 The CRA was enacted to combat this discrimination a quantitative dive into estimates of the CRA’s financial and encourage banks to lend to all segments of a com- impact, and 2) a qualitative analysis of successes and munity. Three regulators—the Federal Reserve System, challenges from the perspective of bankers. BOX 1: CRA MYTH BUSTER The Community Reinvestment Act of 1977, known as the CRA, was enacted by Congress to ensure fairness in lending. But it has run up against its share of criticism over its 40-year history, giving rise to a number of myths. Myth 1: The CRA incentivized banks to make the high-risk loans that caused the 2007 housing crisis. This is the most common criticism of the CRA, but evidence suggests it is inaccurate. First, only depository institutions are subject to the CRA. In 1977, most lending was performed by banks and thrifts. By 2006, however, an estimated 77 percent to 84 percent of mortgage lenders were nonbank lenders.2 Moreover, analysis of Federal Reserve Board data indicates that only one of the 25 top Federal Reserve Bank of Dallas Community Outlook Series Issue 2 2 subprime lenders in 2006 was subject to CRA regulations.3 Additionally, Home Mortgage Disclosure Act (HMDA) data show only 6 percent of higher-priced loans were made by CRA-covered lenders inside CRA assessment areas in 2005–06.4 Therefore, the majority of loans that defaulted were not orginated by financial institutions covered by the CRA. According to a 2009 Dallas Fed report, “data … suggest that the CRA prevented the subprime situation from being more severe.”5 For instance, an analysis of HMDA data indicated that banks covered by the CRA were twice as likely to keep their loans on their books, reducing some risks associated with securitization.6 Other research has indicated that during the crisis, mortgages that CRA banks originated in their assessment areas saw lower foreclosure rates compared to lenders not covered by the CRA.7 Myth 2: The CRA coerces banks to provide loans to individuals and businesses who often cannot pay back the loan. When enacting the CRA, Congress specifically stated that its purpose was to encourage financial institutions to “help meet the credit needs of their communities … in a manner consistent with safe and sound banking practices.”8 Loans in LMI communities or to LMI people perform just as well as other loans in bank portfolios. A 2000 Federal Reserve report found that mortgage loans subject to the CRA were profitable for most institutions; many banks saw equal performance between CRA and non-CRA loans.9 Moreover, the CRA has provided an incentive for banks to pursue those lending opportunities. A joint study by the Brookings Institution and Harvard University released in 2005 found that, by 2000, the CRA could be credited with around $620 billion in home mortgage, small business and community development loans to LMI borrowers and communities.10 Finally, the CRA does not seem to have an impact on delinquencies. Federal Reserve Board data find almost identical subprime delinquency rates in ZIP codes above and below the CRA threshold.11 Myth 3: Banks have CRA lending and investment quotas waiting for nonprofits to take advantage of. The CRA does not direct banks to designate “CRA funds” from which nonprofit organizations can draw. Rather, it recognizes that banks have an obligation to serve LMI neighborhoods as well as higher-income areas with its loans, investments (including grants) and financial services.12 See Notes on Page 15 for additional information. Federal Reserve Bank of Dallas Community Outlook Series Issue 2 3 To qualify as a community development loan, invest- The Financial Impact of the CRA ment or service, the activity’s primary purpose must be Following the methods of a 2015 Federal Reserve Bank of Atlanta report,13 the Federal Reserve Bank of community development, and it must fit into one of the following categories: Dallas conducted a quantitative analysis to attempt to • Affordable housing for LMI people: E.g., loans to answer the following question: How much money flows developers of affordable housing; investments in city into Texas communities because of the CRA? bonds that support LMI housing Although the CRA touches on an array of activities, including residential mortgages, small-business loans and farm loans, the following analysis focuses on community development dollars—both investments and loans. Data on other aspects of the CRA are more • Community services for LMI people: E.g., grants to nonprofits providing education or child care to LMI families; loans to health care facilities targeting LMI needs widely available, particularly through the CRA and Home • Economic development for LMI