Community Reinvestment Act
Encyclopedia
The Community Reinvestment Act (CRA, , title VIII of the Housing and Community Development Act of 1977
, , et seq.) is a United States federal law designed to encourage commercial bank
s and savings associations
to help meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods. Congress passed the Act in 1977 to reduce discriminatory credit practices against low-income neighborhoods, a practice known as redlining
.
This hearing before the full House Committee on Financial Services examined the impact of CRA on the provision of loans, investments and services to under-served communities. In addition to exploring CRA's success, the hearing hoped to examine challenges that prevent the law from being more effective for the future. | Printed Hearing: 110-90(PDF)
The Act requires the appropriate federal financial supervisory agencies to encourage regulated financial institutions to help meet the credit needs of the local communities in which they are chartered, consistent with safe and sound operation (Section 802.) To enforce the statute, federal regulatory agencies examine banking institutions for CRA compliance, and take this information into consideration when approving applications for new bank branches
or for mergers or acquisitions
(Section 804.)
in loans made to individuals and businesses from low and moderate-income neighborhoods. The Act mandates that all banking institutions that receive Federal Deposit Insurance Corporation
(FDIC) insurance be evaluated by Federal banking agencies to determine if the bank offers credit (in a manner consistent with safe and sound operation as per Section 802(b) and Section 804(1)) in all communities in which they are chartered to do business. The law does not list specific criteria for evaluating the performance of financial institutions. Rather, it directs that the evaluation process should accommodate the situation and context of each individual institution. Federal regulations dictate agency conduct in evaluating a bank's compliance in five performance areas, comprising twelve assessment factors. This examination culminates in a rating and a written report that becomes part of the supervisory record for that bank.
The law, however, emphasizes that an institution's CRA activities should be undertaken in a safe and sound manner, and does not require institutions to make high-risk loans that may bring losses to the institution. An institution's CRA compliance record is taken into account by the banking regulatory agencies when the institution seeks to expand through merger, acquisition or branching. The law does not mandate any other penalties for non-compliance with the CRA.
(FRB), the FDIC, the Office of the Comptroller of the Currency
(OCC), and the Office of Thrift Supervision
(OTS). In 1981, to help achieve the goals of the CRA, each of the Federal Reserve banks established a Community Affairs Office to work with banking institutions and the public in identifying credit needs within the community and ways to address those needs.
Implementation of the CRA by these financial supervisory agencies is enacted by Title 12 of the Code of Federal Regulations
(CFR); Parts 25, 228, 345, and 563e with the addition of Part 203 as it relates to sections of the Home Mortgage Disclosure Act
(HMDA).
The Federal Financial Institutions Examination Council
(FFIEC) coordinates inter-agency information about the CRA. Information about the CRA ratings of individual banking institutions from the four responsible agencies (Federal Reserve, FDIC, OCC and OTS), is publicly available from the website of the FFIEC. These ratings were first made available by the Clinton administration to enable public participation and public comment on CRA performance.
In addition to the regulatory framework in place, each federal financial supervisory agency's Inspector General performs regular audits on any regulatory changes made to see if the intended goals are actually being fulfilled.
and signed into law by President Jimmy Carter
on October 12, 1977 . Several legislative and regulatory revisions have since been enacted.
that affected the Community Reinvestment Act directly. The years in which the legislative revisions were made appear in bold text preceding the Public Laws that enacted them. The links to the codification and section notes may provide additional information about the legislative changes as well.
of National People's Action
in Chicago, had led the national fight to pass, and later to enforce the Act.
The CRA followed similar laws passed to reduce discrimination in the credit and housing markets including the Fair Housing Act of 1968, the Equal Credit Opportunity Act
of 1974 and the Home Mortgage Disclosure Act
of 1975 (HMDA). The Fair Housing Act and the Equal Credit Opportunity Act prohibit discrimination on the basis of race, sex, or other personal characteristics. The Home Mortgage Disclosure Act requires that financial institutions publicly disclose mortgage lending and application data. In contrast with those acts, the CRA seeks to ensure the provision of credit to all parts of a community, regardless of the relative wealth or poverty of a neighborhood.
Before the Act was passed, there were severe shortages of credit available to low- and moderate-income neighborhoods. In their 1961 report, the U.S. Commission on Civil Rights found that African-American borrowers were often required to make higher downpayments and adopt faster repayment schedules. The commission also documented blanket refusals to lend in particular areas (redlining
).
The "redlining" of certain neighborhoods originated with the Federal Housing Administration
(FHA) in the 1930s. The "residential security maps" created by the Home Owners' Loan Corporation
(HOLC) for the FHA were used by private and public entities for years afterwards to withhold mortgage capital from neighborhoods that were deemed "unsafe". Contributory factors in the shortage of direct lending in low- and moderate-income communities were a limited secondary market for mortgages, informational problems to do with the lack of credit evaluations for lower-income borrowers, and lack of coordination among credit agencies.
In Congressional debate on the Act, critics charged that the law would create unnecessary regulatory burdens. Partly in response to these concerns, Congress included little prescriptive detail and simply directs the banking regulatory agencies to ensure that banks and savings associations serve the credit needs of their local communities in a safe and sound manner. Community groups only slowly organized to take advantage of their right under the Act to complain about law enforcement of the regulations.
(FIRREA) was enacted by the 101st Congress and signed into law by President George H. W. Bush
in the wake of the savings and loan crisis
of the 1980s. As part of the subsequent general reform of the banking industry, FIRREA added section 807 (12. U.S.C. § 2906) to the existing CRA statutes in an effort to improve the area concerning insured depository institution examinations.
The new language now required the appropriate Federal regulatory agency to prepare a written evaluation after completing the examination of an institution's record in meeting the credit needs of its entire community, including any low- and moderate-income neighborhoods within it. These evaluation reports were divided into separate sections - one confidential; allowing the evaluated institution to retain its proprietary and personal information integrity at the same time the beginnings of the related databases were being compiled, and the other made public; intended to increase access and oversight of the CRS examination process. The public section introduced a four-tiered CRA examination rating system with performance levels of 'Outstanding', 'Satisfactory', 'Needs to Improve', or 'Substantial Noncompliance', each supplemented with a written synopsis of the agencies' evaluation reasoning using any available facts to support their conclusions.
According to Ben Bernanke
, this law greatly increased the ability of advocacy groups, researchers, and other analysts to "perform more-sophisticated, quantitative analyses of banks' records", thereby influencing the lending policies of banks. Over time, community groups and nonprofit organizations established "more-formalized and more-productive partnerships with banks."
(FDICIA), the appropriate Federal regulatory agencies had reliably compiled enough institution examination data to warrant its inclusion in the public section of the written evaluations first established in 1989. With the passage of this Act in December 1991, section 807 (12. U.S.C. § 2906) was amended to required the inclusion of any examination data relevant in determining an institutions CRA rating as well.
A week earlier that same December, the existing CRA statute was amended once again upon the enactment of the Resolution Trust Corporation Refinancing, Restructuring, and Improvement Act of 1991. It allowed the Resolution Trust Corporation
(RTC) to make available any branch of any savings association located in any predominantly minority neighborhoods that the RTC had been appointed the conservator or receiver of to any minority depository institution or women's depository institution with favorable conditions. Upon the addition of section 808 (12. U.S.C. § 2907) to the existing CRA statutes by the Act, any depository institution which donated, sold with favorable terms (as determined by the appropriate Federal financial supervisory agency), or made available on a rent-free basis any branch of such institutions located in any predominantly minority neighborhood to any minority depository institution or women's depository institution, the amount of the contribution or the amount of the loss incurred in connection with such activity would go towards meeting the credit needs of the institution's community and would be taken into consideration when CRA examinations were evaluated.
indirectly affected the CRA practices at the time in requiring Fannie Mae and Freddie Mac, the two government sponsored enterprises that purchase and securitize mortgages, to devote a percentage of their lending to support affordable housing.
, which repealed restrictions on interstate banking, listed the Community Reinvestment Act ratings received by the out-of-state bank as a consideration when determining whether to allow interstate branches.
According to Bernanke, a surge in bank merger and acquisition activities followed the passing of the act, and advocacy groups increasingly used the public comment process to protest bank applications on Community Reinvestment Act grounds. When applications were highly contested, federal agencies held public hearings to allow public comment on the bank's lending record. In response many institutions established separate business units and subsidiary corporations to facilitate CRA-related lending. Local and regional public-private partnerships and multi-bank loan consortia were formed to expand and manage such CRA-related lending.
asked regulators to reform the CRA in order to make examinations more consistent, clarify performance standards, and reduce cost and compliance burden. Robert Rubin, the Assistant to the President for Economic Policy, under President Clinton, explained that this was in line with President Clinton's strategy to "deal with the problems of the inner city and distressed rural communities". Discussing the reasons for the Clinton administration's proposal to strengthen the CRA and further reduce red-lining, Lloyd Bentsen
, Secretary of the Treasury at that time, affirmed his belief that availability of credit should not depend on where a person lives, "The only thing that ought to matter on a loan application is whether or not you can pay it back, not where you live." Bentsen said that the proposed changes would "make it easier for lenders to show how they're complying with the Community Reinvestment Act", and "cut back a lot of the paperwork and the cost on small business loans".
By early 1995, the proposed CRA regulations were substantially revised to address criticisms that the regulations, and the agencies' implementation of them through the examination process to date, were too process-oriented, burdensome, and not sufficiently focused on actual results. The CRA examination process itself was reformed to incorporate the pending changes. Information about banking institutions' CRA ratings was made available via web page for public review as well. The Office of the Comptroller of the Currency (OCC) also moved to revise its regulation structure allowing lenders subject to the CRA to claim community development loan credits for loans made to help finance the environmental cleanup or redevelopment of industrial sites when it was part of an effort to revitalize the low- and moderate-income community where the site was located.
During one of the Congressional hearings addressing the proposed changes in 1995, William A. Niskanen
, chair of the Cato Institute
, criticized both the 1993 and 1994 sets of proposals for political favoritism in allocating credit, for micromanagement by regulators and for the lack of assurances that banks would not be expected to operate at a loss to achieve CRA compliance. He predicted the proposed changes would be very costly to the economy and the banking system in general. Niskanen believed that the primary long term effect would be an artificial contraction of the banking system. Niskanen recommended Congress repeal the Act.
