Why banks are suing over alterations made to the community reinvestment act : The Indicator from Planet Money In 2023, The Federal Reserve and other banking regulators announced they were making changes to how they grade banks on servicing local communities. This all stems from a 1977 law called the Community Reinvestment Act, which was designed to encourage banks to better meet the needs of moderate and low-income borrowers. However, major banking trade groups weren't too excited about the new rules and filed a lawsuit against the banking regulators last week.

Today on the show, we explain the history of racist housing policies in the United States and how that history informs the banks' fight with the government today.

For sponsor-free episodes of The Indicator from Planet Money, subscribe to Planet Money+ via Apple Podcasts or at plus.npr.org.

Music by
Drop Electric. Find us: TikTok, Instagram, Facebook, Newsletter.

Why banks are fighting changes to an anti-redlining program

  • Download
  • <iframe src="https://www.npr.org/player/embed/1197961870/1231890493" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
  • Transcript






And I'm Darian Woods. Last week, trade groups that represent almost every bank in the country filed a lawsuit against banking regulators, and the claim centers around a law that's almost half a century old, which is aimed at addressing this country's history of housing discrimination.

MA: That law is called the Community Reinvestment Act, or CRA. And the reason banks are suing now is because for the first time in decades, the regulators in charge of enforcing the CRA decided that the way they've been doing things wasn't good enough, and it was time to make a change.

WOODS: Today on the show, the history of the government's explicitly racist housing policies and how that informs the banks' fight with the government today.


WOODS: Back in the mid-1930s, during the Great Depression, the federal government was trying to think about a way to juice the economy. One big, bold idea that it hatched was to set up a new agency that was dedicated to increasing access to homeownership, and this was called the Federal Housing Administration.

MA: And the idea was that the FHA would promote homeownership in part by encouraging banks to make loans. They felt like they had to do this because it was the Great Depression, and banks were kind of afraid to make loans. So the FHA said, look, if you make these loans, we'll guarantee them. If a borrower defaults, we'll hold the bag for you.

WOODS: And by one measure, this policy was incredibly successful. With less risk on their plate, banks started making more home loans. Homeownership exploded, especially in the newly expanding, mostly white suburbs.

MA: But at the same time, the government was not trying to backstop just any loans.

MITRIA SPOTSER: Financial institutions had encouragement from the federal government not to lend to majority minority communities. Banks were empowered to decline loans from people of color.

WOODS: This is Mitria Spotser. She's with the Center for Responsible Lending, which is an advocacy group focused on consumer finance. And she says that the FHA's reasoning was that these loans would be too risky for it to guarantee.

JESSE VAN TOL: It's very clear that some racist ideas went into the formulation of categorizing those neighborhoods as more risky.

MA: This is Jesse Van Tol, CEO of the National Community Reinvestment Coalition, a group that advocates for equitable housing policy. He says not only did the FHA discourage banks from lending in neighborhoods where mostly people of color lived. It also discouraged them from lending to Black people or people of color who wanted to move to mostly white areas.

VAN TOL: So in particular, the underwriting manual of the FHA said, quote, "incompatible racial groups should not be permitted to live in the same communities."

WOODS: These policies would later become known as redlining, and it's named after the series of government maps which shaded in red these communities that were deemed a high-risk investment.

SPOTSER: Banks and financial institutions would take in deposits from lots of communities, minority communities, lower-income communities, but they would lend disproportionately only to wealthy communities.

MA: Redlining reinforced the racial wealth gap, and it's one of the big reasons why homeownership rates for white Americans today is about 70%, while homeownership rates for Black Americans is roughly 40%.

WOODS: Now, redlining was eventually outlawed by the passage of the Fair Housing Act in 1968, but almost a decade later, not much had changed. Discrimination persisted. Banks were still not doing much lending in communities of color. And that's where the Community Reinvestment Act of 1977 comes in.

SPOTSER: So the Community Reinvestment Act actually stems from a very simple proposition, which is that the people that you take in deposits from, you have an obligation to make sure that you're lending to all of them.