people, small busi- Mortgage Disclosure Act (HMDA) tools on the Federal nesses or small farms: E.g., loans to small businesses Financial Institutions Examination Council’s website. in amounts over $1 million as part of the SBA’s 504 For community development lending or investment loan program activities, available data are limited. Yet it is critical for community organizations, bankers, regulators and those in government to understand the monetary benefit the CRA brings under community development. To address this issue, the Dallas Fed reviewed and analyzed the performance evaluations (PEs) that regulating agencies are required to make public. Large banks are evaluated on their lending, qualified investment (grants, shares and deposits) and financial • Revitalization or stabilization of LMI communities, underserved rural neighborhoods or disaster areas: E.g., grants for the renovation of a public school in a distressed area that includes LMI children; loans for rebuilding community infrastructure in a designated disaster area For more examples and explanation, please see the OCC’s Fact Sheet on CRA. service activities in their assessment areas. 14 Federal Reserve Bank of Dallas Community Outlook Series Issue 2 4 Before beginning this analysis of PEs, we first gath- flowing to communities comes in the form of loans, while ered a list of banks with a deposit market share of at least the remaining 51 percent is in qualified investments. In 1 percent in Texas. Eleven met that criterion (Table 1). aggregate, these eight banks provide an estimated The top 11 range from about $22 billion to more than $2 trillion in assets and from 5.6 percent to 100 percent in $1.79 billion of community development lending and investments every year. share of deposits in Texas. Together, these banks make up 69 percent of all deposits in Texas. From this list, we created a convenience sample of eight of the banks. The sample is based on the availability and recentness of the institution’s latest PE. The eight in our Texas sample are: Bank of America, Wells Fargo, Compass, Frost, Prosperity, Capital One, ZB (under Amegy in Texas) and Table 2: Texas Community Development Lending and Investment Dollars Texas sample Comerica. The range of PE community development Lending* $879,616,380 Investment* $913,223,052 investing and lending data is roughly 2009 to 2015. The data extracted from each PE show a dollar amount for both loans and investments made in Texas LMI communities, and those amounts were then annu- Total community development dollars* alized. Although each bank reported different levels of lending versus investing, the totals for our sample 38.4% Texas deposit market share $1,792,839,432 *Data are annualized estimates. are similar (Table 2). Forty-nine percent of the money Table 1: Top Banks by Deposit Market Share in Texas State headquarters All markets Texas Total deposits (in thousands) Deposits (in thousands) Market share (%) Share of deposits in Texas (%) JPMorgan Chase OH $1,155,185,018 $151,393,753 19.7 13.1 Bank of America NC $1,204,485,508 $113,458,123 14.8 9.4 Wells Fargo SD $1,145,337,000 $71,855,467 9.3 6.3 USAA Federal Savings Bank TX $67,612,238 $67,612,238 8.8 100.0 Compass Bank AL $67,930,826 $38,233,316 5.0 56.3 Frost Bank TX $24,337,633 $24,337,633 3.2 100.0 Texas Capital Bank TX $16,757,578 $16,757,578 2.2 100.0 Prosperity Bank TX $17,246,580 $15,419,923 2.0 89.4 Capital One VA $207,791,098 $11,585,389 1.5 5.6 ZB/Amegy UT $50,819,470 $10,754,721 1.4 21.2 Comerica TX $55,930,412 $9,802,225 1.3 17.5 SOURCE: Federal Deposit Insurance Corp., Deposit Market Share Report, June 2016. NOTE: See full list of banks with branches in Texas, their asset sizes and CRA category. Federal Reserve Bank of Dallas Community Outlook Series Issue 2 5 Within the category of qualified investments lies a lend and invest $4.08 billion community development subset of funds that are donated without an expectation dollars annually in Texas. Adding this to the $1.79 billion of financial return, referred to as grants or contributions. from our Texas sample, we determine that large banks Estimating what percentage of qualified investments provide about $5.88 billion in the form of loans or invest- is grants is difficult due to the lack of standardized ments to Texas communities annually (Table 3). reporting practices in PEs. However, within the Texas sample, five PEs designated dollar amounts of grants or contributions. Based on analysis of these reports, the level of grants is about 1.7 percent of total qualified Table 3: Estimated Annual Lending and Investing in Texas Communities Tops $5.8 Billion investments (Chart 1). Investment Chart 1: Grants Make Up Small Share of Investments $9,120 All other qualified investments Grants/contributions $523,978 Amount Community development dollars, Texas sample $1.79 billion Community development dollars, other large banks $4.08 billion Total community development dollars $5.88 billion NOTE: The estimate total is rounded. SOURCES: CRA performance evaluations; Atlanta Fed methodology; author’s calculations. See appendix for more. NOTES: Data are in thousands of dollars. Chart is based on subsample of five Texas sample banks. SOURCE: CRA performance evaluations. This number—$5.88 billion—should not be taken as an exact amount, but rather as an estimate based on the author’s assumptions. Many factors are involved in While one should be careful about drawing conclu- banks’ decision-making for lending and investing in LMI sions from a small subsample, bank contributions that are communities that could change yearly, but this estimate free of expected financial return are, in general, a small is a start at capturing a dollar amount that benefits percentage of the investments banks typically make. Texas annually. This estimate will help policymakers and Most CRA dollars are loans or investments on which community development organizations achieve a basic banks expect to make some kind of return. understanding of CRA investing and lending. However, Finally, we were able to estimate the total dollar this quantitative analysis does little to illuminate details amount that flows into LMI communities in Texas—wheth- of the impact of CRA-funded projects, the effectiveness er loans, traditional investments or grants, using a few of the regulations and other experiences. To add more assumptions and a ratio calculated from the Texas sample. richness to this analysis, we launched a poll to ascertain To read more about the methodology, see the appendix. perceived areas of strength and needed improvement We estimate that the remaining large banks in in the CRA from the perspective of those who work with Texas—those not included in our Texas sample—would it firsthand: Texas CRA bankers. Federal Reserve Bank of Dallas Community Outlook Series Issue 2 6 CRA Banker Poll Findings In addition to collecting bank data on the monetary contribution of the CRA in Texas, the Dallas Fed queried the bankers themselves for more insights on how the law is working. Introduction Table 4: Bank Sizes and Respondent Per- centages In July 2017, the Dallas Fed launched a poll of CRA, compliance and community development specialists at Asset range (in prior two calendar years) Percent of poll sample Small < $307 million 2 Intermediatesmall > $307 million; < $1.226 Large > $1.226 billion Bank size banks across Texas (Box 2). The poll garnered 51 responses from bankers headquartered in 24 counties, reaching from East Texas to El Paso and from the Panhandle to the southwestern border. Bank service areas span all 13 service regions as defined by the Texas Department of billion Housing and Community Affairs (Map 1). Fifty-seven percent of respondents represent large banks, and the remainder are from intermediate-small 41 57 (ISB) or small banks (Table 4). BOX 2: THE ROLE OF CRA AND COMPLIANCE OFFICERS Although banks are not required to have a specifically designated CRA officer position, many interme- diate-small and large banks do. The type and title of the role may vary depending on the asset size and complexity of the bank’s operations. Smaller banks may fold CRA responsiblities under one person. In either case, there will be a specific point of contact at all regulated banks for CRA-related inquiries and comments. Responsibilities include staying up to date on federal regulations and developing, implementing and evaluating CRA strategy for the financial institution. Federal Reserve Bank of Dallas Community Outlook Series Issue 2 7 Map 1: Poll Respondents by Service Region Region 2–Northwest Texas Region 8–Central Texas Region 1–High Plains Region 3–Metroplex Region 4–Upper East Texas Region 12–West Texas Region 5–Southeast Texas Region 13–Upper Rio Grande Region 6–Gulf Coast Region 7–Capital Region 10–Coastal Bend Region 9–San Antonio Region 11–South Texas Border 10 and over Number of respondents The vast majority (88 percent) of these bankers have communities. Most (80 percent) indicated that senior branches in LMI areas—ranging from just 1 percent to management has at least a good basic understanding 100 percent—with most having at least a quarter of of LMI needs. Thirty-seven percent suggested that CEOs their branches in these communities. About 30 percent and other leaders are “well aware” of the needs of the indicated that their bank has plans to open a new location LMI communities in their service areas. in an LMI area. Only