Rollback of Federal Community Reinvestment Rule Spurs State Legislative Action

Over the past 47 years, seven states have enacted their own, state-level versions of the federal Community Reinvestment Act to ensure financial institutions within their jurisdictions are meeting the banking, lending and investing needs of consumers.

Passed in 1977, the federal act was established first to combat redlining, the discriminatory practice of denying loans to people based on their race or ethnicity or the racial composition of their neighborhood.

The federal CRA primarily covers banks. Subsequent state legislation enacted in Connecticut, Illinois, Massachusetts, New York, Rhode Island, Washington and West Virginia cover a wider array of nonbank mortgage companies and vary in how they address entities found to not be properly serving low- and moderate-income neighborhoods.

Most commonly, state-level CRAs are enforced by limiting the mergers and acquisitions and licensing of non-complying entities. Today, one state is exploring a scheme with more aggressive penalties for noncompliance, while another is eying its own CRA in response to actions by the Trump administration.

Handful of States Take Up Community Reinvestment Measures

Lawmakers in at least eight states have introduced bills dealing substantively with community reinvestment this year, according to the LexisNexis® State Net® legislative tracking system. Two of those states, Illinois and Maryland, have enacted such measures.

Bills introduced in California and New Jersey

In California, Assemblywoman Mia Bonta (D), wife of the state’s attorney general, Rob Bonta (D), has introduced AB 801, which would establish a California Community Reinvestment Act that would penalize entities receiving a poor rating by banning them from holding state funds or contracts. The bill is part of a reparations legislative package introduced by the California Legislative Black Caucus this year.

“California has an opportunity to ensure that leading mortgage lenders are reinvesting into the communities they serve, including low-income communities, communities of color, and wildfire-impacted communities,” said Bonta in an April press release. “I’m proud to lead this California Legislative Black Caucus priority bill, recognizing that the mortgage lending landscape has changed significantly in the last 50 years. AB 801 seeks to combat the racial wealth gap, expand access to affordable housing, and focus on accountability of our financial institutions to ensure they are investing in communities and community programs to help Californians. It is time for California to prioritize our historically neglected communities.”

In New Jersey, companion measures AB 5957, by Assemblywoman Verlina Reynolds-Jackson (D), and SB 4694, by Sen. Britnee Timberlake (D), would apply to online institutions, credit unions and other nonbank mortgage lenders like the CRAs enacted in other states. But the Garden State’s measure was introduced as the feds announced their intent to rollback a plan to modernize compliance assessment due to a legal challenge. California’s bill was also reportedly prompted by this change.

“New Jersey’s Community Reinvestment Act demands accountability from all financial institutions profiting here—banks, non-banks and more,” Timberlake told New Jersey Citizen Action, a statewide coalition fighting for social, racial and economic justice, in July. “With federal protections fading and corporations extracting wealth without reinvesting, our state must step up to protect vulnerable communities and ensure fair reinvestment where it’s needed most. Modeled after the federal CRA, the state version expands oversight and reinforces commitments to reduce foreclosures and boost lending to small businesses—including those owned by women, veterans, and minorities.”

Industry Opposition to CA CRA

California’s AB 801, in particular, has drawn considerable industry opposition. Credit unions have said a state-mandated CRA is unnecessary because “their community-focused mission is inherently embedded in what they do,” as California Credit Union News reported. The California Credit Union League argued “the bill would introduce new and burdensome compliance which could hinder credit unions’ ability to serve their members.”

The national Mortgage Bankers Association and California Mortgage Bankers Association, likewise, said AB 801 would impose “new compliance obligations” on independent mortgage banks (IMBs) that are “unnecessary, redundant, and damaging,” noting the bill would authorize California’s Department of Financial Protection and Innovation “to impose administrative penalties of up to $100,000 for failing to comply with these new requirements.”

“Subjecting IMBs to costly new CRA obligations is unwarranted given that these companies clearly lead the market in serving low- and moderate-income borrowers and minority communities,” the organizations said, pointing to an MBA-sponsored report by the Urban Institute.

Chris Shultz, vice president of government relations for the California Bankers Association, meanwhile, expressed concern that AB 801 would apply “exclusively to state-chartered institutions, leaving federally chartered banks—which often operate in the same communities—exempt from these new requirements.”

“This creates a significant competitive imbalance,” he said. “In an environment where community banks are already under pressure from consolidation, AB 801 sends a damaging message: that operating under a California charter brings greater regulatory risk and burden than benefit.”

Start of a Blue-State Trend?

Although AB 801 was passed by the California Assembly, it appears to be dead for the session, but it’s also expected to be revived by Bonta next year. The New Jersey measures are still pending, without any actions taken on them yet.

Collectively, though, the bills suggest concern among at least some state legislators about the Trump administration’s oversight of the federal CRA. In fact, also pending in the New Jersey Assembly is a concurrent resolution, ACR 62, introduced by Assemblywoman Garnet Hall(D), urging Congress to reject changes to the federal act.

Whether this is an emerging trend remains to be seen. But given blue-state opposition to the Trump administration’s actions, it’s possible the issue could spread to other Democrat-led states.

—By SNCJ Correspondent BRIAN JOSEPH

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