Should the Community Reinvestment Act (CRA) apply to Independent Mortgage Banks (IMBs)?
Federal and state policymakers are asking this very question. A new policy brief from the Mortgage Bankers Association provides a clear answer: No. The evidence shows that such a move is a solution in search of a problem.
Banks obtain deposit insurance from the Federal Deposit Insurance Corporation (FDIC), giving consumers in local communities the confidence to put their money in the banks. The CRA was enacted in 1977 to encourage banks that benefit from FDIC insurance (and other federal programs) to help meet the credit needs of the communities in which they do business, including low and moderate-income (LMI) neighborhoods.
IMBs, however, do not take local deposits. The concept of “reinvestment” of deposits, therefore, makes no sense in the context of IMBs. Instead, IMBs utilize other capital streams to make their services widely available within the communities they serve – importing funds from national and global capital markets to lend in these communities. They do not obtain deposit insurance or other benefits that federal- or state-chartered banks enjoy. The CRA is designed to cover a different business model and is therefore a poor fit for IMBs.
Moreover, IMBs already invest heavily in the communities that the CRA seeks to help. The Urban Institute has found that IMBs are the primary originators within the federal programs designed to reach low-and moderate-income communities.
According to MBA’s analysis of federal Home Mortgage Disclosure Act (HMDA) data, within the Federal Housing Administration, which predominantly serves minority and first-time homebuyers, IMBs account for 85 percent of loans. They also account for 74 percent of Department of Veterans Affairs loans and 69 percent of Rural Housing Service loans. All told, IMBs originate 62 percent of purchase mortgage loans for low- and moderate-income borrowers. They issue an even higher percentage of loans for minority borrowers – 67 percent. Homebuyers who rely on IMBs have loans that are, on average, 11 percent smaller than those who use banks covered by the CRA.
Applying the CRA to IMBs could undermine the purpose of the law itself. Independent mortgage banks already are subject to a robust and successful regulatory system. The Consumer Financial Protection Bureau (CFPB), state regulators, and Fannie Mae and Freddie Mac (the GSEs) apply high standards to IMBs with respect to capital and liquidity, consumer protection, fair lending, and other requirements. Expanding the CRA would expose them to significant new regulatory burdens, adding costs and complexities that would make their current operations more difficult to continue while providing no apparent benefit given their strong lending records.
While the CRA serves an important policy objective, it is inappropriate to apply it to these institutions. Federal and state policymakers should keep this fact in mind and remember that IMBs already are a key mortgage provider in low-and moderate-income communities.
For more on the important role IMBs play in the housing market, visit www.mba.org/imb.