Only Surprise in Chase CRA Downgrade – What Took So Long?

To anyone involved with low- and moderate-income neighborhoods, the only surprise in the news that JPMorgan Chase's Community Reinvestment Act rating had been downgraded twice in the last six months was that it took so long.

The Community Reinvestment Act of 1977 mandates that banks serve the credit needs of communities where they gather deposits. The law grew out of the widespread and systematic denial of credit to residents of low-income communities that were "redlined" on maps in bank lending departments. These redlined areas were comprised overwhelmingly of people of color, immigrants and other population segments long-disenfranchised by "mainstream" financial institutions.

In the run-up to the financial crisis, communities which had previously been "redlined" became "greenlined." Instead of denying loans to residents of disadvantaged communities, banks profited from channeling these consumers into high-rate, subprime mortgages – even if they qualified for lower-rate, conventional loans.  

Federal regulators rewarded the nation's biggest banks for this lending with "outstanding" CRA ratings. However, we now know that the loans they were making were so toxic that they ultimately precipitated the worst economic disaster since the Great Depression. The catastrophe required a trillion-dollar government bailout to save the nation's largest banks from the consequences of their imprudent lending and to unfreeze the credit markets.

Yet, despite the fact that after the bailout only businesses and consumers with near-perfect credit could secure loans, the Office of the Comptroller of the Currency maintained that the nation's biggest banks were Outstanding in serving the credit needs of low-income communities.

During the ensuing Great Recession, numerous lawsuits by federal agencies, consumers and corporations have questioned the loans made to low-income consumers by JPMorgan Chase and other large banks, the securities into which these mortgages were packaged and sold to investors, and the banks' mortgage servicing and foreclosure practices.

JPMorgan Chase and other megabanks admitted they overcharged and/or foreclosed on thousands of members of the U.S. Armed Forces in violation of the Servicemenbers' Civil Relief Act which prohibits such actions.

JPMorgan Chase and other large banks were found to have manufactured fraudulent "robo-signed" documents with which they attempted to foreclose on delinquent homeowners.  The bank also used "robo-signed" documents to sue delinquent credit card holders.

JPMorgan Chase is among the large banks being sued for forcing mortgage holders to purchase flood insurance in excess of amounts required by law and with receiving commissions and kickbacks from the companies that sold the policies the homeowners were forced to obtain.

And just days ago, Chase and nine other big banks agreed to pay $8.5 billion to settle allegations by the OCC that they mishandled foreclosures following the financial crisis. 

Despite these deplorable lending activities, it has been rare for the OCC to award the nation's largest banks anything but the highest CRA ratings – until now.

It would be reassuring to view the downgrade of JPMorgan Chase's CRA rating as a long-overdue correction to past errors in evaluations – a recognition that CRA ratings should reflect the quality of the credit extended to low- and moderate-income communities as well as the quantity.

But the Chase downgrade stands alone relative to its peers. The rest of the nation's megabanks still have Outstanding CRA ratings despite an environment where this seems improbable, at best. An environment where residents of low-income communities still turn to payday loan companies and pawn brokers for credit because their banks won't make $300 loans.

At the same time, these banks are closing branches in low-income neighborhoods while opening branches in more affluent neighborhoods nearby. And, they are increasing fees, charges and minimum balance requirements for accounts which disproportionately affect Americans of modest means.

Two of the primary contributors to the financial crisis of 2008 were imprudent bank lending and lax regulatory supervision. The crisis cost millions of Americans their jobs, their homes and their life savings.

Awarding "satisfactory" and "outstanding" CRA ratings to the banks at the heart of the crisis adds insult to injury to these Americans.  And these positive ratings virtually guarantee that the questionable activities for which major banks are paying billions of dollars in fines and legal settlements will continue.

By downgrading the CRA rating of JPMorgan Chase, the OCC demonstrated it is capable of holding a major bank accountable for a deplorable record of serving the credit needs of low- and moderate-income communities.  But, the process must be applied to other major lenders to generate a sustained positive impact on financial lives of the country's most vulnerable citizens.

Jim Wells is President of Wellspring Consulting International, a Florida-based consultancy committed to expanding access to financial services for non-traditional consumers who do not use traditional financial institutions.