Is the Community Reinvestment Act really helping to regulate banks?

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Is the Community Reinvestment Act really helping to regulate banks?

Last week, David Dayen at The Intercept reported on a disturbing discrepancy. Under the Community Reinvestment Act, federal law since 1977, banks are graded based on "how well they provide lending and investment to low- and moderate-income (LMI) neighborhoods where they take deposits." The vast majority of banks pass with flying colors, despite the fact that one in four American households have either no access or almost no access to traditional banking.

While banks are pushing forward into the future — online banking and mobile-first efforts are increasingly driving innovation in the industry — LMI communities and government regulations have fallen behind.

Frequently, banks are being rewarded with good grades for actively destroying their local communities. Banks are supposed to be graded on how much they lend and invest in their local areas, but as Dayen points out, this can lead to banks being rewarded for lending to developers who purchase single-family homes in low-income neighborhoods, evict the current residents, and convert them to luxury rentals.

The biggest problem? The Community Reinvestment Act is a toothless law. Three different federal agencies oversee the law, but they don't work together on their examinations. The examinations are also subjective and easy to manipulate; there's currently "no mechanism to decipher whether a loan in an LMI neighborhood benefits or harms the community." And even if a bank does end up getting a bad grade, there are no financial penalties attached to it.

Regulators are re-evaluating the Community Reinvestment Act now, and activists are working to encourage regulators to update the implementation of the law. A better implemented Community Reinvestment Act is only one step towards better serving America's low- and middle-income communities, however: the problem of access remains for a quarter of American households.

One potential solution to this lack of access is an idea called postal banking — essentially, the U.S. Post Office, which already has a location in every zip code in America, would take on basic banking functions. It's a relatively simple and clean solution that both helps a huge portion of the population and saves the U.S. Post Office from almost certain bankruptcy.

Image: Adrian Berg