More Money Down The Case for a Community Reinvestment Act to Ensure Financial Institutions Help Solve Canada's Affordable Housing Crisis CCRC Position Paper #8 (November 1999)

Table of Contents

Summary

I. The Need for Affordable Housing in Canada

II. Financial Institutions and Affordable Housing Financing in Canada: A Gap to be Closed

III. The U.S. Community Reinvestment Act: Encouraging Financing for Affordable Housing

III. A Community Reinvestment Act for Canada: Encouraging Financial Institutions to Do Their Part for Affordable Housing

(a) How Should a Canadian Community Reinvestment Act (CRA) Work?

(b) The Impact on Affordable Housing Financing if a CRA Was Enacted in Canada

V. Recommendations to Close Gaps in Canadian Government Policy and Legislation

There is a clear need, according to several reports analyzing the situation, for affordable housing in Canada. For example, the Federation of Canadian Municipalities estimates the need at 45,000 rental units annually over the next decade, not including single-detached houses. There is also clear evidence that Canada's financial institutions, especially banks, do not provide enough financing for construction of affordable housing developments, and are very inflexible in terms of requirements for financing both developments and home mortgages for people with low incomes. As has been made clear in several reports (for example, National Housing Policy Options Paper: A Call for Action (Federation of Canadian Municipalities (June 1999)); Report of the MayorÕs Homelessness Action Task Force (the Golden Report: 1998)) it is essential that all levels of government in Canada increase funding for affordable housing. There are also measures that Canadian governments, especially the federal government, can take to ensure that financial institutions provide financing to credit-worthy housing developments and mortgage applicants. Legislation that has existed for over 20 years in the U.S. has worked effectively to ensure that financial institutions play their part by providing financing for credit-worthy individuals and community development projects.

The U.S. legislation, entitled the Home Mortgage Disclosure Act(HMDA) and the Community Reinvestment Act (CRA), requires detailed disclosure of financial institutions' lending, investment and service record branch by branch, neighbourhood by neighbourhood across the country. Each institution's record is reviewed and graded regularly by government agencies. Institutions are required to take corrective action if they have a failing grade, and applications to expand, especially by merging with or taking over other financial institutions can be also be denied.

As a result of these laws, more than $1 trillion has been committed by financial institutions for targeted investments in low- and moderate-income, and visibility minority neighbourhoods and communities. Of this amount, estimating conservatively, at least $315 billion has been financing for affordable housing. Included in the list of financial institutions that have been reviewed, graded and required to take corrective action or denied an application to take over another institution because of a failing grade are Bank of Montreal's subsidiary Harris Bancorp of Chicago, and TD Bank's subsidiary Waterhouse.

The disclosure, review and grading requirements of the U.S. HMDA and CRA laws are completely applicable to Canadian banks and other deposit-taking financial institutions. Given our much more concentrated banking sector, however, penalties for failing grades should go beyond denying an application to expand, merge or take over another institution. Other penalties for a failing grade should include the following: prohibition on receiving government contracts, and cancellation of current contracts; requiring the institution to hold public meetings to set out how it will improve its record; and fines and special surtaxes.

If such laws were enacted in Canada, it is very likely that, estimating conservatively, $15 billion over the next decade would flow from financial institutions into affordable housing financing across the country.

In his June 1999 policy paper entitled Reforming CanadaÕs Financial Services Sector, federal Finance Minister Paul Martin has proposed requiring federally regulated financial institutions to disclose some of the information required under the U.S. laws, such as locations of openings and closings of branches, and has proposed setting up a government agency to audit financial institutions' records in customer service, especially to people with low incomes. However, Martin has failed to propose disclosure requirements for lending and investment in business and community development projects, especially affordable housing, on a neighbourhood by neighbourhood level. Martin also failed to propose a review and grading system, or any penalties, for a poor record in lending, investment and service.

If Paul Martin and the federal government do not close these and other gaps in the policy paper's proposals (For details, see below section V: Recommendations), it will be impossible to hold financial institutions accountable for poor service, or for turning away credit-worthy individual, business and community development applicants for loans and investments. Without these accountability measures in place, financial institutions will have no incentive to serve all Canadians fairly and well, or fulfill their role in helping solve the affordable housing crisis in Canada.