one bank not currently operating in 20% an LMI community indicated plans to do so. Bank-Specific CRA Perceptions of respondents, however, stated that there is “a little work to do” to get bank management more informed and mindful of the situations of LMI individuals in the areas they serve. Banks vary greatly in terms of leadership-sponsored Responses indicating this need for improvement initiatives or support that can facilitate the ease of CRA varied regardless of asset size or location and did not activities or make them a priority. Senior management at seem to be correlated with having branches in LMI areas some banks may create programs or processes through or not. which CRA activities become a bank focus; others may We also asked if the respondents’ banks have a formal view the CRA as just a hurdle to jump over. Therefore, we application process through which community-based asked questions to assess the existence of programs or organizations (CBOs) could apply for CRA-eligible loans, level of support for CRA activities within banks. grants or services. These applications could streamline Without the support and understanding of bank CRA initiatives or make them more visible to CBOs. About leadership, fulfilling responsibilities as a CRA officer a third of bankers in the poll reported that they do have a can be much more challenging. We asked respondents formal procedure. Some explained that the application to evaluate their CEOs’ or senior management’s un- focuses solely on loans, while others reported a broader derstanding of the needs of LMI households in their range of options. The most commonly reported practice Federal Reserve Bank of Dallas Community Outlook Series Issue 2 8 Chart 2: Banks Participating in Community Coalitions See Use for Meeting CRA Obligations Percent of respondents 80 70 15.2 60 50 Very useful Moderately useful 23.9 40 A little useful 30 Not useful 23.9 20 10 6.5 0 Perceived use of participation in local coalitions was an online system through which nonprofit organiza- Out of the three community development activity tions can apply for loans, grants or other investments. tests, respondents indicated the most difficult is fulfilling Some banks send the website to CBOs to solicit requests. requirements for loans (Chart 3). Still, for 68 percent of banks in the sample, there is no formal process for collecting loan or investment requests. Finally, we inquired about banks’ participation in local community development coalitions and how this Chart 3: Lending Obligations Most Difficult to Meet Somewhat easy Very easy involvement could facilitate finding CRA opportunities. About 70 percent of the sample is involved in a local Somewhat difficult Very difficult coalition. Of those, the vast majority consider this participation of some use for finding opportunities to meet Lending CRA obligations (Chart 2). The remaining 30 percent of respondents do not have bank representation in local community development Investment coalitions. Bankers who reported that their senior leadership does not have a good basic understanding of LMI needs were more likely to indicate that their institutions are not involved in a coalition. Service CRA Barriers and Impact 0 10 20 30 40 50 60 70 Percent of respondents Getting to the heart of the matter, we asked for banker perspectives on a series of questions relating to regula- NOTE: “Neutral” responses not included. tory burden, CRA effectiveness and community impact. Federal Reserve Bank of Dallas Community Outlook Series Issue 2 9 The majority (54 percent) of the sample described the we asked about specific types of loans that qualify. lending requirements of the CRA as somewhat or very Under community services, child care and education difficult for them to meet. As Table 5 shows, bankers with lending was deemed most difficult by 50 and 52 percent more of their assessment areas in rural communities were of the sample, respectively. Health services was least even more likely to indicate difficulty in meeting loan ob- challenging, with 20 percent of respondents pointing to ligations—75 percent of those with at least a 50 percent relative ease. Under economic development, 44 percent rural assessment area reported difficulty, compared with of bankers believe small-business lending is at least 50 percent of those with less than a third rural. somewhat easy; conversely, just 4 percent believe the Digging into these lending issues, we asked bankers same of digital broadband access, which was publicly to evaluate the relative ease or difficulty of making loans announced as a CRA-eligible infrastructure investment in four distinct community development categories: just last year.15 For more information