Niskanen's, and other respondents to the proposed changes, voiced their concerns during the public comment & testimony periods in late 1993 through early 1995. In response to the aggregate concerns recorded by then, the Federal financial supervisory agencies (the OCC, FRB, FDIC, and OTS) made further clarifications relating to definition, assessment, ratings and scope; sufficiently resolving many of the issues raised in the process. The agencies jointly reported their final amended regulations for implementing the Community Reinvestment Act in the Federal Register
on May 4, 1995. The final amended regulations replaced the existing CRA regulations in their entirety. (See the notes in the "1995" column of Table I. for the specifics)
, also known as the Financial Services Modernization Act. This law repealed the part of the Glass–Steagall Act that had prohibited a bank from offering a full range of investment, commercial bank
ing, and insurance
services since its enactment in 1933. A similar bill was introduced in 1998 by Senator
Phil Gramm
but it was unable to complete the legislative process into law. Resistance to enacting the 1998 bill, as well as the subsequent 1999 bill, centered around the legislation's language which would expand the types of banking institutions of the time into other areas of service but would not be subject to CRA compliance in order to do so. The Senator also demanded full disclosure of any financial "deals" which community groups had with banks, accusing such groups of "extortion".
In the fall of 1999, Senators Christopher Dodd
and Charles E. Schumer prevented another impasse
by securing a compromise between Sen. Gramm and the Clinton Administration by agreeing to amend the Federal Deposit Insurance Act to allow banks to merge or expand into other types of financial institutions. The new Gramm-Leach-Bliley Act's FDIC related provisions, along with the addition of sub-section § 2903(c) directly to Title 12, insured any bank holding institution wishing to be re-designated as a financial holding institution by the Board of Governors
of the Federal Reserve System
would also have to follow Community Reinvestment Act compliance guidelines before any merger or expansion could take effect.
At the same time the G-L-B Act's changes to the Federal Deposit Insurance Act would now allow for bank expansions into new lines of business, non-affiliated groups entering into agreements with these bank or financial institutions would also have to be reported as outlined under the newly added section to Title 12, § 1831y. (CRA Sunshine Requirements), satisfying Sen. Gramm's concerns.
In conjunction with the above Gramm-Leach-Bliley Act changes, smaller banks would be reviewed less frequently for CRA compliance by the addition of §2908. (Small Bank Regulatory Relief) directly to , (the existing CRA laws), itself. The 1999 Act also mandated two studies to be conducted in connection with the "Community Reinvestment Act":
On signing the Gramm-Leach-Bliley Act, President Clinton said that it, "establishes the principles that, as we expand the powers of banks, we will expand the reach of the [Community Reinvestment] Act".
In early 2005, the Office of Thrift Supervision
(OTS) implemented new rules that – among other changes – allowed thrifts with over $1 billion in assets to tweak the long standing 50-25-25 CRA ratings thresholds by continuing to meet 50 percent of their overall CRA rating through lending activity as always but the other 50 percent could be any combination of lending, investment, and services that the thrift wanted. The obligations to adhere to 25 percent for services and 25 percent for investments became optional and the means to securing a satisfactory CRA rating was left to the discretion of the qualifying thrifts instead (See the notes in the "2005" column of Table I. for the specifics).
In April 2005, a contingent of Democratic Congressmen issued a letter protesting these changes, saying they undercut the ability of the CRA to "meet the needs of low and moderate-income persons and communities". The changes were also opposed by community groups concerned that it would weaken the CRA.
After enacting a technical regulatory amendment in the interim incorporating a different formula for stratifying both metropolitan and rural zones to better align with an expanded definition of them under the CRA in the process, the Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve System (FRB), and the Office of the Comptroller of the Currency (OCC) also put a new set of regulations into effect in September 2005 - mirroring much of what the OTS had already initiated earlier in the year (See the notes in the "2005" column of Table I.' for the specifics). These regulations also included less restrictive definitions of "small" and "intermediate small" banks. "Intermediate small banks" were defined as banks with assets of less than $1 billion but more than $250 million, which allowed these banks to opt for examination as either as a small bank or a large bank. Currently banks with assets greater than $1.061 billion have their CRA performance evaluated according to lending, investment and service tests. The agencies use the Consumer Price Index to adjust the asset size thresholds for small and large institutions annually.
OTS Director at the time, John Reich announced the final decision to go ahead and implement the proposed revisions in four main areas of its existing Community Reinvestment Act (CRA) regulations to reestablish uniformity between its rules and those of the other federal banking agencies. Reaffirming the basis for the revised rules as first proposed, Reich stated, "OTS is making these revisions to promote consistency and facilitate objective evaluations of CRA performance across the banking and thrift industries. Consistent standards will allow the public to make more effective comparisons of bank and thrift CRA performance." He noted that the changes reinforce CRA objectives consistent with thrifts' performance in meeting the financial services needs of their communities.
This OTS rule revision aligned with that of the other agencies by:
These four changes generally mirror the ones made by the other three federal agencies in late 2005. The agency noted that latitude would be provided for a short period of time to institutions in the context of examinations conducted after the effective date, July 1, 2007, in order to implement program changes under the new rule smoothly.
(CFR) according to Title X, Subtitle C, Section 1031 of the Act.
On February 13, 2008, the United States House Committee on Financial Services
held a hearing on the Community Reinvestment Act's impact on the provision of loans, investments and services to under-served communities and its effectiveness. There were 15 witnesses from government and the private sector.
On April 15, 2008, an FDIC official told the same committee that the FDIC was exploring offering incentives for banks to offer low-cost alternatives to payday loan
s. Doing so would allow them favorable consideration under their Community Reinvestment Act responsibilities. It had recently begun a two-year pilot project with an initial group of 31 banks.
Congresswoman Eddie Bernice Johnson
introduced new legislation, , in Congress on March 12, 2009 to expand the scope of CRA to include non-bank financial institution
s, such as credit union
s. There were other attempts to legislatively "modernize" the Community Reinvestment Act in previous sessions of Congress; more notably the bills in / and among others. The United States House Committee on Financial Services
held hearings on September 16, 2009 on "Proposals to Modernize the Community Reinvestment Act" with 10 witnesses, including Johnson. Another hearing was held on April 15, 2010 on "Perspectives and Proposals on the Community Reinvestment Act" with eight witnesses.
On June 24, 2010, the Office of the Comptroller of the Currency
(OCC), Federal Reserve System
, Federal Deposit Insurance Corporation
(FDIC), and the Office of Thrift Supervision
(OTS) jointly published proposed revisions to the rules implementing the Community Reinvestment Act http://www.fdic.gov/regulations/laws/federal/2010/10proposeAD60.pdf. These agencies, with the National Credit Union Administration
(NCUA), make up the Federal Financial Institutions Examination Council
(FFIEC), which coordinates regulation of financial institutions, including implementation of the Community Reinvestment Act. The proposed revisions to CRA rules are intended to revise the term "community development" to "include loans, investments and services that support, enable or facilitate projects or activities" that meet the criteria described in the Housing and Economic Recovery Act of 2008
(HERA) and are conducted in designated target areas identified under the Neighborhood Stabilization Program established by HERA and the American Recovery and Reinvestment Act of 2009
(ARRA). Among other things, this would expand the range of persons served to include middle-income households.
In 2009, The Federal Reserve Banks of Boston and San Francisco published "Revisiting the CRA: Perspectives on the Future of the Community Reinvestment Act," which assembles views from a wide range of academic researchers, regulators, community development practitioners and financial service industry representatives on how to improve the CRA going forward.
The Obama administration has increased scrutiny of the provision of credit to poor and African American neighbourhoods. Lenders have come under investigation for not operating in such areas, whether they have halted service there or have never operated in them before. Atlantic financial editor Daniel Indiviglio attributes increasing noncompliance with the CRA to tightening lending requirements.
, have wondered if the CRA was – or at least had become – irrelevant, because it was not needed to force banks to make profitable loans to a variety of borrowers. In a 2003 research paper, economists at the Federal Reserve could not find clear evidence that the CRA increased lending and home ownership more in low income neighborhoods than in higher income ones. A 2008 Competitive Enterprise Institute
study resulted in a similar finding. Federal Reserve chair Ben Bernanke
has stated that an underlying assumption of the CRA – that more lending equals better outcomes for local communities – may not always be true, pointing to "recent problems in mortgage markets". However, he also notes that at least in some instances, "the CRA has served as a catalyst, inducing banks to enter under-served markets that they might otherwise have ignored".
The Woodstock Institute, a Chicago-based policy and advocacy nonprofit, found in an analysis of 1996 Chicago-area survey data that low income areas still lagged behind in access to commercial loans. Most small business loans made by CRA regulated banks went to higher income areas; 16.6% in low-income areas, 18.4% in low- and moderate-income tracts; 21.8% in middle-income areas and 23.1% in upper-income areas.
In a 1998 paper, Alex Schwartz of the Fannie Mae Foundation found that CRA agreements were "consistently successful in meeting their goals for mortgages, investments in low-income housing tax credits, grant giving to community-based organizations, and in opening (and keeping open) inner-city bank branches." In a 2000 report for the US Treasury, several economists concluded that the CRA had the intended impact of improving access to credit for minority and low-to-moderate-income consumers.
In a 2005 paper for the New York University Law Review, Michael S. Barr, professor at the University of Michigan Law School, presents evidence to demonstrate that the CRA had overcome market failure
s to increase access to credit for low-income, moderate-income, and minority borrowers at relatively low cost. He contends that the CRA is justified, has resulted in progress, and should be continued.
Speaking to the February 2008 Congressional Committee on Financial Services
hearing on the CRA, Sandra L. Thompson, Director of the Division of Supervision and Consumer Protection at the FDIC, lauded the positive impact of CRA, noting that, "studies have pointed to increases in lending to low- and moderate-income customers and minorities in the decades since the CRA's passage." She cited a study by the Joint Center for Housing Studies at Harvard University, that found that "data for 1993 through 2000 show home purchase lending to low- and moderate-income people living in low- and moderate-income neighborhoods grew by 94 percent – more than in any of the other income categories".