Affordable housing is a term that is often used loosely, and can refer to everything from an affordably priced home for first time home-buyers, to subsidized housing that is geared to income. The key question is: "affordable to whom?" Affordable housing in this paper refers to housing that is affordable to people surviving on social assistance, with a disability, or working poor -- families with children, individuals, sole-support parents, and elderly people surviving on low incomes.

Since the private market has generally not produced any quantity of affordable housing, the responsibility has fallen primarily to the public and not-for-profit sectors. Historically, through a combination of public, non-profit and cooperative housing, governments have provided or assisted in the provision of housing at below market rates. However, with the withdrawal of governments from housing funding, we are seeing a growing crisis in Canada.

In June 1999, the Federation of Canadian Municipalities (FCM) published its National Housing Policy Options Paper: A Call for Action. The paper uses the term "Core Need" for affordable housing, which it describes as follows:

Core need is a precise measure of housing need developed by Canada Mortgage and Housing Corporation (CMHC) and used for many years. Core Need counts households that cannot afford (within 30 percent of income) a suitable, adequate, median-rent unit in their local market and who have one or more of the following problems:

This measure therefore excludes people who have more space than they need or could realistically move up or down to an average-priced unit. The FCM's profile of tenants in core need households indicates that they "have average household incomes of $14,600 (ranging from $11,600 to $17,500 by province). They pay on average 47% of their income on rent." The FCM paper estimates that 1.2 million Canadian tenant households are core need households, not including Aboriginal people living on reserves and a small number of owner households that are core need households. Moreover, the report states that this figure "increased sharply from 1991 to '96, rising by one-third from 849,000 to 1,151,000." and that "[p]reliminary indications from other data indicate that this did not improve in the latter 1990's, as rising rents outstripped improved income from the strong economy."

The report also gives some interesting figures on other elements of affordability:

• Over 90,000 households are on assisted housing waiting lists in major cities across the country. This is a very conservative estimate, because many waiting lists for non-profit and co-operative housing are not comprehensively tallied, and because many people do not bother to apply when lists are so long.
• The estimated need for additional supportive housing is 5,000 units in Toronto, and about 800 in Edmonton. Other cities identify a clear need which has not yet been quantified.
• In the past five years, major Canadian cities have lost over 12,000 units of rental housing, mainly through conversion to condominiums.
• Use of homeless shelters on an average night is about 300 people in Vancouver, 700 in Calgary, 800 in Edmonton, 250 in Ottawa and over 3,000 in Toronto.
• Additional rental housing requirements nationwide, net of single-detached houses, are predicted to be 45,000 units annually over the decade 2001-2010. These requirements are considerably above recent rental housing production levels. For example, in 1998 only 7,000 rental units were developed.

These figures show clearly that, nationwide the need for affordable housing is dire and growing. The figures only tell part of the tale of the human cost of not having adequate housing. A home is the foundation from which people piece together the building blocks of a productive life for themselves and their children. Without a home, it is nearly impossible to maintain emotional, physical and mental health, to find and keep a job, to go to school or to raise a family. Beyond being a cornerstone for individual well being and a stable family life, adequate housing is also a cornerstone of communities.

An initial problem faced by many affordable housing projects is a lack of up-front capital to cover the costs of developing the project proposal and to leverage financing for the project. As several reports have detailed (for example, National Housing Policy Options Paper: A Call for Action (Federation of Canadian Municipalities (June 1999); Report of the Mayor's Homelessness Action Task Force (the Golden Report: 1998)) all levels of government should be dedicating funds to close this and other key gaps that currently prohibit the development of affordable housing in Canada.

If, despite the significant funding hurdles, a housing development proposal can be completed the next step is usually either an application to a provincially subsidized housing agency or, if private financing is sought, to the Canada Mortgage and Housing Corporation (CMHC). CMHC provides insurance of up to 95% of the value of the mortgage for affordable housing developments. The CMHC insurance is provided for a cost, taking into consideration factors such as the amount of the down payment and whether the development is a new building or a renovation of an existing building. Some affordable housing developers cite problems with the CMHCÕs terms for insuring such developments, as the insurance costs for some types of housing sometimes make the development very difficult to finance.