on receiving CRA affordable housing, community services, economic credit for broadband investments, see the Dallas Fed development and revitalization/stabilization. publication “Closing the Digital Divide: A Framework for Meeting CRA Obligations.” Chart 4 shows most respondents believe CRA-eligible affordable housing loans are the most difficult to Barrier Specifics make in their communities. The easiest loans to make, according to most respondents, are for revitalization Community development CRA requirements can be or stabilization. Over a third of respondents said lending for the com- perceived as difficult to meet for a variety of reasons. munity services or economic development categories Compliance officers or CRA bankers may feel there is is neither easy nor difficult. For these two loan groups, little opportunity in their region, that nonprofits looking Table 5: Lending More Onerous for Banks with Large Rural Assessment Areas Percent of assessment area in rural communities Less than a third At least a third At least half 50 66 75 Percent reporting lending as “somewhat” or “very” difficult Chart 4: Housing Loans Most Difficult to Make 52 Affordable housing 16 48 Community services 37 39 Revitalization or stabilization 0 10 20 14.5 37.5 42 Economic development 32 21 28 30 40 50 33 60 70 80 90 100 Percent of respondents Difficult Federal Reserve Bank of Dallas Community Outlook Series Issue 2 Neutral Easy 10 for loans are unable to manage the influx of funds, or the metropolitan areas. The rural banks don’t have so many regulatory burden may feel too great. We asked respon- opportunities.” dents to elaborate on these issues, as shown in Chart 5. Within “regulatory constraints,” some feel they serve One-third of the sample selected “lack of opportunity too many masters, with multiple types of examiners for impactful and cost-efficient deals that meet demand” (safety and soundness, along with CRA and fair lend- as one of the top barriers to CRA activity. For some ing). Others note a lack of tangible examples for CRA. bankers, particularly those in rural areas, finding lending “Interagency questions and answers are helpful,” one opportunities is difficult. A compliance officer at a large representative from a large South Texas bank notes, re- East Texas bank explained: ferring to guidance documents released by regulators,16 “but there is still so much gray area.” “The biggest challenge for us is finding opportunities Just 10 respondents pointed to organizational capac- with lending. We’ve entered a few partnerships with ity of local nonprofits or other partners as a large barrier. organizations for either economic development or When asked about specific types of organizations in their affordable-housing programs, but getting partici- communities, most bankers believed capacities to prop- pants in those programs so that loans are actually erly handle a loan or investment were about average. made has proven challenging. We believe a lot of the challenge is because of the more rural areas we Changes and Recommendations serve. Our presence in urban areas is tiny.” Another banker had a similar perspective, stating that Addressing these constraints and barriers, we asked despite doing everything possible to help communities, bankers what regulatory changes, if any, would improve “the prospects for CRA are far greater for banks in large the CRA. Suggestions fall into four main categories Chart 5: Bankers See Lack of Opportunity as Greatest Barrier to CRA Activity Lack of opportunity for deals 34 Too many regulatory constraints 20 Too risky/too complicated 19 Lack of organizational capacity 10 Need technical assistance 9 Other 8 Lack of support from bank leadership 2 0 5 10 15 20 25 30 35 40 Number of responses NOTE: Respondents could check up to three boxes. Federal Reserve Bank of Dallas Community Outlook Series Issue 2 11 (Table 6). The highest number of comments received importance. The remainder of the comments suggested relate to improving clarity of the goals or requirements. clearer expectations and more communication between Not understanding how to “meet the minimums” surfaced a few times in the comments. Beyond improving clarity, some bankers also mentioned the need for certain bankers and regulators. CRA Impact definition or scope changes, such as getting more credit for all volunteer activities or expanding what qualifies as The final question asked bankers if they see the “service” to activities beyond financial services. Rural impact of CRA activities in their communities. All but four challenges were highlighted again in the remaining com- bankers noted some impact, mostly in the moderate or ments. Some bankers suggested expanding