In his statement before the same hearing, New York University
economics professor Larry White stated that regulator efforts to "lean on" banks in vague and subjective ways to make loans is an "inappropriate instrument for achieving those goals." In a world of national banking enterprises, these policies are more likely to drive institutions out of neighborhoods. He stated that better ways to accomplish the goals would be vigorous enforcement of anti-discrimination laws, of antitrust laws to promote competition, and federal funding of worthy projects directly through an "on-budget and transparent process" like the Community Development Financial Institutions Fund
.
study of lending trends in 305 U.S. cities between 1993 and 1998, $467 billion in mortgage credit flowed from CRA-covered lenders to low- and medium-income borrowers and areas. In that period, the total number of loans to poorer Americans by CRA-eligible institutions rose by 39% while loans to wealthier individuals by CRA-covered institutions rose by 17%. The share of total US lending to low and medium income borrowers rose from 25% in 1993 to 28% in 1998 as a consequence.
Responding to concerns that the CRA would lower bank profitability, a 1997 research paper by economists at the Federal Reserve found that "[CRA] lenders active in lower-income neighborhoods and with lower-income borrowers appear to be as profitable as other mortgage-oriented commercial banks".
Concerns at the time over the 1995 regulatory change causing an increase in the inability of financial institutions to expand through mergers or acquisition due to regulatory denial based on poor CRA compliance were unfounded. Over the 1993-97 period, one regulatory agency, the Federal Reserve Board, actually approved more applications than the average percentages of those without a detailed CRA review taking place. Of the 1,100 merger or acquisition cases the FRB reviewed on average per year where the relevant institutions were subject to CRA, only 70 instances on average were identified with potential CRA problems regardless of public opposition or internal reporting raising the concern. On average, 22 of these were ultimately identified as CRA compliance being the primary reason for both application withdrawal or FRB denial.
In October 1997, First Union Capital Markets and Bear, Stearns & Co launched the first publicly available securitization
of Community Reinvestment Act loans, issuing $384.6 million of such securities. The securities were guaranteed by Freddie Mac and had an implied "AAA" rating. The public offering was several times oversubscribed, predominantly by money managers and insurance companies who were not buying them for CRA credit.
In October 2000, to expand the secondary market
for affordable community-based mortgages and to increase liquidity for CRA-eligible loans, Fannie Mae committed to purchase and securitize $2 billion of "MyCommunityMortgage" loans. In November 2000 Fannie Mae announced that the Department of Housing and Urban Development ("HUD") would soon require it to dedicate 50% of its business to low- and moderate-income families." It stated that since 1997 Fannie Mae had done nearly $7 billion in CRA business with depository institutions, but its goal was $20 billion. In 2001 Fannie Mae announced that it had acquired $10 billion in specially-targeted Community Reinvestment Act (CRA) loans more than one and a half years ahead of schedule, and announced its goal to finance over $500 billion in CRA business by 2010, about one third of loans anticipated to be financed by Fannie Mae during that period.
Speaking in 2007, the 30th anniversary of the CRA, Ben Bernanke
, Chair of the Federal Reserve System
since 2006, stated that the high costs of gathering information, "may have created a 'first-mover' problem, in which each financial institution has an incentive to let one of its competitors be the first to enter an underserved market." Bernanke notes that at least in some instances, "the CRA has served as a catalyst, inducing banks to enter underserved markets that they might otherwise have ignored".
In the same 2007 speech, Federal Reserve Chair Ben Bernanke also noted that, "managers of financial institutions found that these loan portfolios, if properly underwritten and managed, could be profitable" and that the loans "usually did not involve disproportionately higher levels of default".
's administration allowed these community groups better access to CRA information and enabled them to increase their activities.
In an article for the New York Post
, economist Stan Liebowitz wrote that community activists intervention at yearly bank reviews resulted in their obtaining large amounts of money from banks, since poor reviews could lead to frustrated merger plans and even legal challenges by the Justice Department. Michelle Minton noted that Chase Manhattan and J.P. Morgan donated hundreds of thousands of dollars to ACORN at about the same time they were to apply for permission to merge and needed to comply with CRA regulations.
According to the New York Times, some of these housing advocacy groups provided early warnings about the potential impact of lowered credit standards and the resulting unsupportable increase in real estate values they were causing in low to moderate income communities. Ballooning mortgages on rental properties threatened to require large rent increases from low and moderate income tenants that could ill afford them.
Housing advocacy groups were also leaders in the fight against subprime lending in low- and moderate-income communities, "In fact, community advocates had been telling the Federal Reserve about the dangers of subprime lending since the 1990s", according to Inner City Press. "For example, Bronx-based Fair Finance Watch commented to the Federal Reserve about the practices of now-defunct non-bank subprime lender New Century
, when U.S. Bancorp
bought warrants for 24% of New Century's stock. The Fed, rather than take any action on New Century, merely waited until U.S. Bancorp sold off some of the warrants, and then said the issue was moot." However, subprime loans were so profitable, that they were aggressively marketed in low-and moderate-income communities, even over the objections and warnings of housing advocacy groups like ACORN.
The FDIC has tried to address this issue by "stopping abusive practices through the examination process and supervisory actions; encouraging banks to serve all members and areas of their communities fairly; and providing information and financial education to help consumers make informed choices". FDIC policy currently states that "predatory lending can have a negative effect on a bank's CRA performance."
, Congressman Ron Paul
, who serves on the United States House Committee on Financial Services
, charged the CRA with "forcing banks to lend to people who normally would be rejected as bad credit risks." In a Wall Street Journal opinion piece, Austrian school
economist Russell Roberts
wrote that the CRA subsidized low-income housing by pressuring banks to serve poor borrowers and poor regions of the country.
However, many others dispute that the CRA was a significant cause of the subprime crisis. Nobel laureate Paul Krugman
noted in November 2009 that 55% of commercial real estate loans were currently underwater, despite being completely unaffected by the CRA. According to Federal Reserve Governor Randall Kroszner
, the claim that "the law pushed banking institutions to undertake high-risk mortgage lending" was contrary to their experience, and that no empirical evidence had been presented to support the claim. In a Bank for International Settlements
(BIS) working paper, economist Luci Ellis concluded that "there is no evidence that the Community Reinvestment Act was responsible for encouraging the subprime lending boom and subsequent housing bust", relying partly on evidence that the housing bust has been a largely exurban event. Others have also concluded that the CRA did not contribute to the financial crisis, for example, FDIC Chairman Sheila Bair, Comptroller of the Currency John C. Dugan, Tim Westrich of the Center for American Progress
, Robert Gordon of the American Prospect, Ellen Seidman of the New America Foundation
, Daniel Gross of Slate
, and Aaron Pressman from BusinessWeek
.
Legal and financial experts have noted that CRA regulated loans tend to be safe and profitable, and that subprime excesses came mainly from institutions not regulated by the CRA. In the February 2008 House hearing, law professor Michael S. Barr, a Treasury Department official under President Clinton, stated that a Federal Reserve survey showed that affected institutions considered CRA loans profitable and not overly risky. He noted that approximately 50% of the subprime loans were made by independent mortgage companies that were not regulated by the CRA, and another 25% to 30% came from only partially CRA regulated bank subsidiaries and affiliates. Barr noted that institutions fully regulated by CRA made "perhaps one in four" sub-prime loans, and that "the worst and most widespread abuses occurred in the institutions with the least federal oversight". According to Janet L. Yellen, President of the Federal Reserve Bank of San Francisco
, independent mortgage companies made risky "high-priced loans" at more than twice the rate of the banks and thrifts; most CRA loans were responsibly made, and were not the higher-priced loans that have contributed to the current crisis. A 2008 study by Traiger & Hinckley LLP, a law firm that counsels financial institutions on CRA compliance, found that CRA regulated institutions were less likely to make subprime loans, and when they did the interest rates were lower. CRA banks were also half as likely to resell the loans. Emre Ergungor of the Federal Reserve Bank of Cleveland
found that there was no statistical difference in foreclosure rates between regulated and less-regulated banks, although a local bank presence resulted in fewer foreclosures.
During a 2008 House Committee on Oversight and Government Reform hearing on the role of Fannie Mae and Freddie Mac in the financial crisis, including in relation to the Community Reinvestment Act, asked if the CRA provided the "fuel" for increasing subprime loans, former Fannie Mae CEO Franklin Raines
said it might have been a catalyst encouraging bad behavior, but it was difficult to know. Raines also cited information that only a small percentage of risky loans originated as a result of the CRA.
Housing and Community Development Act
Housing and Community Development Act, the name of several United States federal laws, may refer to:*Housing and Community Development Act of 1974*Housing and Community Development Act of 1977*Housing and Community Development Act of 1980...
, , et seq.) is a United States federal law designed to encourage commercial bank
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
s and savings associations
Savings and loan association
A savings and loan association , also known as a thrift, is a financial institution that specializes in accepting savings deposits and making mortgage and other loans...
to help meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods. Congress passed the Act in 1977 to reduce discriminatory credit practices against low-income neighborhoods, a practice known as redlining
Redlining
Redlining is the practice of denying, or increasing the cost of services such as banking, insurance, access to jobs, access to health care, or even supermarkets to residents in certain, often racially determined, areas. The term "redlining" was coined in the late 1960s by John McKnight, a...
.
This hearing before the full House Committee on Financial Services examined the impact of CRA on the provision of loans, investments and services to under-served communities. In addition to exploring CRA's success, the hearing hoped to examine challenges that prevent the law from being more effective for the future. | Printed Hearing: 110-90(PDF)
The Act requires the appropriate federal financial supervisory agencies to encourage regulated financial institutions to help meet the credit needs of the local communities in which they are chartered, consistent with safe and sound operation (Section 802.) To enforce the statute, federal regulatory agencies examine banking institutions for CRA compliance, and take this information into consideration when approving applications for new bank branches
Branch (banking)
A branch, banking center or financial center is a retail location where a bank, credit union, or other financial institution offers a wide array of face-to-face and automated services to its customers....
or for mergers or acquisitions
Mergers and acquisitions
Mergers and acquisitions refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or...
(Section 804.)
Enforcement
The Community Reinvestment Act of 1977 seeks to address discriminationDiscrimination
Discrimination is the prejudicial treatment of an individual based on their membership in a certain group or category. It involves the actual behaviors towards groups such as excluding or restricting members of one group from opportunities that are available to another group. The term began to be...
in loans made to individuals and businesses from low and moderate-income neighborhoods. The Act mandates that all banking institutions that receive Federal Deposit Insurance Corporation
Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. , the FDIC insures deposits at...