Beyond the initial funding and insurance hurdles, many projects then face difficulties securing financing from Canadian financial institutions, even with guaranteed CMHC insurance of the mortgage. Examples of these difficulties include inflexible or excessive interest rates, policies that deny lending to non-customers or to non-profit organizations, and provision of only part of the financing costs.

Individuals with low incomes also face significant barriers when applying to rent an apartment or to purchase or mortgage a home.

The most significant barrier to low income households obtaining rental housing is a requirement by some landlords that the rent must not be higher than 25-35% of the tenant's income (called the "rent to income ratio" requirement). This requirement has been found by provincial human rights tribunals in Quebec and Ontario to be discriminatory against women, single mothers, social assistance recipients, young people and other disadvantaged groups.

The Quebec Charter of Human Rights and Freedoms is the only human rights legislation in Canada that prohibits discrimination on the basis of social condition and recognizes social and economic rights, though many other provincial human rights codes provide protection from discrimination on the basis of receipt of public assistance or source of income. The Canadian Human Rights Act, unfortunately, provides no protection from this type of widespread discrimination. A Quebec Human Rights Tribunal found that a landlord who used a rent to income ratio to reject a tenant's rental application had discriminated on the basis of social condition. The landlord had presupposed that the applicant would not be able to pay the rent instead of checking with former landlords or other creditors to determine the applicant's actual record in meeting financial obligations. The Quebec Court of Appeal upheld the tribunal's ruling (Quebec (Comm. des droits de la personne) v. Whittom (1993), C.H.R.R. D/349, Leonard Whittom c. La Commission des Droits de la Personne du Quebec et Johanne Drouin, Cour D'Appel, Province de Quebec Greffe de Montreal No. 5000-09-000153-940, Date of Decision, May 28, 1997).

More recently, a specially appointed board of inquiry under Ontario's Human Rights Code found that the use of rent to income ratios, either alone or in conjunction with other factors, results in discrimination on the basis of sex, race, citizenship, receipt of public assistance, age, marital status and family status and causes widespread hardship among disadvantaged groups. After 60 days of hearings and the presentation of elaborate surveys by landlords, the board concluded that there is no evidence of a correlation between rent to income ratios and risk of default on rent. (Kearney et al. v. Bramalea Limited et al., [1998] 21 O.H.R.B.I.D., Decision No. 98-021).

Unfortunately, similar barriers exist for low income households trying to get mortgages in order to access affordable home ownership or for single parents trying to hang onto a home after a separation. Financial institutions will generally not consider an applicant for a mortgage if the mortgage payments (gross debt service) would be higher than 32% of the applicant's income. This widespread practice among Canadian financial institutions derives, in part, from the policy of CMHC to deny insurance to any applicant for a mortgage who would be paying more than 32% of income toward mortgage costs. In any situation requiring CMHC mortgage insurance, a bank is unable to provide a mortgage because of the CMHC requirement.

This blanket requirement assumes that the person cannot pay the mortgage if they have a higher debt service to income ratio, yet the majority of low income households, particularly single mothers and young families, must pay significantly more than this on housing costs, whether in rent or in mortgage payments. While 57% of single parent renters in Canada pay more than 30% of their income on rent, financial institutions refuse to consider these and other low income households for a mortgage if the mortgage payments would be higher than 32% of income - even if the mortgage would be cheaper than the rent they are currently paying in full and on time every month!

There is no significant statistical evidence that people paying more than 32% of income toward housing or mortgage costs have higher default rates in paying rents or mortgages. In fact there is evidence from the U.S. that default rates for mortgages held by people with low incomes are no higher than for other mortgages (See Section III below for details).

In Quebec, a human rights tribunal overturned a caisse populaire's decision to refuse a mortgage to a single mother on social assistance (D'Aoust c. Vallieres, 19 C.H.R.R. D/322.) While the caisse populaire argued that the decision was legitimately based on financial considerations related to her income level, the tribunal found that protection from discrimination because of "social condition" includes protection from arbitrary or prejudicial assumptions made about people on social assistance and people with low incomes. It noted that the mortgage payments would have been significantly lower than the rent that Ms. D'Aoust was paying at the time.

