Gregory Lobo Jost
Community Reinvestment 2.0
Over the past thirty years, neighborhood and tenant groups dealing with problem landlords have employed something known as "the good repair clause" to get repairs made in their buildings. This clause, included in most multifamily mortgage documents, requires the owner of an apartment building to keep the building in good repair (i.e., operate it as decent housing). Organizing groups such as the Northwest Bronx Community and Clergy Coalition have been using this strategy with banks that lend to problem owners/buildings since the 1970s.
While lenders will not enforce the good repair clause to the fullest extent possible (calling the mortgage due and beginning foreclosure proceedings), the more responsible institutions will inspect properties and contact owners about the repairs that need to be made. Some lenders have gone as far as to stop future lending with a specific owner if they don't comply. This type of organizing work has led to the improvement of many properties, but it only takes one bank that is willing to lend to any borrower or on any property to put a major dent in this strategy.
One such lender that has financed hundreds of distressed properties in recent years, New York Community Bank (NYCB), was the subject of a recent campaign employed by Housing Here and Now, called Fix It Now! One reason NYCB was targeted (in addition to the fact that they were the largest financier of distressed properties in New York City), was that they were in the process of acquiring another bank. Under the Community Reinvestment Act, a 1977 law that requires banks to lend in low income and minority neighborhoods, community groups could submit comments to a bank's regulator challenging an acquisition or merger based on that bank's past performance. Even though these comments rarely or never result in an application being denied, a number of nonprofits submitted negative comments in the case of NYCB. While the merger was not blocked, Housing Here and Now was able to get an agreement out of NYCB, or more precisely, "a written commitment from NYCB to improve conditions in its mortgaged properties." Whether the bank holds up its end of the bargain remains to be seen.
What was ironic in this whole process was that NYCB has consistently scored well on their Community Reinvestment Act evaluations, including on the lending test. As one of the top lenders in multifamily rental housing in New York City's low and moderate income neighborhoods, there was no reason for the regulators to think NYCB was not doing a great job (even though conditions in many NYCB-financed buildings were deplorable). Since CRA was written in response to redlining (a practice where banks refused to lend in specific neighborhoods, usually because they were predominately poor and/or minority), the original (and existing) language in CRA looked primarily at a bank's volume of lending. In this post-redlining (dare we say post-CRA) world we live in today, where credit is readily available but the quality of loans is suspect (e.g., sub-prime), banks are rated with an antiquated system.
As Mark Winston Griffith has written on DMIblog, CRA is outdated in a number of ways. It's never been modernized like the financial services industry was a few years back, and many low-income residents rely on the unregulated financial market (check cashers, payday lenders, etc.). As the Community Reinvestment Act turns 30 this year, it's time for organizing and community groups to decide if they want to make CRA relevant again. Judging on CRA's past successes in leveraging investments, neighborhoods across the country would benefit greatly from CRA 2.0.
One way to get CRA back into low and moderate neighborhoods in a meaningful way is to take into account building conditions on a bank's exam. Instead of looking purely at volume, multifamily lenders need to be held accountable for making loans to buildings that are in poor and even horrible condition. Since most rental properties in poor and minority neighborhoods are financed by lenders who are subject to CRA, this change could have a large-scale impact in the near future. Banks that are already doing a good job monitoring their portfolios and putting pressure on owners to make repairs would be rewarded with high scores. And those one or two banks that continue to lend to suspect owners and properties might finally have an incentive to stop.