assessment small category (Chart 6). Representatives of large banks areas for banks with large rural footprints to increase were slightly more likely to see moderate or large impacts opportunities; others wrote that adding a new asset than small banks or ISBs. category between ISB and large would help reduce the burden on rural banks with less than half the asset size of other large banks. Finally, we asked about additional resources bankers might want to help them meet CRA targets. Once again, respondents discussed improving resource allocations Chart 6: Most Bankers See Some CRA Impact in Their Communities Number of responses 25 in rural and border communities that include improving 20 connections to coalitions in these areas. 15 Other bankers focused on staff needs and training 10 opportunities, including more interagency roundta- 5 bles—meetings hosted by the OCC, FDIC and Federal Reserve System—that give bankers a chance to interact 0 No real impact with regulators and hear about CRA opportunities and resources. Two respondents wanted to see more Small impact Moderate impact Large impact Perceived size of impact bank staff involved in understanding CRA work and its Table 6: Recommendations to Improve CRA Examples Number of comments Increase clarity • Further define what should be included in supporting documentation • More clarity on minimum expectations for “satisfactory” rating 10 Expand scope • Broaden scope to include more volunteer work • Expand definition of service activities beyond financial expertise 6 • Add bank asset category between intermediate-small bank and large bank • Streamline required forms and documentation 5 • Expand geography for rural assessment areas • Greater consideration of activities in statewide funds 4 Other regulatory changes Broaden geography Federal Reserve Bank of Dallas Community Outlook Series Issue 2 12 Banker Interviews and Project Highlights Bank, a large institution, highlighted the importance of affordable housing work in San Antonio. “Rarely are de- Adding further dimension to these findings, a handful velopers building houses under $150,000,” she noted. To of poll respondents opted to speak further about chal- help fill this need, the bank created the Home Advantage lenges or successes related to their recent CRA loans, Loan Program through a partnership with Neighborhood investments or service opportunities. Housing Services. The minimum borrower contribution A chief lending officer for an ISB near the southwestern for a down payment is just $500. Just through June 2017, Texas border echoed some of the challenges discussed the program has funded 35 loans to get LMI families into earlier in this report. He described the difficulties of affordable and green housing. This program is particu- rural banks—especially smaller ones—pointing to lack larly advantageous because it concentrates CRA activity of staff and lack of opportunities. “Reputational effects, for maximum impact—and credit. Broadway Bank has resource allocations, lending opportunities and business been able to earn credit for this program under lending structures are not uniform among large and small banks,” (making loans), investment (donations to fund classes) he said, adding that this makes it difficult for a smaller, and service (bankers have served on the board of their rural bank to get a high rating. The officer specifically partner nonprofit). mentioned bonds—the ones his bank can bid for are A senior officer at Citizens 1st Bank, a small East Texas typically outside its assessment area, making CRA credit bank, participates in a fruitful partnership focused on ed- unlikely. He also mentioned the rarity of “outstanding” ucation and the workforce. Joining with local foundations ratings and how difficult they are to obtain. Indeed, of and the Rusk school district, the bank through its Rusk the 11 PEs analyzed for the quantitative portion of this TJC Citizens Promise Program provides scholarships to report, one had an “outstanding” rating, one had “needs Tyler Junior College for the top half of graduating high to improve” and the remaining were “satisfactory.” The students and includes not just academic programs, but officer worries that because smaller banks are thought also vocational training. This collaboration is a prime to be highly engaged in communities, a “satisfactory” example of how a bank of any size can tackle workforce rating could hurt their reputations. development through the CRA.17 The partnership began Other bankers, representing financial institutions in 2014, and through the spring of 2017, more than of all sizes, discussed positive experiences in lending, $544,000 had been granted. Citizens 1st was awarded investment