(FDIC) insurance be evaluated by Federal banking agencies to determine if the bank offers credit (in a manner consistent with safe and sound operation as per Section 802(b) and Section 804(1)) in all communities in which they are chartered to do business. The law does not list specific criteria for evaluating the performance of financial institutions. Rather, it directs that the evaluation process should accommodate the situation and context of each individual institution. Federal regulations dictate agency conduct in evaluating a bank's compliance in five performance areas, comprising twelve assessment factors. This examination culminates in a rating and a written report that becomes part of the supervisory record for that bank.
The law, however, emphasizes that an institution's CRA activities should be undertaken in a safe and sound manner, and does not require institutions to make high-risk loans that may bring losses to the institution. An institution's CRA compliance record is taken into account by the banking regulatory agencies when the institution seeks to expand through merger, acquisition or branching. The law does not mandate any other penalties for non-compliance with the CRA.
Regulations
The same Federal banking agencies that are responsible for supervising depository institutions are also the agencies that conduct examinations for CRA compliance. These agencies are the Federal Reserve SystemFederal Reserve System
The Federal Reserve System is the central banking system of the United States. It was created on December 23, 1913 with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907...
(FRB), the FDIC, the Office of the Comptroller of the Currency
Office of the Comptroller of the Currency
The Office of the Comptroller of the Currency is a US federal agency established by the National Currency Act of 1863 and serves to charter, regulate, and supervise all national banks and the federal branches and agencies of foreign banks in the United States...
(OCC), and the Office of Thrift Supervision
Office of Thrift Supervision
The Office of Thrift Supervision was a United States federal agency under the Department of the Treasury that charters, supervises, and regulates all federally- and state-chartered savings banks and savings and loans associations. It was created in 1989 as a renamed version of another federal agency...
(OTS). In 1981, to help achieve the goals of the CRA, each of the Federal Reserve banks established a Community Affairs Office to work with banking institutions and the public in identifying credit needs within the community and ways to address those needs.
Implementation of the CRA by these financial supervisory agencies is enacted by Title 12 of the Code of Federal Regulations
Code of Federal Regulations
The Code of Federal Regulations is the codification of the general and permanent rules and regulations published in the Federal Register by the executive departments and agencies of the Federal Government of the United States.The CFR is published by the Office of the Federal Register, an agency...
(CFR); Parts 25, 228, 345, and 563e with the addition of Part 203 as it relates to sections of the Home Mortgage Disclosure Act
Home Mortgage Disclosure Act
The United States Home Mortgage Disclosure Act was passed in 1975. It requires financial institutions to maintain and annually disclose data about home purchases, home purchase pre-approvals, home improvement, and refinance applications involving 1 to 4 unit and multifamily dwellings...
(HMDA).
| Federal Financial Supervisory Agency | Code of Federal Regulations | e-CFR Code of Federal Regulations The Code of Federal Regulations is the codification of the general and permanent rules and regulations published in the Federal Register by the executive departments and agencies of the Federal Government of the United States.The CFR is published by the Office of the Federal Register, an agency... |
Notes | 1995 | 2005 |
|---|---|---|---|---|---|
| Office of the Comptroller of the Currency (OCC) | 12. C.F.R. Part 25. et seq. | ||||
| Federal Reserve System (FRB) | 12. C.F.R. Part 228. et seq. | ||||
| 12. C.F.R. Part 203. et seq. | |||||
| Federal Deposit Insurance Corporation (FDIC) | 12. C.F.R. Part 345. et seq. | ||||
| Office of Thrift Supervision (OTS) | 12. C.F.R. Part 563e. et seq. |
The Federal Financial Institutions Examination Council
Federal Financial Institutions Examination Council
The Federal Financial Institutions Examination Council, or FFIEC, is a formal interagency body of the United States government empowered to prescribe uniform principles, standards, and report forms for the federal examination of financial institutions by the Board of Governors of the Federal...
(FFIEC) coordinates inter-agency information about the CRA. Information about the CRA ratings of individual banking institutions from the four responsible agencies (Federal Reserve, FDIC, OCC and OTS), is publicly available from the website of the FFIEC. These ratings were first made available by the Clinton administration to enable public participation and public comment on CRA performance.
In addition to the regulatory framework in place, each federal financial supervisory agency's Inspector General performs regular audits on any regulatory changes made to see if the intended goals are actually being fulfilled.
History
The original Act was passed by the 95th United States CongressUnited States Congress
The United States Congress is the bicameral legislature of the federal government of the United States, consisting of the Senate and the House of Representatives. The Congress meets in the United States Capitol in Washington, D.C....
and signed into law by President Jimmy Carter
Jimmy Carter
James Earl "Jimmy" Carter, Jr. is an American politician who served as the 39th President of the United States and was the recipient of the 2002 Nobel Peace Prize, the only U.S. President to have received the Prize after leaving office...
on October 12, 1977 . Several legislative and regulatory revisions have since been enacted.
Legislative revision history
The hidden table below lists the acts of CongressAct of Congress
An Act of Congress is a statute enacted by government with a legislature named "Congress," such as the United States Congress or the Congress of the Philippines....
that affected the Community Reinvestment Act directly. The years in which the legislative revisions were made appear in bold text preceding the Public Laws that enacted them. The links to the codification and section notes may provide additional information about the legislative changes as well.
| Housing and Community Development Act of 1977 − Title VIII USC Title 12 − Chapter 30 − Community Reinvestment |
|---|
Original act
The CRA was passed as a result of national pressure to address the deteriorating conditions of American cities—particularly lower-income and minority neighborhoods. Community activists, such as Gale CincottaGale Cincotta
Gale Cincotta , a community activist from the Austin neighborhood of Chicago, led the national fight for the US federal Home Mortgage Disclosure Act and the Community Reinvestment Act...
of National People's Action
National People's Action
National People’s Action is a network of metropolitan, regional, and statewide organizations that build grassroots power. NPA works to build the collective political will to advance racial and economic justice. National People’s Action has over 135 organizers and support staff working in...
in Chicago, had led the national fight to pass, and later to enforce the Act.
The CRA followed similar laws passed to reduce discrimination in the credit and housing markets including the Fair Housing Act of 1968, the Equal Credit Opportunity Act
Equal Credit Opportunity Act
The Equal Credit Opportunity Act is a United States law , enacted in 1974, that makes it unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction, on the basis of race, color, religion, national origin, sex, marital status, or age ; to the...
of 1974 and the Home Mortgage Disclosure Act
Home Mortgage Disclosure Act
The United States Home Mortgage Disclosure Act was passed in 1975. It requires financial institutions to maintain and annually disclose data about home purchases, home purchase pre-approvals, home improvement, and refinance applications involving 1 to 4 unit and multifamily dwellings...
of 1975 (HMDA). The Fair Housing Act and the Equal Credit Opportunity Act prohibit discrimination on the basis of race, sex, or other personal characteristics. The Home Mortgage Disclosure Act requires that financial institutions publicly disclose mortgage lending and application data. In contrast with those acts, the CRA seeks to ensure the provision of credit to all parts of a community, regardless of the relative wealth or poverty of a neighborhood.
Before the Act was passed, there were severe shortages of credit available to low- and moderate-income neighborhoods. In their 1961 report, the U.S. Commission on Civil Rights found that African-American borrowers were often required to make higher downpayments and adopt faster repayment schedules. The commission also documented blanket refusals to lend in particular areas (redlining
Redlining
Redlining is the practice of denying, or increasing the cost of services such as banking, insurance, access to jobs, access to health care, or even supermarkets to residents in certain, often racially determined, areas. The term "redlining" was coined in the late 1960s by John McKnight, a...
).
The "redlining" of certain neighborhoods originated with the Federal Housing Administration
Federal Housing Administration
The Federal Housing Administration is a United States government agency created as part of the National Housing Act of 1934. It insured loans made by banks and other private lenders for home building and home buying...
(FHA) in the 1930s. The "residential security maps" created by the Home Owners' Loan Corporation
Home Owners' Loan Corporation
The Home Owners' Loan Corporation was a New Deal agency established in 1933 by the Home Owners' Loan Corporation Act under President Franklin D. Roosevelt. Its purpose was to refinance home mortgages currently in default to prevent foreclosure. This was accomplished by selling bonds to lenders in...
(HOLC) for the FHA were used by private and public entities for years afterwards to withhold mortgage capital from neighborhoods that were deemed "unsafe". Contributory factors in the shortage of direct lending in low- and moderate-income communities were a limited secondary market for mortgages, informational problems to do with the lack of credit evaluations for lower-income borrowers, and lack of coordination among credit agencies.
In Congressional debate on the Act, critics charged that the law would create unnecessary regulatory burdens. Partly in response to these concerns, Congress included little prescriptive detail and simply directs the banking regulatory agencies to ensure that banks and savings associations serve the credit needs of their local communities in a safe and sound manner. Community groups only slowly organized to take advantage of their right under the Act to complain about law enforcement of the regulations.
Legislative changes 1989
The Financial Institutions Reform, Recovery and Enforcement Act of 1989Financial Institutions Reform, Recovery and Enforcement Act of 1989
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 , , is a United States federal law enacted in the wake of the savings and loan crisis of the 1980s....
(FIRREA) was enacted by the 101st Congress and signed into law by President George H. W. Bush
George H. W. Bush
George Herbert Walker Bush is an American politician who served as the 41st President of the United States . He had previously served as the 43rd Vice President of the United States , a congressman, an ambassador, and Director of Central Intelligence.Bush was born in Milton, Massachusetts, to...
in the wake of the savings and loan crisis
Savings and Loan crisis
The savings and loan crisis of the 1980s and 1990s was the failure of about 747 out of the 3,234 savings and loan associations in the United States...
of the 1980s. As part of the subsequent general reform of the banking industry, FIRREA added section 807 (12. U.S.C. § 2906) to the existing CRA statutes in an effort to improve the area concerning insured depository institution examinations.