Unfortunately, without protections in the Canadian Human Rights Act from this type of discrimination, banks and CMHC have been allowed to deny access to housing mortgages to low income households with impunity. The result is that many households which would actually save money by moving into ownership, or rural households who have no renting options, are denied access to the most affordable and appropriate housing available to them. In particular, single mothers hanging onto their home after a separation from a spouse are often forced to pay exorbitant interest rates to private lenders simply because banks will not consider their applications for mortgages.

All of these unjustifiable barriers to financing for affordable housing, and their full effects, have not been tracked systematically across the country, a key gap that governments in Canada can and should close, as detailed in the remaining sections in this paper, by following the example of U.S. governments.

Also detailed in the following sections are measures that Canadian governments, especially the federal government, can and should enact (based on success of such measures in the U.S.) to increase the willingness and flexibility of banks and other financial institutions in providing financing for affordable housing. Given that Canada's big five banks alone lend about five times more each year than the federal, provincial and territorial governments combined spend, the banks and other financial institutions clearly can play a significant role in helping to solve the affordable housing crisis.

In the United States, two main federal laws form the financial institution accountability system: the Home Mortgage Disclosure Act (HMDA) and the Community Reinvestment Act (CRA). A full discussion of these laws appears in the CCRC's Position Paper #5: An Accountability System for Financial Institutions in Canada: How to Ensure They Meet a High Standard of Performance (December 1997).

As a result of these laws, more than $1 trillion has been committed by financial institutions for targeted loans, investments, and service programs in low- and moderate-income, and visibility minority neighbourhoods and communities -- commitments that would not have been made if these laws were not in force. Most of these commitments (95%) have been made since 1992, mainly because before then the U.S. government devoted few resources to enforcing the laws.

HMDA requires almost all of the 10,000 U.S. banks and other financial institutions and companies that provide mortgages to disclose how many people apply for a mortgage loan (of various types), how many are approved and how many are rejected. This information is all categorized by the race, gender, income level, and census tract of the borrower.

Recent changes to the CRA, which was first enacted in 1977, extend these disclosure requirements to small business, small farm, and some consumer loans, as well as requiring tracking of community development loans and investments. Several states have their own disclosure laws that, in some cases, extend the requirements to other areas as well. In all cases, however, information that would allow anyone to identify a loan applicant is not disclosed, to protect the privacy of borrowers.

One of the stated reasons for these disclosure requirements is to "assist public officials in distributing public-sector investments so as to attract private investment to areas where it is needed."

Under the CRA, financial institutions must satisfy the credit and service needs of the communities in which they are located, in a manner consistent with the safe and sound operation of the institution. Large financial institutions (for CRA purposes defined as having assets greater than $250 million) can choose either to submit a strategic plan or to face three performance tests (lending, investment and service). Under the strategic plan option, the financial institution must develop a plan containing annual measurable goals that address each of the three performance test categories.

In both the strategic plan and annual testing processes, financial institutions are judged in part on how they satisfy community economic development in the communities they serve. Essentially, the CRA defines community economic development as consisting of: affordable housing; services for to low- and moderate-income individuals; financing small businesses and farms; and revitalizing low- and moderate-income neighbourhoods and communities. The CRA also allows financial institutions to partner with other financial service and lending institutions that may specialize in serving particular neighbourhoods or groups of people, instead of doing the lending, investment or service themselves.

Regulatory agencies periodically review financial institutions' performance in lending, investment and service. It is important to note that the purpose section of the CRA explicitly states that lending and investment must be done within the bounds of safety and soundness, and that regulators should take into account a financial institution's size and financial condition, legal impediments and local economic conditions, as well as the performance of other financial institutions in the same communities, when evaluating an institution's CRA performance.

In 1996, a study by the Federal Reserve Bank of Kansas City (part of the U.S. government's Federal Reserve system) which involved a survey of 600 financial institutions across the United States found that 98 percent of the institutions that responded reported that their lending in response to the legislative requirements (HMDA and CRA) was profitable, and all reported that losses on these loans were comparable to losses on their conventional loans, that the loan default rates were comparable to conventional loans, and that overall, their risk level on these loans was manageable.