and service. Each gave examples of how the 2017 Cornerstone Award from the Texas Bankers important partnerships can be to helping the community Association for these efforts. The bank hopes to start and meeting CRA goals. A CRA banker at Broadway more programs throughout the region and across Federal Reserve Bank of Dallas Community Outlook Series Issue 2 13 Texas and is interested in helping others start their own importance of grant writing for communities and banks. Promise programs. CRA2U is a two-and-a-half day institute for bankers and Finally, a CRA officer of Southside Bank in East nonprofits; goals include fostering better collaboration Texas spoke about a successful partnership with a local between the two groups. She said about the program, nonprofit that created an innovative opportunity in launched in January of this year, “Nonprofit organizations nonprofit capacity building. Partnering with A Circle of commented that they felt empowered to request money Ten, Southside launched a grant-writing program called and work closer with banks to fulfill their needs. It gave CRA2U focused on improving understanding of the them the tools to change people’s lives.” CONCLUSIONS The CRA has been a significant and effective tool for ensuring financial investment in many otherwise underserved communities. The estimated $5.88 billion of community development dollars that Texas sees every year—mostly in the form of investments or loans with an expectation of a financial return—can go a long way to funding impactful and innovative community projects such as the ones highlighted in this report. For bankers, getting support and buy-in from all levels of leadership will continue to be advantageous to meeting goals. As the American economy modernizes and changes, new and creative opportunities will become available. Regulatory support of newer eligible opportunities, such as broadband investment, is an essential feature of keeping the CRA flexible and relevant. Bankers say this communication with regulatory agencies is helpful and is needed on an even larger scale. While the CRA is important, it is not always perfect. In fact, the act has been amended numerous times over its 40-year history. Further research should be done related to respondent suggestions—including broadening its scope and providing more incentives in the CRA to address rural issues—to maximize the CRA’s impact, ensure its responsiveness to all communities and reinforce its role as a strong community development tool for future generations. Federal Reserve Bank of Dallas Community Outlook Series Issue 2 14 Community Outlook Series Federal Reserve Bank of Dallas Community Outlook Series Contact the Dallas Fed’s Community Development Department to find out how to get involved in CRA initiatives across the state. For more information about this report, email Emily Ryder Perlmeter at emily.perlmeter@dal.frb.org. Federal Reserve Bank of Dallas Notes The term “redlining” comes from the practice of outlining particular neighborhoods with red pen. See the Federal Reserve Bank of San Francisco’s An Introduction to the Community Reinvestment Act video, available at www.frbsf.org/our-district/about/sf-fed-blog/ community-reinvestment-act-cra-what-you-need-to-know. “Credit Where It Counts: The Community Reinvestment Act and Its Critics,” by Barr, M. S., New York University Law Review, vol. 80, no. 4, 2005, pp. 513–652. 1 10 “Regulators Scrutinized in Mortgage Meltdown,” by Greg Ip and Damian Paletta, Wall Street Journal, March 22, 2007. 11 “Did the CRA Cause the Mortgage Market Meltdown?” by Neil Bhutta and Glenn B. Canner, Federal Reserve Bank of Minneapolis Community Dividend, March 2009, www.minneapolisfed.org/ research/pub_display.cfm?id=4136. 2 3 “Private Sector Loans, Not Fannie or Freddie, Triggered Crisis,” by David Goldstein and Kevin G. Hall, McClatchy Newspapers, Oct. 12, 2008, http://www.mcclatchydc.com/news/politics-government/ article24504598.html. 4 Data source is HMDA data from the Federal Financial Institutions Examination Council. See “The CRA and Subprime Lending: Discerning the Difference,” by Elizabeth Sobel Blum, Federal Reserve Bank of Dallas Banking and Community Perspectives, issue 1, 2009. 5 6 “The Community Reinvestment Act: A Welcome Anomaly in the Foreclosure Crisis,” Traiger and Hinckley LLP, New York, January 2008. “Debunking the CRA Myth—Again,” by Carolina Reid et al., University of North Carolina Center for Community Capital, January 2013, http://ccc.sites.unc.edu/files/2013/02/DebunkingCRAMyth.pdf. 7 See “Between a Rock and a Hard Place: The CRA–Safety and Soundness Pinch,” by Jeffery W. Gunther, Federal Reserve Bank of Dallas Economic and Financial Policy Review, Second Quarter, 1999. 