Congress passed the Community Reinvestment Act (CRA) in 1977 to encourage local financial institutions to help meet the credit needs of their communities, especially in low- and middle-income neighborhoods. Now, the Federal Reserve is considering ways to modernize CRA regulations to reflect how the sector operates in the 21st century. century creating an opportunity to reverse the years decline in the availability of mortgages under $ 150,000.

Under the ARC, regulators assess specific banking services and loans, such as mortgages in certain underserved areas where banks have branches; financial institutions receive CRA credits, or points, for these activities and products. Most banks pass these tests, however, what makes it difficult assess the overall effectiveness of the ARC.

Perhaps more importantly, today’s industry bears little resemblance to what it was almost 45 years ago when the CRA was enacted: banks are increasingly doing business online and offer a wider range of products and services. In September, the Federal Reserve released its modernization proposal The CRA needs to reflect these changes and reconsider the ways in which banks can obtain credit for loans to people living in low- and middle-income neighborhoods and underserved communities. On February 16, Pew sent a letter supporting the council’s goal of updating the law, but noted room for improvement.

The CRA encourages access to mortgage credit

Single-family mortgages account for most of the CRA credit earned by banks. This positive contribution to overall mortgage creation has not, however, made up for the shortage of small mortgages, even in areas of the country where many low-cost properties are available.

This lack of small mortgage financing makes it more difficult for some creditworthy households to purchase affordable housing and begin to climb the ladder of homeownership. It can also have important implications for the ability of borrowers to achieve economic stability and build generational wealth. While there are alternatives to conventional mortgages, these offer less protection to consumers and often result in higher costs. The CRA’s proposed reforms could help improve access to low-value mortgages for families looking to buy a low-cost home.

Expansion of assessment areas could encourage lending in areas with low-rental housing

Low and middle income families are more likely to live in low cost homes. Loans to these borrowers are generally higher in what are known as ARC valuation areas, the geographic locations that a bank can reasonably serve and for which it will receive credit. The current rating system, however, limits ratings to areas where banks have offices, branches or ATMs. This means that there is little incentive for banks to lend beyond these locations, which can lead to concentrations of lending activity.

While geographically demarcated assessment areas continue to be a key driver of CRA lending, many core banking functions are migrating or moving to the Internet. Therefore, it would be wise to reassess the assessment areas and include substantial activity beyond areas around branches as well as loans by online banks that do not have physical locations.

Any decision on whether the new areas of assessment should be based on deposit and loan levels, or simply apply across the country, will require further research. Whatever the final decision, the approach should not encourage credit hot spots or deserts.

CRA proposal helps encourage small mortgages

For decades, the CRA’s credit on mortgages has been based on total dollars loaned, which tends to motivate banks to focus on larger loans at the expense of smaller loans that could serve as credit. many low and moderate income households. So the council’s proposal to count mortgages based on the number of loans – rather than the total value – should prompt banks to issue more small mortgages.

This can help discourage banks from offering only the products that generate the most dollars and encourage them to serve more people. In addition, regulators could take this approach to determine what to include in an ARC assessment by considering only bank products that produce a high number of loans.

Home mortgages that banks buy from other lenders should also be assessed for CRA credit. These “secondary market” purchases promote liquidity by freeing up funds so that banks and other lenders can make new loans to low- and middle-income borrowers. However, loans purchased should not be eligible for ARC credit more than once so that banks receive a reward for facilitating new loans to less well-off families and underserved communities, but not for resales. multiples of existing loans.

CRA credit can be broadened to include areas with low mortgages

Banks also receive credit from ARC for loans to community development projects. But these projects sometimes take place outside of bank valuation areas, although always in areas of need, such as communities with low levels of mortgages. By providing credit to the CRA for loans to areas of need at stake, regulators could improve the volume of small mortgage origination to better meet demand.

Regulators will need to continue to focus on the shortage of small mortgages as the CRA continues to be used as a tool to encourage lending to low- and middle-income and underserved communities. They can update the CRA’s regulatory and supervisory framework to foster a more robust small mortgage market and provide a path to home ownership for many creditworthy families who want to buy low-cost homes.

Nick Bourke is a director and Tracy Maguze is an officer of The Pew Charitable Trusts home finance project.