A study published in January 1997 by the U.S. Federal Reserve Board found that U.S. financial institutions that have a higher than average percentage of CRA loans in their lending portfolio are usually more profitable, and that these institutions have no problems managing the risks of CRA loans. In addition, an August 1997 report by the federal Office of the Comptroller of the Currency, one of the agencies responsible for enforcing the CRA and HMDA, found that while there is some evidence of a slightly higher default and delinquency rate for CRA low-income mortgages, the institutions had no problems managing these loans.

An additional study by the U.S. federal General Accounting Office undertaken during the Bush Administration concluded that HMDA and CRA requirements met the test of minimal regulation and did not impose a significant paper burden on U.S. financial institutions.

The failure to register a satisfactory grade in the CRA review process can result in a denial of a request to expand, either by opening additional branches or through a merger or an acquisition. Therefore, the banks have a commercial incentive to meet their CRA targets. Given that federal regulators have only rarely denied an expansion application even if a financial institution has a poor CRA rating, however, many observers conclude that this incentive could be much more effective if the laws were enforced to their full extent.

One of the most important features of the CRA however, is that it provides citizens with standing to intervene in the regulatory review process. Federal regulators have established mechanisms to encourage dialogue and cooperation between financial institutions and community groups. Agreements may be signed between institutions and community groups which regulators will take into consideration in assessing the community reinvestment record of the institution.

The agreements cover not only housing, but also business and economic development, consumer loans, farm loans, building community capacity, banking services and staff policies, and general accountability to the community. But most CRA commitments include specific dollar or volume amounts for housing loans to low- and moderate-income and minority neighbourhoods. Usually, the commitments target a specific type of housing.

Since 1990, agreements reached between community groups and U.S. financial institutions and direct commitments by financial institutions have directed, estimating conservatively, at least $315 billion to housing financing in low-income, moderate-income and minority neighbourhoods in the U.S. Of this amount, at least $265 billion has been committed to minority and low- and moderate-income neighbourhoods for single-family housing mortgages and multi-family mortgages. In addition, at least $50 billion has been committed for community development loans focusing mainly on investments in affordable housing projects, along with economic development projects and community service facilities such as child care centres.

The mechanisms employed by these agreements vary greatly, and largely depend on the unique character of each community. Some agreements direct financing to low- and moderate-income home buyers via community land trusts and other non-profit community development agencies. Others direct financing to manufactured housing or even mobile homes.

Beyond financing, the agreements have also led to more flexibility by financial institutions in terms of the criteria they use to approve or deny loans, criteria that had been used in the past in a discriminatory fashion to deny loans to creditworthy low-income individuals. Certain agreements have provided for reduced or waived closing cost fees, low down payments, waived mortgage insurance requirements, and inclusion of "sweat equity" toward the down payment.

In one case, First Chicago NBD agreed to a second review of all minority and low- to moderate-income applications. The bank will strive to offer loans to applicants with "marginal" credit scores, and refer denied applicants to home-ownership counseling programs. Under another agreement announced August 10, 1999, Bank of America will fund a $3 billion mortgage program for low- to moderate-income borrowers with no down payment, no application fee, and no closing costs required. Similar agreements in the past have made criteria such as employment history, income sources, obligation ratios and property appraisal more flexible to account for low-income individuals. Other agreements have created similar loan counseling and "second look" loan review programs, as well as lending discrimination testing by outside assessors. In addition, at least two agreements have required lenders to notify or offer foreclosed properties to non-profit organizations.

(a) How Should a Canadian Community Reinvestment Act (CRA) Work?

While the structure of the Canadian banking sector differs from the United States, an adaptation of the U.S. Community Reinvestment Act (CRA) could easily be enacted in Canada. Regardless of how the industry is structured, each branch serves a community. Even virtual banks could define the community that they serve. Once this definition is established, banks could then be required to adhere to community disclosure requirements, and to meet the lending, investment and service needs of those communities.

It is important to note that the existence of the U.S. requirements has not dissuaded either the Bank of Montreal or the Toronto Dominion Bank from acquiring deposit-taking institutions in the United States, and therefore, having to comply with U.S. laws. The Canadian Imperial Bank of Commerce (CIBC) has also recently applied for a U.S. bank charter. Harris Bancorp of Chicago was acquired by the Bank of Montreal in 1984, and has become one of the bank's most profitable subsidiaries. In 1994, Harris pledged $305 million of reinvestment over five years in the Chicago area to correct the bank's poor lending and service record, as revealed by the U.S. disclosure provisions. Nearly half of this was allocated to affordable housing.