The new language now required the appropriate Federal regulatory agency to prepare a written evaluation after completing the examination of an institution's record in meeting the credit needs of its entire community, including any low- and moderate-income neighborhoods within it. These evaluation reports were divided into separate sections - one confidential; allowing the evaluated institution to retain its proprietary and personal information integrity at the same time the beginnings of the related databases were being compiled, and the other made public; intended to increase access and oversight of the CRS examination process. The public section introduced a four-tiered CRA examination rating system with performance levels of 'Outstanding', 'Satisfactory', 'Needs to Improve', or 'Substantial Noncompliance', each supplemented with a written synopsis of the agencies' evaluation reasoning using any available facts to support their conclusions.
According to Ben Bernanke
Ben Bernanke
Ben Shalom Bernanke is an American economist, and the current Chairman of the Federal Reserve, the central bank of the United States. During his tenure as Chairman, Bernanke has overseen the response of the Federal Reserve to late-2000s financial crisis....
, this law greatly increased the ability of advocacy groups, researchers, and other analysts to "perform more-sophisticated, quantitative analyses of banks' records", thereby influencing the lending policies of banks. Over time, community groups and nonprofit organizations established "more-formalized and more-productive partnerships with banks."
Legislative changes 1991
Around the time of the introduction of the Federal Deposit Insurance Corporation Improvement Act of 1991Federal Deposit Insurance Corporation Improvement Act of 1991
The Federal Deposit Insurance Corporation Improvement Act of 1991 , passed during the Savings and loan crisis, strengthened the power of the Federal Deposit Insurance Corporation....
(FDICIA), the appropriate Federal regulatory agencies had reliably compiled enough institution examination data to warrant its inclusion in the public section of the written evaluations first established in 1989. With the passage of this Act in December 1991, section 807 (12. U.S.C. § 2906) was amended to required the inclusion of any examination data relevant in determining an institutions CRA rating as well.
A week earlier that same December, the existing CRA statute was amended once again upon the enactment of the Resolution Trust Corporation Refinancing, Restructuring, and Improvement Act of 1991. It allowed the Resolution Trust Corporation
Resolution Trust Corporation
The Resolution Trust Corporation was a United States Government-owned asset management company run by Lewis William Seidman and charged with liquidating assets, primarily real estate-related assets such as mortgage loans, that had been assets of savings and loan associations declared insolvent by...
(RTC) to make available any branch of any savings association located in any predominantly minority neighborhoods that the RTC had been appointed the conservator or receiver of to any minority depository institution or women's depository institution with favorable conditions. Upon the addition of section 808 (12. U.S.C. § 2907) to the existing CRA statutes by the Act, any depository institution which donated, sold with favorable terms (as determined by the appropriate Federal financial supervisory agency), or made available on a rent-free basis any branch of such institutions located in any predominantly minority neighborhood to any minority depository institution or women's depository institution, the amount of the contribution or the amount of the loss incurred in connection with such activity would go towards meeting the credit needs of the institution's community and would be taken into consideration when CRA examinations were evaluated.
Legislative changes 1992
Although minor amendments were made directly to the Community Reinvestment Act concerning the consideration of minority and female owned institutions & partnerships during evaluations first established in 1991, other portions of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992Federal Housing Enterprises Financial Safety and Soundness Act of 1992
The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 . The Act established the Office of Federal Housing Enterprise Oversight within the United States Department of Housing and Urban Development...
indirectly affected the CRA practices at the time in requiring Fannie Mae and Freddie Mac, the two government sponsored enterprises that purchase and securitize mortgages, to devote a percentage of their lending to support affordable housing.
Legislative changes 1994
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 [IBBEA] amended the laws governing federally-chartered banks in order to restore the laws' competitiveness with the recently relaxed laws governing state-chartered banks. The goal was the return to a balance between the...
, which repealed restrictions on interstate banking, listed the Community Reinvestment Act ratings received by the out-of-state bank as a consideration when determining whether to allow interstate branches.
According to Bernanke, a surge in bank merger and acquisition activities followed the passing of the act, and advocacy groups increasingly used the public comment process to protest bank applications on Community Reinvestment Act grounds. When applications were highly contested, federal agencies held public hearings to allow public comment on the bank's lending record. In response many institutions established separate business units and subsidiary corporations to facilitate CRA-related lending. Local and regional public-private partnerships and multi-bank loan consortia were formed to expand and manage such CRA-related lending.
Regulatory changes 1995
In July 1993, President Bill ClintonBill Clinton
William Jefferson "Bill" Clinton is an American politician who served as the 42nd President of the United States from 1993 to 2001. Inaugurated at age 46, he was the third-youngest president. He took office at the end of the Cold War, and was the first president of the baby boomer generation...
asked regulators to reform the CRA in order to make examinations more consistent, clarify performance standards, and reduce cost and compliance burden. Robert Rubin, the Assistant to the President for Economic Policy, under President Clinton, explained that this was in line with President Clinton's strategy to "deal with the problems of the inner city and distressed rural communities". Discussing the reasons for the Clinton administration's proposal to strengthen the CRA and further reduce red-lining, Lloyd Bentsen
Lloyd Bentsen
Lloyd Millard Bentsen, Jr. was a four-term United States senator from Texas and the Democratic Party nominee for Vice President in 1988 on the Michael Dukakis ticket. He also served in the House of Representatives from 1949 to 1955. In his later political life, he was Chairman of the Senate...
, Secretary of the Treasury at that time, affirmed his belief that availability of credit should not depend on where a person lives, "The only thing that ought to matter on a loan application is whether or not you can pay it back, not where you live." Bentsen said that the proposed changes would "make it easier for lenders to show how they're complying with the Community Reinvestment Act", and "cut back a lot of the paperwork and the cost on small business loans".
By early 1995, the proposed CRA regulations were substantially revised to address criticisms that the regulations, and the agencies' implementation of them through the examination process to date, were too process-oriented, burdensome, and not sufficiently focused on actual results. The CRA examination process itself was reformed to incorporate the pending changes. Information about banking institutions' CRA ratings was made available via web page for public review as well. The Office of the Comptroller of the Currency (OCC) also moved to revise its regulation structure allowing lenders subject to the CRA to claim community development loan credits for loans made to help finance the environmental cleanup or redevelopment of industrial sites when it was part of an effort to revitalize the low- and moderate-income community where the site was located.
During one of the Congressional hearings addressing the proposed changes in 1995, William A. Niskanen
William A. Niskanen
William Arthur Niskanen was an American economist noted as one of the architects of President Ronald Reagan's economic programme and for his contributions to public choice theory. He was also a long-time chairman of the libertarian Cato Institute.-Education:Niskanen received his B.A. from Harvard...
, chair of the Cato Institute
Cato Institute
The Cato Institute is a libertarian think tank headquartered in Washington, D.C. It was founded in 1977 by Edward H. Crane, who remains president and CEO, and Charles Koch, chairman of the board and chief executive officer of the conglomerate Koch Industries, Inc., the largest privately held...
, criticized both the 1993 and 1994 sets of proposals for political favoritism in allocating credit, for micromanagement by regulators and for the lack of assurances that banks would not be expected to operate at a loss to achieve CRA compliance. He predicted the proposed changes would be very costly to the economy and the banking system in general. Niskanen believed that the primary long term effect would be an artificial contraction of the banking system. Niskanen recommended Congress repeal the Act.
Niskanen's, and other respondents to the proposed changes, voiced their concerns during the public comment & testimony periods in late 1993 through early 1995. In response to the aggregate concerns recorded by then, the Federal financial supervisory agencies (the OCC, FRB, FDIC, and OTS) made further clarifications relating to definition, assessment, ratings and scope; sufficiently resolving many of the issues raised in the process. The agencies jointly reported their final amended regulations for implementing the Community Reinvestment Act in the Federal Register
Federal Register
The Federal Register , abbreviated FR, or sometimes Fed. Reg.) is the official journal of the federal government of the United States that contains most routine publications and public notices of government agencies...
on May 4, 1995. The final amended regulations replaced the existing CRA regulations in their entirety. (See the notes in the "1995" column of Table I. for the specifics)
Legislative changes 1999
In 1999 the Congress enacted and President Clinton signed into law the Gramm-Leach-Bliley ActGramm-Leach-Bliley Act
The Gramm–Leach–Bliley Act , also known as the Financial Services Modernization Act of 1999, is an act of the 106th United States Congress...
, also known as the Financial Services Modernization Act. This law repealed the part of the Glass–Steagall Act that had prohibited a bank from offering a full range of investment, commercial bank
Commercial bank
After the implementation of the Glass–Steagall Act, the U.S. Congress required that banks engage only in banking activities, whereas investment banks were limited to capital market activities. As the two no longer have to be under separate ownership under U.S...
ing, and insurance
Insurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
services since its enactment in 1933. A similar bill was introduced in 1998 by Senator
United States Senate
The United States Senate is the upper house of the bicameral legislature of the United States, and together with the United States House of Representatives comprises the United States Congress. The composition and powers of the Senate are established in Article One of the U.S. Constitution. Each...
Phil Gramm
Phil Gramm
William Philip "Phil" Gramm is an American economist and politician, who has served as a Democratic Congressman , a Republican Congressman and a Republican Senator from Texas...
but it was unable to complete the legislative process into law. Resistance to enacting the 1998 bill, as well as the subsequent 1999 bill, centered around the legislation's language which would expand the types of banking institutions of the time into other areas of service but would not be subject to CRA compliance in order to do so. The Senator also demanded full disclosure of any financial "deals" which community groups had with banks, accusing such groups of "extortion".
In the fall of 1999, Senators Christopher Dodd
Christopher Dodd
Christopher John "Chris" Dodd is an American lawyer, lobbyist, and Democratic Party politician who served as a United States Senator from Connecticut for a thirty-year period ending with the 111th United States Congress....
and Charles E. Schumer prevented another impasse
Impasse
A bargaining impasse occurs when the two sides negotiating an agreement are unable to reach an agreement and become deadlocked. An impasse is almost invariably mutually harmful, either as a result of direct action which may be taken such as a strike in employment negotiation or sanctions/military...
by securing a compromise between Sen. Gramm and the Clinton Administration by agreeing to amend the Federal Deposit Insurance Act to allow banks to merge or expand into other types of financial institutions. The new Gramm-Leach-Bliley Act's FDIC related provisions, along with the addition of sub-section § 2903(c) directly to Title 12, insured any bank holding institution wishing to be re-designated as a financial holding institution by the Board of Governors
Board of governors
Board of governors is a term sometimes applied to the board of directors of a public entity or non-profit organization.Many public institutions, such as public universities, are government-owned corporations. The British Broadcasting Corporation was managed by a board of governors, though this role...
of the Federal Reserve System
Federal Reserve System
The Federal Reserve System is the central banking system of the United States. It was created on December 23, 1913 with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907...
would also have to follow Community Reinvestment Act compliance guidelines before any merger or expansion could take effect.
