In the mid-1970s, civil rights activists painted a red line down Seattle’s Central District that went along 14th Avenue from Yesler Way to Union Street. The minor vandalism was a protest against the city’s discriminatory practices, specifically by its banks, that restricted where people could buy homes based on race or ethnicity. In 1975, the Central Seattle Community Council Federation published a report claiming that the lending practices of Seattle’s banks as related to redlining were “destroying our neighborhoods.”
Of course, Seattle and its banks weren’t the only places participating in redlining, nor was Seattle alone in generating a robust movement to redirect investments to areas that had been historically neglected due to racial biases. Because of public pressure to end residential segregation, Congress passed the Community Reinvestment Act (CRA) of 1977. The CRA sought to address the historical legacy of racist lending practices by requiring banks to reserve a certain percentage of their lending activities for distressed areas. But unlike most civil rights legislation in the U.S., the CRA does not punish banks for their discriminatory practices. Instead, it actively compels banks to undo their racist legacies of underinvestment by prioritizing lending to neglected communities.
Despite the CRA’s lofty intentions, the law has often been criticized for being milquetoast. The requirements for a passing CRA grade are notoriously vague. The Office of the Comptroller of the Currency (OCC) determines a bank’s practices by evaluating its lending, investment and services. However, the OCC explicitly says that when evaluating the criteria, it does not use ratios or benchmarks. Due to this, regulators have tended to interpret the rules in a manner more generous to banks; currently 98% of banks covered under the CRA get passing grades. Additionally, there are no legal repercussions if a bank fails to meet its CRA requirements. The only consequences are further scrutiny among regulators and the potential for public shaming from community groups.
Originally, the requirements for serving underinvested areas under the CRA were geographically focused. Banks were obligated to serve distressed communities that existed in close proximity to their branches. However, from 2019 to 2023, the total number of bank branches in the U.S. declined by 5.6% due to the growth of online banking. The number of people living in “bank deserts” increased by 760,000, according to research by the Federal Reserve Bank of Philadelphia.
On Oct. 24, 2023, the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the OCC announced changes to how the CRA would be implemented. These were surprisingly aggressive, giving the CRA a new sense of importance and rigor that the law has not had since it was first implemented.
The new rules contain tangible metrics based on an objective quantitative analysis of a bank’s lending practices. These new stringent metrics include expanding the lending categories from a meager four to a very robust 11. The changes also call for more accountability, requiring banks to make their CRA information available on their websites. These new regulations account for the rapid expansion in tech by ordering banks to lend not only to distressed areas in geographic proximity to their branches but also where banks concentrate their lending activity. Finally, obligations were restructured so that the biggest banks received the most scrutiny, while obligations on small banks are mostly voluntary, as shown in the table.
Enforcement of the new rules was scheduled to begin April 1 but is now being delayed. On Feb. 5, the American Bankers Association and other commercial trade associations sued to block the law in the Northern District of Texas, which is known for its conservative and often business-friendly rulings. On March 29, U.S. District Judge Matthew Kacsmaryk instituted an injunction against enforcing the law, leaving open the possibility that the rules could be thrown out by the courts altogether.
The banking industry is accusing the federal agencies of engaging in a vast and burdensome governmental overreach, which they claim will discourage lending to the communities that the CRA was intended to serve. Rob Nichols, CEO of the American Banking Association, has claimed that the new rules will require between 105,500 and 235,000 hours of reporting, record keeping and disclosure. He points to research from the OCC that estimated the total cost of compliance to be nearly $100 million. According to Nichols, those extra costs will cause the new rules to backfire, as banks will have to adjust their lending to safer and fewer loans to cover the cost of enforcement.
On its face, these seem like dramatic sums. Within context, however, the amount is a pittance. The strictest regulations only apply to banks that have over $2 billion in assets — banks that have resources more than 20 times the total cost of enforcement throughout the entire industry. Across the U.S., there are over 4,500 commercial banks; less than 500 qualify for that strictest level of regulations. In all likelihood, the banking industry is opposed to the new rules because it will require actions it loathes to do: accept smaller profit returns on certain loans to ensure that distressed communities receive the investments they need.
This all comes back to issues we have been and are facing in the Emerald City. Seattle’s history of discriminatory lending and lack of investment in affordable housing, which is a critical feature of urban segregation, has reached a crisis point. A 2023 study by the Council for Community and Economic Research revealed that Seattle currently has the 9th highest cost of living of any city in the U.S., and the majority of those expenses come from housing, which costs 211.6% above the national average (see page 6). Meanwhile, the city’s Office of Housing has recently announced that Seattle will allocate far less in affordable housing funds than it has in previous years. In 2024, the Office of Housing will only fund four new affordable housing projects at $53.3 million — approximately one-third of what the city allocated last year for 12 new projects. Prior to 2024, funding for affordable housing in Seattle has not dipped below $100 million since 2018.
If the city is not willing to pay for affordable housing and if the banking industry can beat back the enforcement of the new CRA rules, then Seattle’s marginalized communities will have few options when seeking new investments. Considering the high cost of living keeping the metropolitan region segregated, it might be time for civil rights activists to consider painting a new series of red lines in the streets — but this time the lines should lead to the main culprits occupying the boardrooms of the city’s largest banks.
Marco Rosaire Rossi is the executive director of Washingtonians for Public Banking.
Read more of the April 3–9, 2024 issue.