To summarize the key elements of a CRA for Canada (For details, see the CCRC's Position Paper #5: An Accountability System for Financial Institutions in Canada: How to Ensure They Meet a High Standard of Performance (December 1997)), banks and other financial institutions should be required to do the following:

• define the community each branch serves;
• track and publicly disclose for each branch/community the number of applicants for business, community development (especially housing), and home mortgage loans and investments, the number of applicants the bank accepts and rejects in each category, the default and loss rate for each category, the number of loans or investments in each category the bank calls each quarter, and the reasons for rejecting an application or calling a loan (See the CCRCÕs Position Paper #3 (Disclosure By Banks Of Business Lending Statistics: How to Correct the Flaws in the Current System for more details concerning tracking business lending);
• all of the above disclosed information should be categorized by size, type and location of the business or community development, and the location and income level of the mortgage applicant (and the gender of the business owner for small businesses);
• in addition, concerning the service record of the financial institution, track and publicly disclose the number of complaints and lawsuits involving each branch and how they are resolved, the location of branches opened and closed, and the results of an independent audit of service to people with low incomes.

Each financial institution's raw data should be provided to Statistics Canada to be compiled into reports for regulatory review purposes. Statistics Canada would annually release data for each bank by Parliamentary riding, province, region and aggregate national totals, following Statistics Canada guidelines to ensure that the privacy of specific borrowers is protected.

Based on this data, the lending, investment and service record of financial institutions should then be regularly evaluated and graded by the government, after hearings to allow for community input into the grading.

In addition, banks should be allowed to meet part of their obligations by partnering with local financial institutions. This would involve helping capitalize a community-based institution and having that institution lend and invest funds, or provide services locally.

The CCRC proposes that the following sanctions should apply for a financial institution that receives a failing grade for any branch, or overall. First, federal, provincial, territorial and local governments should be explicitly permitted to determine their financial dealings with any financial institution based upon the institution's performance under the accountability system set out above. Second, if a financial institution proposes to expand within its sector (e.g. a trust company taking over another trust company) or outside its sector (e.g. a bank taking over a trust company) the government that regulates the expansion should be explicitly permitted to deny the right to expand if either financial institution has an overall failing grade.

Third, a representative of senior management and a member of the board of directors of a financial institution should be required to give at least two weeks public notice and then hold a well-publicized public meeting in any community where that financial institutionÕs branch has a failing grade. At the meeting, the institutionÕs representatives should be required to take written and oral submissions from members of the community concerning the performance of the branch, and to detail the institution's plans for obtaining a passing grade in the future.

Fourth, the Minister of Finance should have the right to impose the fines specified by the financial institution legislation if he or she believes such action is warranted. Finally, in its 1996 budget the Ontario government imposed a corporate surtax on the chartered banks, combined with a tax credit that could be applied to the surtax for banks demonstrating support for small business. All provinces and the federal government should consider enacting similar legislation as an incentive for financial institutions to maintain a satisfactory rating in their overall performance in the province in terms of serving not just small businesses, but all customers.

(b) The Impact on Affordable Housing Financing if a CRA Was Enacted in Canada

Based on the above figures from the United States, and taking into account the relative sizes of the Canadian and U.S. banking sectors and the Canadian population, the enactment of a Canadian CRA would very likely direct at least $15 billion toward affordable housing in Canada over the next decade, in the form of investments in housing projects and home mortgages for people with low incomes. Those working in the field of developing affordable housing confirm that a Canadian CRA would go a long way in addressing the affordable housing crisis.

In its June 1999 National Housing Policy Options Paper: A Call for Action, the Federation of Canadian Municipalities notes:

The American Community Reinvestment Act successfully channels large volumes of private capital toward low-income housing. American experience suggests that if such requirements are imposed in Canada, standard financing "products" will be developed to make funding more available to community housing groups. (pp. 48-49)

Steve Pomeroy, an Ottawa consultant specializing in affordable housing policy, says CRA has been very important in the United States, and while we have a different context in Canada, Òclearly there would be a benefitÓ if Canada had a CRA.