At the same time the G-L-B Act's changes to the Federal Deposit Insurance Act would now allow for bank expansions into new lines of business, non-affiliated groups entering into agreements with these bank or financial institutions would also have to be reported as outlined under the newly added section to Title 12, § 1831y. (CRA Sunshine Requirements), satisfying Sen. Gramm's concerns.
In conjunction with the above Gramm-Leach-Bliley Act changes, smaller banks would be reviewed less frequently for CRA compliance by the addition of §2908. (Small Bank Regulatory Relief) directly to , (the existing CRA laws), itself. The 1999 Act also mandated two studies to be conducted in connection with the "Community Reinvestment Act":
- the first report by the Federal Reserve, to be delivered to Congress by March 15, 2000, is a comprehensive study of CRA to focus on default and delinquency rates, and the profitability of loans made in connection with CRA;
- the second report to be conducted by the Treasury Department over the next two years, is intended to determine the impact of the Act on the provision of services to low- and moderate-income neighborhoods and people, as intended by CRA.
On signing the Gramm-Leach-Bliley Act, President Clinton said that it, "establishes the principles that, as we expand the powers of banks, we will expand the reach of the [Community Reinvestment] Act".
Regulatory changes 2005
In 2002 there was an inter-agency review of the effectiveness of the 1995 regulatory changes to the Community Reinvestment Act and new proposals were considered. In 2003, researchers at the Federal Reserve Bank of New York noted that dramatic changes in the financial services landscape had weakened the CRA, and that in 2003 less than 30 percent of all home purchase loans were subject to intensive review under the CRA.In early 2005, the Office of Thrift Supervision
Office of Thrift Supervision
The Office of Thrift Supervision was a United States federal agency under the Department of the Treasury that charters, supervises, and regulates all federally- and state-chartered savings banks and savings and loans associations. It was created in 1989 as a renamed version of another federal agency...
(OTS) implemented new rules that – among other changes – allowed thrifts with over $1 billion in assets to tweak the long standing 50-25-25 CRA ratings thresholds by continuing to meet 50 percent of their overall CRA rating through lending activity as always but the other 50 percent could be any combination of lending, investment, and services that the thrift wanted. The obligations to adhere to 25 percent for services and 25 percent for investments became optional and the means to securing a satisfactory CRA rating was left to the discretion of the qualifying thrifts instead (See the notes in the "2005" column of Table I. for the specifics).
In April 2005, a contingent of Democratic Congressmen issued a letter protesting these changes, saying they undercut the ability of the CRA to "meet the needs of low and moderate-income persons and communities". The changes were also opposed by community groups concerned that it would weaken the CRA.
After enacting a technical regulatory amendment in the interim incorporating a different formula for stratifying both metropolitan and rural zones to better align with an expanded definition of them under the CRA in the process, the Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve System (FRB), and the Office of the Comptroller of the Currency (OCC) also put a new set of regulations into effect in September 2005 - mirroring much of what the OTS had already initiated earlier in the year (See the notes in the "2005" column of Table I.' for the specifics). These regulations also included less restrictive definitions of "small" and "intermediate small" banks. "Intermediate small banks" were defined as banks with assets of less than $1 billion but more than $250 million, which allowed these banks to opt for examination as either as a small bank or a large bank. Currently banks with assets greater than $1.061 billion have their CRA performance evaluated according to lending, investment and service tests. The agencies use the Consumer Price Index to adjust the asset size thresholds for small and large institutions annually.
Regulatory changes 2007
The Office of Thrift Supervision (OTS) proposed revising and started to solicit public comment regarding the complete alignment of its CRA rule with the CRA rules of the other three federal banking agencies in November 2006. The agency referenced several factors for the proposed realignment, in particular, that a consistent CRA standard applied to both the banking and the thrift industries would facilitate objective evaluations of CRA performance; ensure accurate assessments of banks and thrifts that operated in the same markets; and permit the public to make reasonable comparisons of bank and thrift CRA performance.OTS Director at the time, John Reich announced the final decision to go ahead and implement the proposed revisions in four main areas of its existing Community Reinvestment Act (CRA) regulations to reestablish uniformity between its rules and those of the other federal banking agencies. Reaffirming the basis for the revised rules as first proposed, Reich stated, "OTS is making these revisions to promote consistency and facilitate objective evaluations of CRA performance across the banking and thrift industries. Consistent standards will allow the public to make more effective comparisons of bank and thrift CRA performance." He noted that the changes reinforce CRA objectives consistent with thrifts' performance in meeting the financial services needs of their communities.
This OTS rule revision aligned with that of the other agencies by:
- eliminating the option of alternative weights for lending, investment, and service under the large, retail savings association test;
- defining institutions with assets between $250 million and $1 billion as "intermediate small savings associations" subject to a new community development test;
- indexing the asset threshold for "small" and "intermediate small" savings associations annually based on changes to the Consumer Price Index (CPI); and
- clarifying the adverse impact on a savings association's CRA rating where the OTS finds evidence of discrimination or other illegal credit practices.
These four changes generally mirror the ones made by the other three federal agencies in late 2005. The agency noted that latitude would be provided for a short period of time to institutions in the context of examinations conducted after the effective date, July 1, 2007, in order to implement program changes under the new rule smoothly.
Legislative changes 2008
With the passage of the Higher Education Opportunity Act into law, , on August 14, 2008, each appropriate Federal financial supervisory agency shall now consider, as a factor in assessing and taking into account the record of a financial institution's CRA compliance, any & all low-cost education loans provided by the financial institution to low-income borrowers. All the affected Federal financial supervisory agencies have one year after the date of enactment to issue rules in final form to implement the change into the Code of Federal RegulationsCode of Federal Regulations
The Code of Federal Regulations is the codification of the general and permanent rules and regulations published in the Federal Register by the executive departments and agencies of the Federal Government of the United States.The CFR is published by the Office of the Federal Register, an agency...
(CFR) according to Title X, Subtitle C, Section 1031 of the Act.
CRA reform proposals
In 2007, Ben Bernanke suggested further increasing the presence of Fannie Mae and Freddie Mac in the affordable housing market to help banks fulfill their CRA obligations by providing them with more opportunities to securitize CRA-related loans.On February 13, 2008, the United States House Committee on Financial Services
United States House Committee on Financial Services
The United States House Committee on Financial Services is the committee of the United States House of Representatives that oversees the entire financial services industry, including the securities, insurance, banking, and housing industries...
held a hearing on the Community Reinvestment Act's impact on the provision of loans, investments and services to under-served communities and its effectiveness. There were 15 witnesses from government and the private sector.
On April 15, 2008, an FDIC official told the same committee that the FDIC was exploring offering incentives for banks to offer low-cost alternatives to payday loan
Payday loan
A payday loan is a small, short-term loan that is intended to cover a borrower's expenses until his or her next payday. The loans are also sometimes referred to as cash advances, though that term can also refer to cash provided against a prearranged line of credit such as a credit card...
s. Doing so would allow them favorable consideration under their Community Reinvestment Act responsibilities. It had recently begun a two-year pilot project with an initial group of 31 banks.
Congresswoman Eddie Bernice Johnson
Eddie Bernice Johnson
Eddie Bernice Johnson is a politician from the state of Texas, currently representing the state's in the United States House of Representatives. She is the first registered nurse elected to the US Congress....
introduced new legislation, , in Congress on March 12, 2009 to expand the scope of CRA to include non-bank financial institution
Non-bank financial institution
A non-bank financial institution is a financial institution that does not have a full banking license or is not supervised by a national or international banking regulatory agency. NBFIs facilitate bank-related financial services, such as investment, risk pooling, contractual savings, and market...
s, such as credit union
Credit union
A credit union is a cooperative financial institution that is owned and controlled by its members and operated for the purpose of promoting thrift, providing credit at competitive rates, and providing other financial services to its members...
s. There were other attempts to legislatively "modernize" the Community Reinvestment Act in previous sessions of Congress; more notably the bills in / and among others. The United States House Committee on Financial Services
United States House Committee on Financial Services
The United States House Committee on Financial Services is the committee of the United States House of Representatives that oversees the entire financial services industry, including the securities, insurance, banking, and housing industries...
held hearings on September 16, 2009 on "Proposals to Modernize the Community Reinvestment Act" with 10 witnesses, including Johnson. Another hearing was held on April 15, 2010 on "Perspectives and Proposals on the Community Reinvestment Act" with eight witnesses.
On June 24, 2010, the Office of the Comptroller of the Currency
Office of the Comptroller of the Currency
The Office of the Comptroller of the Currency is a US federal agency established by the National Currency Act of 1863 and serves to charter, regulate, and supervise all national banks and the federal branches and agencies of foreign banks in the United States...
(OCC), Federal Reserve System
Federal Reserve System
The Federal Reserve System is the central banking system of the United States. It was created on December 23, 1913 with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907...
, Federal Deposit Insurance Corporation
Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. , the FDIC insures deposits at...
(FDIC), and the Office of Thrift Supervision
Office of Thrift Supervision
The Office of Thrift Supervision was a United States federal agency under the Department of the Treasury that charters, supervises, and regulates all federally- and state-chartered savings banks and savings and loans associations. It was created in 1989 as a renamed version of another federal agency...
(OTS) jointly published proposed revisions to the rules implementing the Community Reinvestment Act http://www.fdic.gov/regulations/laws/federal/2010/10proposeAD60.pdf. These agencies, with the National Credit Union Administration
National Credit Union Administration
The National Credit Union Administration is the United States independent federal agency that supervises and charters federal credit unions...
(NCUA), make up the Federal Financial Institutions Examination Council
Federal Financial Institutions Examination Council
The Federal Financial Institutions Examination Council, or FFIEC, is a formal interagency body of the United States government empowered to prescribe uniform principles, standards, and report forms for the federal examination of financial institutions by the Board of Governors of the Federal...
