Seven states and the District of Columbia have adopted laws similar to the federal Community Reinvestment Act that require lenders to make investments in the communities in which they do business. While the federal Community Reinvestment Act law applies strictly to banks, some state laws apply to a wider range of financial institutions including nonbank mortgage companies.
The Consumer Financial Protection Bureau released a report last week examining state CRA laws and community reinvestment standards. Several states — including Illinois, Massachusetts and New York — have laws that specifically cover nonbank mortgage lenders even though the companies are not federally chartered and do not take deposits. Those three states currently conduct standalone CRA exams that assess mortgage, small-business, and small farm lending.
The report is part of an ongoing discussion of whether the nonbank mortgage companies should be subject to CRA requirements given their increased market share compared to banks.
"The financial market has changed considerably since the passage of the Community Reinvestment Act, and nonbanks are now capturing a large share of the mortgage market," CFPB Director Rohit Chopra said in a press release.
In 2021, banks originated just 25% of home loans compared with 28% in 2007 and 74% when the federal CRA was passed in 1977. By contrast, nonbank mortgage lenders originated 64% of conventional home purchase mortgage loans in 2021, the CFPB said in the report.
Due to such changes, "states have responded by creating reinvestment obligations for mortgage companies and have tailored state reinvestment requirements to meet the needs of their local communities," Chopra said.
The CFPB said in its report that none of the state CRA laws explicitly provide for states to issue civil monetary penalties or structural remedies when a company fails to meet state CRA requirements.
"The question is how much resources these states are even applying to enforcement of the CRA?" asked Brian Pillmore, the founder and CEO of Visbanking, a data information provider in Oklahoma City, Okla. "That's where the rub is."
The strongest enforcement tool that the seven states and the District of Columbia have is to have a financial institution's CRA performance taken into account during an application for a merger or acquisition. The same seven states also require that CRA performance be considered for office or branch applications. Most states consider CRA performance as part of a license application, the report found.
The CFPB said that most states rely on existing Home Mortgage Disclosure Act data for mortgage lending, or federal Community Reinvestment Act data for small businesses or small farms to conduct their evaluations. Only New York requires additional small-business lending data reporting beyond what is required by the federal law, the CFPB said.
Pillmore also noted that high mortgage rates have made it prohibitive for low- and moderate-income borrowers to buy a home, preventing those that the law was intended to help from getting into the mortgage market.
"It doesn't matter how much you encourage banks to lend in LMI areas, higher interest costs are going to prevent those borrowers in those areas from qualifying on any normal underwriting," he said.
Ken Thomas, president of Community Development Fund Advisors and a veteran CRA expert, said the CFPB's encouragement of more state CRA laws is "a good public policy development," because expanding CRA to credit unions and potentially to mortgage lenders could "level the playing field for banks."
Some consumer advocates have suggested that Massachusetts' state CRA law, enacted in 2007, should serve as a model for expanding community reinvestments to mortgage companies.
But Thomas said he thinks that credit unions rather than nonbank mortgage lenders should be the target of CRA expansion efforts by the states largely because federally chartered credit unions enjoy the same privileges as banks.
"We give banks deposit insurance, access to the discount window, charter privileges and all those arguments apply equally to credit unions that are federally insured," Thomas said.
Looking at data collected by the state of Massachusetts, 14 banks received an "outstanding," CRA rating compared with just three credit unions, out of a total of 92 state banks and 51 federally insured credit unions.
"We now have proof that banks do a much better job than others in serving their community as measured by the Massachusetts data and that's pretty impressive," Thomas said. "Especially for big credit unions and those that are buying banks, they are taking out the community footprint of a bank with a CRA obligation and replacing it with a credit union that doesn't have that obligation."
