A MARTÍNEZ, HOST:
A planned update to a federal law meant to stop racist lending practices faces a lawsuit. It involves redlining, where lenders systematically denied loans to people in certain communities. From our daily economics program, The Indicator, here is Adrian Ma and Darian Woods.
ADRIAN MA, BYLINE: 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%.
DARIAN WOODS, BYLINE: 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.
MA: Jesse Van Tol is CEO of the National Community Reinvestment Coalition, a group that advocates for equitable housing policy.
JESSE VAN TOL: 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.
WOODS: Every few years, a bank examiner will look at a bank and assess, 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 needs improvement basically means that the bank failed. A failing grade 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.
WOODS: The other problem with the CRA is that 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: Both consumer advocates and banks 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 the new rules could actually result in banks making fewer loans, and it could hurt the very people the CRA was meant to help. 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: Darian Woods
MA: Adrian Ma, NPR News.
(SOUNDBITE OF MUSIC) Transcript provided by NPR, Copyright NPR.
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.