(FFIEC), which coordinates regulation of financial institutions, including implementation of the Community Reinvestment Act. The proposed revisions to CRA rules are intended to revise the term "community development" to "include loans, investments and services that support, enable or facilitate projects or activities" that meet the criteria described in the Housing and Economic Recovery Act of 2008
Housing and Economic Recovery Act of 2008
The Housing and Economic Recovery Act of 2008 designed primarily to address the subprime mortgage crisis. It authorized the Federal Housing Administration to guarantee up to $300 billion in new 30-year fixed rate mortgages for subprime borrowers if lenders write-down principal loan balances to 90...
(HERA) and are conducted in designated target areas identified under the Neighborhood Stabilization Program established by HERA and the American Recovery and Reinvestment Act of 2009
American Recovery and Reinvestment Act of 2009
The American Recovery and Reinvestment Act of 2009, abbreviated ARRA and commonly referred to as the Stimulus or The Recovery Act, is an economic stimulus package enacted by the 111th United States Congress in February 2009 and signed into law on February 17, 2009, by President Barack Obama.To...
(ARRA). Among other things, this would expand the range of persons served to include middle-income households.
In 2009, The Federal Reserve Banks of Boston and San Francisco published "Revisiting the CRA: Perspectives on the Future of the Community Reinvestment Act," which assembles views from a wide range of academic researchers, regulators, community development practitioners and financial service industry representatives on how to improve the CRA going forward.
The Obama administration has increased scrutiny of the provision of credit to poor and African American neighbourhoods. Lenders have come under investigation for not operating in such areas, whether they have halted service there or have never operated in them before. Atlantic financial editor Daniel Indiviglio attributes increasing noncompliance with the CRA to tightening lending requirements.
Controversies and criticisms
The effects of the Community Reinvestment Act on the housing markets are controversial for a number of reasons.Effectiveness
Economists and financial people writing a Federal Reserve report, including Jeffrey W. Gunther, who also wrote a report on CRA for the Cato InstituteCato Institute
The Cato Institute is a libertarian think tank headquartered in Washington, D.C. It was founded in 1977 by Edward H. Crane, who remains president and CEO, and Charles Koch, chairman of the board and chief executive officer of the conglomerate Koch Industries, Inc., the largest privately held...
, have wondered if the CRA was – or at least had become – irrelevant, because it was not needed to force banks to make profitable loans to a variety of borrowers. In a 2003 research paper, economists at the Federal Reserve could not find clear evidence that the CRA increased lending and home ownership more in low income neighborhoods than in higher income ones. A 2008 Competitive Enterprise Institute
Competitive Enterprise Institute
The Competitive Enterprise Institute is a non-profit think tank founded on March 9, 1984 in Washington, D.C. by lobbyist Fred L. Smith, Jr to advance economic liberty and fight over-regulation by big government...
study resulted in a similar finding. Federal Reserve chair Ben Bernanke
Ben Bernanke
Ben Shalom Bernanke is an American economist, and the current Chairman of the Federal Reserve, the central bank of the United States. During his tenure as Chairman, Bernanke has overseen the response of the Federal Reserve to late-2000s financial crisis....
has stated that an underlying assumption of the CRA – that more lending equals better outcomes for local communities – may not always be true, pointing to "recent problems in mortgage markets". However, he also notes that at least in some instances, "the CRA has served as a catalyst, inducing banks to enter under-served markets that they might otherwise have ignored".
The Woodstock Institute, a Chicago-based policy and advocacy nonprofit, found in an analysis of 1996 Chicago-area survey data that low income areas still lagged behind in access to commercial loans. Most small business loans made by CRA regulated banks went to higher income areas; 16.6% in low-income areas, 18.4% in low- and moderate-income tracts; 21.8% in middle-income areas and 23.1% in upper-income areas.
In a 1998 paper, Alex Schwartz of the Fannie Mae Foundation found that CRA agreements were "consistently successful in meeting their goals for mortgages, investments in low-income housing tax credits, grant giving to community-based organizations, and in opening (and keeping open) inner-city bank branches." In a 2000 report for the US Treasury, several economists concluded that the CRA had the intended impact of improving access to credit for minority and low-to-moderate-income consumers.
In a 2005 paper for the New York University Law Review, Michael S. Barr, professor at the University of Michigan Law School, presents evidence to demonstrate that the CRA had overcome market failure
Market failure
Market failure is a concept within economic theory wherein the allocation of goods and services by a free market is not efficient. That is, there exists another conceivable outcome where a market participant may be made better-off without making someone else worse-off...
s to increase access to credit for low-income, moderate-income, and minority borrowers at relatively low cost. He contends that the CRA is justified, has resulted in progress, and should be continued.
Speaking to the February 2008 Congressional Committee on Financial Services
United States House Committee on Financial Services
The United States House Committee on Financial Services is the committee of the United States House of Representatives that oversees the entire financial services industry, including the securities, insurance, banking, and housing industries...
hearing on the CRA, Sandra L. Thompson, Director of the Division of Supervision and Consumer Protection at the FDIC, lauded the positive impact of CRA, noting that, "studies have pointed to increases in lending to low- and moderate-income customers and minorities in the decades since the CRA's passage." She cited a study by the Joint Center for Housing Studies at Harvard University, that found that "data for 1993 through 2000 show home purchase lending to low- and moderate-income people living in low- and moderate-income neighborhoods grew by 94 percent – more than in any of the other income categories".
In his statement before the same hearing, New York University
New York University
New York University is a private, nonsectarian research university based in New York City. NYU's main campus is situated in the Greenwich Village section of Manhattan...
economics professor Larry White stated that regulator efforts to "lean on" banks in vague and subjective ways to make loans is an "inappropriate instrument for achieving those goals." In a world of national banking enterprises, these policies are more likely to drive institutions out of neighborhoods. He stated that better ways to accomplish the goals would be vigorous enforcement of anti-discrimination laws, of antitrust laws to promote competition, and federal funding of worthy projects directly through an "on-budget and transparent process" like the Community Development Financial Institutions Fund
Community Development Financial Institutions Fund
The Community Development Financial Institutions Fund, or CDFI Fund, promotes economic revitalization in distressed communities throughout the United States by providing financial assistance and information to community development financial institutions...
.
Sound practices and profitability
According to a 2000 United States Department of the TreasuryUnited States Department of the Treasury
The Department of the Treasury is an executive department and the treasury of the United States federal government. It was established by an Act of Congress in 1789 to manage government revenue...
study of lending trends in 305 U.S. cities between 1993 and 1998, $467 billion in mortgage credit flowed from CRA-covered lenders to low- and medium-income borrowers and areas. In that period, the total number of loans to poorer Americans by CRA-eligible institutions rose by 39% while loans to wealthier individuals by CRA-covered institutions rose by 17%. The share of total US lending to low and medium income borrowers rose from 25% in 1993 to 28% in 1998 as a consequence.
Responding to concerns that the CRA would lower bank profitability, a 1997 research paper by economists at the Federal Reserve found that "[CRA] lenders active in lower-income neighborhoods and with lower-income borrowers appear to be as profitable as other mortgage-oriented commercial banks".
Concerns at the time over the 1995 regulatory change causing an increase in the inability of financial institutions to expand through mergers or acquisition due to regulatory denial based on poor CRA compliance were unfounded. Over the 1993-97 period, one regulatory agency, the Federal Reserve Board, actually approved more applications than the average percentages of those without a detailed CRA review taking place. Of the 1,100 merger or acquisition cases the FRB reviewed on average per year where the relevant institutions were subject to CRA, only 70 instances on average were identified with potential CRA problems regardless of public opposition or internal reporting raising the concern. On average, 22 of these were ultimately identified as CRA compliance being the primary reason for both application withdrawal or FRB denial.
In October 1997, First Union Capital Markets and Bear, Stearns & Co launched the first publicly available securitization
Security (finance)
A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...
of Community Reinvestment Act loans, issuing $384.6 million of such securities. The securities were guaranteed by Freddie Mac and had an implied "AAA" rating. The public offering was several times oversubscribed, predominantly by money managers and insurance companies who were not buying them for CRA credit.
In October 2000, to expand the secondary market
Secondary market
The page applies to the finanical term; For the merchandising concept, see Aftermarket .The secondary market, also called aftermarket, is the financial market where previously issued securities and financial instruments such as stock, bonds, options, and futures are bought and sold....
for affordable community-based mortgages and to increase liquidity for CRA-eligible loans, Fannie Mae committed to purchase and securitize $2 billion of "MyCommunityMortgage" loans. In November 2000 Fannie Mae announced that the Department of Housing and Urban Development ("HUD") would soon require it to dedicate 50% of its business to low- and moderate-income families." It stated that since 1997 Fannie Mae had done nearly $7 billion in CRA business with depository institutions, but its goal was $20 billion. In 2001 Fannie Mae announced that it had acquired $10 billion in specially-targeted Community Reinvestment Act (CRA) loans more than one and a half years ahead of schedule, and announced its goal to finance over $500 billion in CRA business by 2010, about one third of loans anticipated to be financed by Fannie Mae during that period.
Speaking in 2007, the 30th anniversary of the CRA, Ben Bernanke
Ben Bernanke
Ben Shalom Bernanke is an American economist, and the current Chairman of the Federal Reserve, the central bank of the United States. During his tenure as Chairman, Bernanke has overseen the response of the Federal Reserve to late-2000s financial crisis....
, Chair of the Federal Reserve System
Federal Reserve System
The Federal Reserve System is the central banking system of the United States. It was created on December 23, 1913 with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907...
since 2006, stated that the high costs of gathering information, "may have created a 'first-mover' problem, in which each financial institution has an incentive to let one of its competitors be the first to enter an underserved market." Bernanke notes that at least in some instances, "the CRA has served as a catalyst, inducing banks to enter underserved markets that they might otherwise have ignored".
In the same 2007 speech, Federal Reserve Chair Ben Bernanke also noted that, "managers of financial institutions found that these loan portfolios, if properly underwritten and managed, could be profitable" and that the loans "usually did not involve disproportionately higher levels of default".
Housing advocacy groups
CRA regulations give community groups the right to comment on or protest about banks' non-compliance with CRA. Such comments could help or hinder banks' planned expansions. Groups at first only slowly took advantage of these rights. Regulatory changes during President Bill ClintonBill Clinton
William Jefferson "Bill" Clinton is an American politician who served as the 42nd President of the United States from 1993 to 2001. Inaugurated at age 46, he was the third-youngest president. He took office at the end of the Cold War, and was the first president of the baby boomer generation...