Greg Suttor, a City of Toronto Housing Policy Analyst, agrees. "A CRA would encourage financial institutions to put money towards affordable housing," he says. "It is part of the solution. With suitable mortgage products and insurance, it would be a combination that would do the trick."

Dennis Carr is the Development Coordinator for the Centretown Citizens Ottawa Corporation, a community-based, private, non-profit housing corporation that has been developing and managing non-profit housing for 25 years. It is the largest private non-profit housing corporation in the country. Carr says the CRA would be "very helpful" in meeting affordable housing needs in Canada. "The banks have an ethical responsibility -- one they have neglected -- to help build affordable housing," says Carr says, "The CRA would assist by making lending criteria more friendly to affordable housing projects."

In his June 1999 policy paper on changes to financial institution laws, entitled Reforming Canada's Financial Services Sector, federal Finance Minister Paul Martin proposed elements of a Community Reinvestment Act (CRA) for Canada but left some key gaps. If these gaps remain, governments, communities and the public will not be able to hold banks and other financial institutions accountable for poor service in many areas and will not be able to ensure that financial institutions meet the credit needs of credit-worthy individuals, businesses, and community development projects (especially for affordable housing).

Specifically, Paul Martin has proposed requiring federally regulated financial institutions to disclose the following things that relate to community development and affordable housing financing and service: small business financing initiatives and dollar amounts of small business lending categorized by loan size and region; examples of funding provided to local government and voluntary agencies for community works; investments or partnerships in micro-credit programs; location of branches opened and closed; and initiatives to improve access to banking services for low-income individuals, seniors and people with disabilities. A government-run agency will be set up to audit such things as institutions' records on consulting with the public before closing branches and providing access to banking services.

While these are steps forward in terms of accountability for banks and other financial institutions in Canada, these proposals fail to require disclosure of the lending, investment and service record of financial institutions on a neighbourhood by neighbourhood level, fail to set up an adequate review and grading system for the institutions' records, and fail to impose sanctions or penalties for a poor record. As a result, banks and other financial institutions will be able to continue, without any accountability or penalties, to deny credit to credit-worthy individuals, businesses and community development projects, to provide poor and discriminatory service, to withdraw financing and service unjustifiably in communities across the country.

As detailed above in section III, the U.S. Community Reinvestment Act (CRA) requires detailed disclosure of lending, investment and service patterns of financial institutions, and regulators review and grade each institution and institutions with poor grades must take corrective action or face significant penalties. These laws (although still not as strong as they could be) have resulted in over $1 trillion in targeted investments by financial institutions, a significant portion of which has been dedicated to affordable housing.

In order to address adequately the affordable housing crisis in Canada and close key gaps in Finance Minister Paul Martin's proposed changes to financial institutions legislation (set out in the Department of Finance June 1999 policy paper), and by so doing ensure financial institutions help solve the affordable housing crisis and do their part to fulfill the important goal of ensuring that all Canadians have access to appropriate housing and are not unreasonably denied access to necessary credit, the CCRC recommends the following (For details see the CCRC's Position Papers and reports, available on the CCRC's website at http://www.cancrc.org):

1. All levels of government must dedicate funding to affordable housing, and should also enact other measures to close the gaps that currently prohibit the development of new affordable housing and the renovation of existing affordable housing in Canada.

2. As in the U.S. under the Community Reinvestment Act (CRA) and the Home Mortgage Disclosure Act (HMDA), and as detailed in sections IV(a) and V above, banks and other financial institutions should be required to track and publicly disclose the demand for loans and investments by businesses, community development projects (especially affordable housing), and individuals seeking home mortgages. The institutions record in meeting that demand as well as its service record for all customers should also be tracked and disclosed on a branch by branch, neighbourhood by neighbourhood level (Paul Martin has proposed tracking and disclosure only at a regional and national level and for too narrow a range of financial institution activities) (For details see the CCRC's fifth Position Paper: An Accountability System for Financial Institutions in Canada: How To Ensure They Meet a High Standard of Performance (December 1997)).