8 9 “The Performance and Profitability of CRA-Related Lending,” Board of Governors of the Federal Reserve System, July 17, 2000, www. federalreserve.gov/BoardDocs/Surveys/CRAloansurvey/cratext.pdf. 12 “The Effectiveness of the Community Reinvestment Act,” by Darryl E. Getter, Congressional Research Service, Jan. 7, 2015, www. newyorkfed.org/medialibrary/media/outreach-and-education/ cra/reports/CRS-The-Effectiveness-of-the-Community-Reinvestment-Act.pdf. “Community Reinvestment Act: How Much Is It Worth in the Southeast?” by Will Lambe and Jessica Farr, Federal Reserve Bank of Atlanta, September/October 2015, www.frbatlanta.org/community-development/publications/partners-update/2015/05/151016community-reinvestment-act-how-much-is-it-worth-in-the-southeast. 13 Because service activities are not captured as a dollar amount, they are not included in this analysis. 14 15 See “Interagency Questions and Answers,” July 15, 2016, FFIEC. gov, www.ffiec.gov/cra/qnadoc.html 16 See note 5. For more information on CRA-eligible workforce investments, see “Engaging Workforce Development: A Framework for Meeting CRA Obligations,” by Elizabeth Sobel Blum and Steve Shepelwich, Federal Reserve Banks of Dallas and Kansas City, www.dallasfed. org/en/cd/EconDev/workforce/2017/workforceCRA.aspx. 17 The views expressed in this report are the authors’ and do not necessarily reflect official positions of the Federal Reserve System. Authors Contributors Emily Ryder Perlmeter Community Development Analyst Roy C. Lopez Community Development Officer Jennifer Chamberlain Communications Advisor Areeb Siddiqui Community Development Intern Julie Gunter Community Development Director Kathy Thacker Editor Sharon Ford Assistant Director of Examinations Emily Rogers Graphic Designer Molly Hubbert Doyle Community Development Specialist Federal Reserve Bank of Dallas Community Outlook Series Issue 2 15 APPENDIX: QUANTITATIVE METHODOLOGY AND ASSUMPTIONS Overall, this research on the impact of the Community Reinvestment Act (CRA) in Texas follows methods established in a report from the Federal Reserve Bank of Atlanta, “Community Reinvestment Act: How Much Is It Worth in the Southeast?”1 To arrive at an estimate of total annualized community development lending and investing in Texas, we made a few assumptions: 1. We limit our analysis to large banks —those with assets of at least $1.226 billion—for a few reasons: First, we assume that these banks do the great majority of lending and investing in low- and moderate-income communities. This is not to say that intermediate-small (ISB) or small-bank lending/ investing does not occur or does not have an important impact in communities, but rather that the volume is considerably less. Second, the CRA requirements for ISBs and small banks differ quite a bit from those for large banks. Small banks are not necessarily evaluated on community development lending specifically. ISBs do not have separate community development tests for lending, investment and service; rather, they are grouped together for one community development activities test. For these two reasons, it is difficult to obtain specific PE data and compare those with large bank data. 2. We use a ratio calculated from the Texas sample to estimate the total level of CRA funds in Texas communities. This requires an assumption that the eight banks in the Texas sample are similar in nature and representative of other large banks in terms of lending and investments. Based on these assumptions, we calculated an estimate of the total amount of community development money that banks provide on an annual basis. First, we determined the ratio of community development money to total in-market deposits for the Texas sample, which came out to be .0061, or 0.61 percent.2 We then determined that the remaining large banks in Texas hold approximately $669.3 billion in deposits in the state. Applying that ratio, we calculated that these remaining large banks would lend and invest $4.083 billion community development dollars annually in Texas. Adding this to the $1.793 billion from the Texas sample, we arrived at the total reported in this report, $5.88 billion. Notes 1 “Community Reinvestment Act: How Much Is It Worth in the Southeast?” by Will Lambe and Jessica Farr, Federal Reserve Bank of Atlanta, September/ October 2015, www.frbatlanta.org/community-development/publications/partners-update/2015/05/151016-community-reinvestment-act-how-much-is-itworth-in-the-southeast. This is based on the author’s estimates and should not be considered an industry standard. 2 Federal Reserve Bank of Dallas Community Outlook Series Issue 2 16
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