WOODS: When the Community Reinvestment Act was passed, Jesse says it was kind of an unusual law.

VAN TOL: There are lots of laws that say that you cannot do bad things. There are very few laws that say, essentially, you must do good things, and CRA is constructed in that way. It says you have this affirmative obligation to invest in things like affordable housing, to invest in job creation, to lend to small businesses, to lend to people seeking to buy their first home.

MA: And the law says banks have these obligations wherever they take deposits - so basically, wherever they have physical branch locations or ATMs. You could say that the CRA was trying to address the effects of a racist policy without actually mentioning race, and this has actually been a longtime criticism a lot of housing advocates have of the law.

WOODS: And this is how it worked - the agencies in charge of enforcing the CRA, which included the Federal Reserve, would subject banks to these tests. Every few years, a bank examiner will look at a bank and assess - how much lending is it doing in the areas that it serves? Are low- and moderate-income people getting loans? Is the bank investing in things like affordable housing? And after all that, the bank gets a rating. A rating of outstanding or satisfactory means that the bank passed, and a rating of needs improvement basically means that the bank failed. And while a failing grade doesn't mean, like, the bank gets shut down or anything like that, it could mean the regulators don't allow a bank to expand in the future.

MA: Now, Jesse says this is not a bad framework in theory, but there are two big problems with the CRA today. For one thing, there are not a lot of standard metrics to decide, does a bank fail, or does it pass? And he says that's sort of led to grade inflation.

VAN TOL: Over time, more and more banks have gotten satisfactory and outstanding. In fact, 98% of banks under CRA get a passing grade today, and that hasn't always been true. And when you dig into that 98%, some of them don't look like they're doing a great job.

MA: Jesse points to the fact that the Department of Justice recently settled with multiple banks after accusing them of discrimination, and yet most of these very same banks passed their CRA exams. So Jesse argues that this shows the tests don't really work as well as they should.

WOODS: And the other problem with the CRA is that it hasn't kept up with the changing technology in the banking sector. For years now, people have been able to bank online. They've been able to deposit checks by phone and even get loans without ever setting foot in a bank branch. And yet the CRA still focuses on bank activity around physical locations and ATMs.

MA: Now, what's interesting here is that both consumer advocates and banks were in broad agreement about these problems. Both wanted to see regulators modernize their approach to the CRA. And after several years of working on new rules, federal regulators finalized those changes last October.

WOODS: Among those changes, more standardized metrics to assess whether banks are meeting their obligations - also, new rules that assess banks' lending and community investment activities, regardless of whether it takes place near a branch.

MA: So for example, let's say a bank only has branches in North Carolina, but they also make a lot of loans to people in California. Under the new rules, those California loans would be part of how regulators judge the banks under the CRA.

WOODS: And this is what triggered the lawsuit from the American Bankers Association and other industry groups. Now, the bank association declined our request for an interview, but in their lawsuit, they argue that regulators are overstepping their authority. And they say that the new rules could actually result in banks making fewer loans, and it could hurt the very people the CRA was meant to help.

MA: Mitria from the Center for Responsible Lending does not buy this argument.

SPOTSER: If I were being real, I think it's also hypocritical. I think what they wanted is they wanted to have their cake, and they wanted to eat it, too.

WOODS: This lawsuit was filed in federal court in Texas, which is known in the legal world for being business friendly and regulator hostile, and the banks are asking the courts to put the new CRA rules on hold until the litigation is resolved.

MA: And if the banks get their way on that, it might be years until this anti-redlining rule finally gets an update.


WOODS: This episode was produced by Corey Bridges with engineering by Neal Rauch. It was fact-checked by Sierra Juarez. Paddy Hirsch edited this episode, and Kate Concannon edits the show. THE INDICATOR is a production of NPR.

Copyright © 2024 NPR. All rights reserved. Visit our website terms of use and permissions pages at www.npr.org for further information.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.