3. Provincial governments should require provincially regulated financial institutions to meet similar public disclosure requirements to those outlined in Recommendation 1 above.

4. As under the U.S. CRA, and as detailed in sections IV(b) and V above, Canadian governments should review and grade the performance of financial institutions in lending, investment and service to individuals, businesses and communities, and impose penalties for failing grades (including, among other things, denying any application to merge with or acquire any other financial institution, and not awarding any government contracts to the institution) (For details see the CCRC's fifth Position Paper: An Accountability System for Financial Institutions in Canada: How To Ensure They Meet a High Standard of Performance (December 1997).

5. The federal government should place a moratorium on bank mergers and takeovers of other financial institutions (including the TD Bank and Canada Trust proposal), and expansions of bank powers, until two years after changes to foreign-bank and new domestic bank entry laws are in force and a CRA-like law is enacted in Canada (this time period is needed to determine whether foreign and new domestic banks will actually provide significant competition to Canada's big banks, and whether our big banks serve all Canadians fairly and well, including playing their role in solving the affordable housing crisis) (For details see the CCRC's sixth Position Paper: Ending Power Without Accountability: Making Banks in Canada Better Before They Get Bigger (May 1998) and the CCRC's report: Bank Rhetoric or Customer Reality: Key Questions About the Competition BureauÕs Analysis of the Proposed Bank Mergers (November 1998)).

6. The federal government should conduct a nation-wide study of the impact of the use of a gross debt service to income ratio on access to mortgages by people with low incomes, and particularly women and families with children. If it is found that the ratio leads to discrimination against low-income applicants and other groups, banks and other financial institutions should be required to develop non-discriminatory methods of assessing credit-worthiness.

Further, in order to close other key gaps in Finance Minister Paul Martin's proposed changes to financial institutions legislation (set out in the Department of Finance June 1999 policy paper), and by so doing ensure financial institutions meet the other credit and service needs of individuals, businesses and communities across the country, the CCRC recommends the following:

7. As a necessary complement to Paul Martin's proposed creation of a government-appointed ombudsman and a government-run Financial Consumer Agency, and to ensure that the ombudsman and the agency serve consumers and enforce laws such as a CRA adequately, the federal government should facilitate the creation of a consumer-directed and funded Financial Consumer Organization by requiring federally-regulated bank, trust, and life and health insurance companies to enclose the FCO's flyer in their mailing envelopes sent to their customers. (For details see CCRC Position Paper #4: A Financial Organization for Canada: Balancing the Financial Services Marketplace (December 1997)).

8. In addition to requiring four month's notice of the closure of an urban branch of a deposit-taking institution, and six monthÕs notice of the closure of a rural branch, the federal government should require the institution to conduct a public review of any proposed branch closures, including disclosure of the branch's profit/loss and net income record for a few years before the proposed closing date, to ensure that the closure is justifiable (For details see CCRC Position Paper #2: Access to Basic Banking Service: Ensuring a Right to This Essential Service (October 1997)).

9. In addition to creating a right to a low-cost account and a right to cash government cheques after presenting basic identification (as proposed in Paul Martin's policy paper), the federal and provincial governments should, as in the U.S., require all financial institutions to provide access to cash deposited in the form of the cheque as soon as the cheque clears (almost always after a few days) through the Canadian payments system (For details see CCRC Position Paper #2: Access to Basic Banking Service: Ensuring a Right to This Essential Service (October 1997) and the CCRC's national survey report: Access Denied: The Failure of Voluntary Codes to Improve Banking Services (June 1999)).

10. The federal government and provincial governments should add social condition as a prohibited ground of discrimination in their respective human rights codes and include social and economic rights including the right to adequate housing, as required by Canada's obligations under international human rights law. These changes to human rights codes are another means of ensuring that financial institutions do not discriminate against people with low incomes in the provision of lending, investment and service, as the practices of banks and other financial institutions could be assessed under the changed codes and corrective measures required.

Beyond the measures set out in Paul Martin's June 1999 policy paper, all of the above measures are necessary to ensure that governments adequately address the affordable housing crisis in Canada, and to ensure that financial institutions fulfill their role in helping solve the crisis, and generally serve the needs of Canadians fairly and well.