Housing Law to Help People of Color Doesn't Apply to Most Mortgage Lenders

While the Federal Reserve's recent efforts target racial discrimination in home lending, a critical distinction seems to have been largely overlooked. Most of today's mortgage lenders are non-banks and credit unions, entities not governed by the new mandate.

Despite the Fed pushing mortgage rates to levels not seen since the turn of the century with 11 interest rate hikes, its latest move primarily impacts banks.

Last week, the institution voted in favor of updating the 1977 Community Reinvestment Act (CRA), which seeks to combat the legacy of redlining. The first update since 1995 mandates that banks—not the majority of current mortgage lenders—bolster mortgage lending in low-income areas, directly challenging historic practices that barred minority applicants from loans.

The CRA was established to curtail redlining, a discriminatory tactic in which lenders were dissuaded from providing mortgage loans to predominantly Black neighborhoods. The racial homeownership gap today is broader than in 1968 when redlining was still legal, so the update that goes into effect in 2026 is crucial for minority groups looking to own a home.

What's new?

The update to the law ensures that banks must allocate more loans in lower-income regions, especially where they have a significant volume of mortgage and small-business loans, regardless of physical branches.

Before the change, online banks were evaluated based only on their headquarters' location, while traditional banks were judged by their physical branch locations.

The CRA changes will impact banks with more than $600 million in assets.

Potential consequences

Federal Reserve Chair Jerome Powell, while defending the rule, said, "to help ensure that the CRA can continue to play its vital role in supporting economic opportunity in low- and moderate-income and other underserved communities, the agencies have worked together to modernize the framework and I am pleased that those efforts have culminated today."

However, the banking community's reactions are mixed. The American Bankers Association (ABA), which had expressed concerns over the changes, remains uncertain. ABA CEO Rob Nichols highlighted that while banks invested a staggering $287 billion in capital in low-income regions in 2021, the proposed updates might have unintended consequences, particularly in more sparsely populated areas.

Consumer Bankers Association (CRA) President Lindsey Johnson, while acknowledging the noble intentions, cautioned, "Some of the updates could unintentionally impact the consumers we aim to assist."

Kentucky Republican Representative Andy Barr had stronger criticism, warning of reduced credit availability to underserved communities due to micromanagement and potential misuse of the CRA rule by politically unaccountable regulators.

Broader implications

Beyond the potential economic consequences, the CRA update has profound societal ramifications. Redlining has left an indelible mark on the American socio-economic fabric, leading to generational disparities in wealth and homeownership.

The new update seeks to rectify past wrongs by pushing banks to invest more in historically marginalized communities.

Yet, the challenges cannot be understated, as there remains a genuine concern that banks might retreat from these areas instead of investing further.

The exclusion of credit unions and non-bank lenders from the update—entities like Rocket Mortgage and SoFi Technologies make up the majority of mortgage lenders—poses another significant hurdle.

Still, the updated CRA presents a hope for rectification and a maze of potential challenges. With the rule going into effect on January 1, 2026, some banks and the Fed will be watching for its real-world implications.