Whenever a bank wants to open a new branch, relocate, or merge with another bank it has to show it has complied with the Community Reinvestment Act (CRA), a Carter-era piece of federal legislation aimed at the problem of “redlining.” Before the act, redlining was the prevalent practice by banks of not loaning money to people in certain neighborhoods or otherwise investing money there. The CRA forces banks to make investments that demonstrate a “continuing and affirmative obligation to help meet the credit needs of the local communities in which they are chartered.” The CRA is a really critical piece of legislation that has helped to counter years of discriminatory lending practices.
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Now, maybe there’s a way to make the act even better: how about adding a requirement to encourage lending for energy efficiencies? A report from Green For All, called “Building a Sustainable City: Green Jobs for Buffalo” calls for exactly that.
But the fact is, when it comes to energy efficiencies the market place for borrowers and lenders is failing. As I have written before there isn’t a big demand for retrofits in the residential sector, and banks aren’t lending lots of money for retrofits. In theory, homeowners should be stampeding to banks asking for money to perform energy retrofits to their homes. Why wouldn’t a person invest in something that is clearly going to save money over the long haul? As I’ve discussed, the reason it doesn’t happen is because people don’t have the money up front—and given current energy prices the savings can take a long time to materialize. Increase energy prices, and demand for retrofits and loans would probably increase as well.
The economy is in shambles and lots of people are unemployed. Everyone is sitting tight these days: banks are sitting on their money; potential home buyers are waiting for prices to fall further; and sellers are holding on their asking price, for example. The whole borrowing and lending market for real estate is kind of stuck right now. One way to help unstick part of it would be using CRA to address the market failures in energy efficiency financing.
Pushing banks to put their money into efficiencies makes a lot of sense. Energy efficiency upgrades reduce energy spending, so they would save poor people money on energy now, and create a buffer for those families if energy prices should rise in the future. The CRA is geographically focused, so banks could conceivably target whole neighborhoods, which could improve the scale of lending and generate a better risk pool and more profits. And the result would be a lending program that would save energy, reduce CO2, and create jobs. In other words, pumping up CRA would help get us Retrofits For All.
Photo credit: gracey from morguefile.com.