Recent news stories explain the criticism of Senator Warren and Congresswoman Waters directed at banks that are litigating the 2023 CRA rule. But perhaps their frustration should be focused on the regulators who have promulgated the new rule which exempts from CRA examination critical types of credit extended by banks to meet the needs of the communities they serve. Ironically, the main purpose of the CRA is to measure a bank’s performance meeting the “credit needs of the local communities in which they are chartered.” In fact, the CRA has always emphasized products that are “responsive” to community needs. But the new CRA omits certain types of credit that are important to meeting the needs of the communities that banks serve. Moreover, those types of credit have been considered and evaluated under the Lending Test for decades. Now, in the 2023 CRA those types of credit will be exempt from the Lending Test.
What types of credit are now omitted from the critical Lending Test?
First, multifamily mortgages are now exempt from evaluation under the Lending Test. Multifamily mortgages that meet the affordable housing definition will be considered under the Community Development Financing Test and the Intermediate Bank Community Development Test. But only a small percentage of multifamily mortgages qualify as affordable housing. Thus, an overwhelming majority of multifamily mortgages will not be considered under either the Lending Test or the Community Development Financing Test.
Yet multifamily housing is a critical component of a community’s housing needs. In fact, in some counties multifamily housing is an overwhelming part of the housing stock. For example, in New York County, New York multifamily housing accounts for more than 95% of the housing stock based on 2024 FFIEC demographics. Financing multifamily housing is an absolutely critical need of that community, but the new CRA fails to recognize and evaluate this important form of credit, even though it is responsive to the needs of the community. This is a contradiction of decades of CRA enforcement.
In the preamble to the 2023 regulators point out that multifamily mortgages may be evaluated under the Retail Services and Products Test. But considering multifamily mortgages under the Retail Services and Products Test represents a substantially different treatment than when they were included in the Lending Test. First, the importance of the Lending Test has been emphasized by regulators by requiring a bank attain at least a “low satisfactory” performance rating under the Lending Test to be eligible to earn a “composite” performance rating of satisfactory. Second, the Retail Products and Services Test accounts for only 10% of a bank’s CRA performance rating. Incorporating multifamily mortgages in the Retail Services and Products Test represents a considerable demotion of the relevance of that mortgage product. The deemphasis of multifamily mortgages is inconsistent with the CRA’s emphasis on meeting the credit needs of the community and is a contradiction of long standing CRA enforcement.
Another form of important credit that will be exempt from examination in the 2023 CRA rule is open-end mortgage financing. According to the CFPB open-end mortgage activity accounted for more than 20% of the reported mortgage activity during 2023. In the 2023 CRA preamble the agencies “considered that open-end home mortgage loans can help to meet important community credit needs.” Nevertheless, the agencies once again contradict long standing CRA practice by excluding open-end mortgages from the Lending Test. The rationale used by the agencies to justify dropping open-end mortgages from CRA consideration strangely cites factors that have always been present in open-end mortgages but which, nonetheless, didn’t deter the agencies from including open-end mortgages in the Lending Test since 1995.
The foregoing observations don’t include the treatment and understatement of “renewals” of small business loans which I have written about in previous articles about the new CRA – another glaring omission of critical credit activity important to communities.
As high-profile consumer advocates, Senator Warren and Representative Waters don’t appear to be aware of the 2023 CRA rule’s glaring demotion of important types of residential mortgage credit needed by the communities served by banks. It is suggested that the legislators refocus their criticism on the regulators and join forces with the banking community by demanding that regulators reconsider the new rule. The new CRA should be redrafted to consider the legitimate objections of the banking community and consumer advocates alike. There’s plenty of room for a better CRA rule.