's administration allowed these community groups better access to CRA information and enabled them to increase their activities.
In an article for the New York Post
New York Post
The New York Post is the 13th-oldest newspaper published in the United States and is generally acknowledged as the oldest to have been published continuously as a daily, although – as is the case with most other papers – its publication has been periodically interrupted by labor actions...
, economist Stan Liebowitz wrote that community activists intervention at yearly bank reviews resulted in their obtaining large amounts of money from banks, since poor reviews could lead to frustrated merger plans and even legal challenges by the Justice Department. Michelle Minton noted that Chase Manhattan and J.P. Morgan donated hundreds of thousands of dollars to ACORN at about the same time they were to apply for permission to merge and needed to comply with CRA regulations.
According to the New York Times, some of these housing advocacy groups provided early warnings about the potential impact of lowered credit standards and the resulting unsupportable increase in real estate values they were causing in low to moderate income communities. Ballooning mortgages on rental properties threatened to require large rent increases from low and moderate income tenants that could ill afford them.
Housing advocacy groups were also leaders in the fight against subprime lending in low- and moderate-income communities, "In fact, community advocates had been telling the Federal Reserve about the dangers of subprime lending since the 1990s", according to Inner City Press. "For example, Bronx-based Fair Finance Watch commented to the Federal Reserve about the practices of now-defunct non-bank subprime lender New Century
New Century
New Century Financial Corporation was founded in 1995 by a trio of former managers at Option One Mortgage, including former CEO Brad Morrice and is headquartered in Irvine, California...
, when U.S. Bancorp
U.S. Bancorp
U.S. Bancorp is a diversified financial services holding company, headquartered in Minneapolis, Minnesota. It is the parent company of U.S. Bank, the fifth largest commercial bank in the United States based on $330 billion in assets. U.S. Bank ranks as the sixth largest bank in the U.S. based on...
bought warrants for 24% of New Century's stock. The Fed, rather than take any action on New Century, merely waited until U.S. Bancorp sold off some of the warrants, and then said the issue was moot." However, subprime loans were so profitable, that they were aggressively marketed in low-and moderate-income communities, even over the objections and warnings of housing advocacy groups like ACORN.
Predatory lending
In a 2002 study exploring the relationship between the CRA and lending looked at as predatory, Kathleen C. Engel and Patricia A. McCoy noted that banks could receive CRA credit by lending or brokering loans in lower-income areas that would be considered a risk for ordinary lending practices. CRA regulated banks may also inadvertently facilitate these lending practices by financing lenders. They also noted that CRA regulations, as then administered and carried out by Fannie Mae and Freddie MAC, did not penalize banks that engaged in these lending practices. They recommended that the federal agencies use the CRA to sanction behavior that either directly or indirectly increased predatory lending practices by lowering the CRA rating of any bank that facilitated in these lending practices.The FDIC has tried to address this issue by "stopping abusive practices through the examination process and supervisory actions; encouraging banks to serve all members and areas of their communities fairly; and providing information and financial education to help consumers make informed choices". FDIC policy currently states that "predatory lending can have a negative effect on a bank's CRA performance."
Relation to 2008 financial crisis
Economist Stan Liebowitz wrote in the New York Post that a strengthening of the CRA in the 1990s encouraged a loosening of lending standards throughout the banking industry. He also charges the Federal Reserve with ignoring the negative impact of the CRA. In a commentary for CNNCNN
Cable News Network is a U.S. cable news channel founded in 1980 by Ted Turner. Upon its launch, CNN was the first channel to provide 24-hour television news coverage, and the first all-news television channel in the United States...
, Congressman Ron Paul
Ron Paul
Ronald Ernest "Ron" Paul is an American physician, author and United States Congressman who is seeking to be the Republican Party candidate in the 2012 presidential election. Paul represents Texas's 14th congressional district, which covers an area south and southwest of Houston that includes...
, who serves on the United States House Committee on Financial Services
United States House Committee on Financial Services
The United States House Committee on Financial Services is the committee of the United States House of Representatives that oversees the entire financial services industry, including the securities, insurance, banking, and housing industries...
, charged the CRA with "forcing banks to lend to people who normally would be rejected as bad credit risks." In a Wall Street Journal opinion piece, Austrian school
Austrian School
The Austrian School of economics is a heterodox school of economic thought. It advocates methodological individualism in interpreting economic developments , the theory that money is non-neutral, the theory that the capital structure of economies consists of heterogeneous goods that have...
economist Russell Roberts
Russell Roberts (economist)
Russell Roberts is a professor of economics at the George Mason University Mercatus Center. Roberts founded and directed the Management Center at the John M. Olin School of Business at Washington University in St. Louis...
wrote that the CRA subsidized low-income housing by pressuring banks to serve poor borrowers and poor regions of the country.
However, many others dispute that the CRA was a significant cause of the subprime crisis. Nobel laureate Paul Krugman
Paul Krugman
Paul Robin Krugman is an American economist, professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times...
noted in November 2009 that 55% of commercial real estate loans were currently underwater, despite being completely unaffected by the CRA. According to Federal Reserve Governor Randall Kroszner
Randall Kroszner
Randall S. Kroszner, Ph.D. is a former member of the Board of Governors of the Federal Reserve System of the United States. He took office on March 1, 2006 to fill an unexpired term, and stepped down on January 21, 2009. Now Kroszner is Norman R...
, the claim that "the law pushed banking institutions to undertake high-risk mortgage lending" was contrary to their experience, and that no empirical evidence had been presented to support the claim. In a Bank for International Settlements
Bank for International Settlements
The Bank for International Settlements is an intergovernmental organization of central banks which "fosters international monetary and financial cooperation and serves as a bank for central banks." It is not accountable to any national government...
(BIS) working paper, economist Luci Ellis concluded that "there is no evidence that the Community Reinvestment Act was responsible for encouraging the subprime lending boom and subsequent housing bust", relying partly on evidence that the housing bust has been a largely exurban event. Others have also concluded that the CRA did not contribute to the financial crisis, for example, FDIC Chairman Sheila Bair, Comptroller of the Currency John C. Dugan, Tim Westrich of the Center for American Progress
Center for American Progress
The Center for American Progress is a progressive public policy research and advocacy organization. Its website states that the organization is "dedicated to improving the lives of Americans through progressive ideas and action." It has its headquarters in Washington D.C.Its President and Chief...
, Robert Gordon of the American Prospect, Ellen Seidman of the New America Foundation
New America Foundation
The New America Foundation is a non-profit public policy institute and think tank with offices in Washington, D.C. and Sacramento, CA. It was founded in 1999 by Ted Halstead, Sherle Schwenninger, Michael Lind and Walter Russell Mead....
, Daniel Gross of Slate
Slate (magazine)
Slate is a US-based English language online current affairs and culture magazine created in 1996 by former New Republic editor Michael Kinsley, initially under the ownership of Microsoft as part of MSN. On 21 December 2004 it was purchased by the Washington Post Company...
, and Aaron Pressman from BusinessWeek
BusinessWeek
Bloomberg Businessweek, commonly and formerly known as BusinessWeek, is a weekly business magazine published by Bloomberg L.P. It is currently headquartered in New York City.- History :...
.
Legal and financial experts have noted that CRA regulated loans tend to be safe and profitable, and that subprime excesses came mainly from institutions not regulated by the CRA. In the February 2008 House hearing, law professor Michael S. Barr, a Treasury Department official under President Clinton, stated that a Federal Reserve survey showed that affected institutions considered CRA loans profitable and not overly risky. He noted that approximately 50% of the subprime loans were made by independent mortgage companies that were not regulated by the CRA, and another 25% to 30% came from only partially CRA regulated bank subsidiaries and affiliates. Barr noted that institutions fully regulated by CRA made "perhaps one in four" sub-prime loans, and that "the worst and most widespread abuses occurred in the institutions with the least federal oversight". According to Janet L. Yellen, President of the Federal Reserve Bank of San Francisco
Federal Reserve Bank of San Francisco
The Federal Reserve Bank of San Francisco is the federal bank for the twelfth district in the United States. The twelfth district is made up of nine western states-—Alaska, Arizona, California, Hawaii, Idaho, Nevada, Oregon, Utah, and Washington--plus the Northern Mariana Islands, American Samoa,...
, independent mortgage companies made risky "high-priced loans" at more than twice the rate of the banks and thrifts; most CRA loans were responsibly made, and were not the higher-priced loans that have contributed to the current crisis. A 2008 study by Traiger & Hinckley LLP, a law firm that counsels financial institutions on CRA compliance, found that CRA regulated institutions were less likely to make subprime loans, and when they did the interest rates were lower. CRA banks were also half as likely to resell the loans. Emre Ergungor of the Federal Reserve Bank of Cleveland
Federal Reserve Bank of Cleveland
The Federal Reserve Bank of Cleveland is the Cleveland-based headquarters of the U.S. Federal Reserve System's Fourth District. The district is composed of Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia. It has branch offices in Cincinnati and Pittsburgh....
found that there was no statistical difference in foreclosure rates between regulated and less-regulated banks, although a local bank presence resulted in fewer foreclosures.
During a 2008 House Committee on Oversight and Government Reform hearing on the role of Fannie Mae and Freddie Mac in the financial crisis, including in relation to the Community Reinvestment Act, asked if the CRA provided the "fuel" for increasing subprime loans, former Fannie Mae CEO Franklin Raines
Franklin Raines
Franklin Delano "Frank" Raines is an American business executive. He is the former chairman and chief executive officer of the Federal National Mortgage Association, commonly known as Fannie Mae, who served as White House budget director under President Bill Clinton...
said it might have been a catalyst encouraging bad behavior, but it was difficult to know. Raines also cited information that only a small percentage of risky loans originated as a result of the CRA.
External links
- Revisiting the CRA: Perspectives & Policy Discussion on the Community Reinvestment Act, a joint publication by the Federal Reserve Banks of Boston and San Francisco, Federal Reserve System. Researchers, regulators, bankers, nonprofit practitioners, and community advocates contributing. Published February 2009.
- “The Community Reinvestment Act: Thirty Years of Accomplishments, but Challenges Remain”, February 13, 2008. This hearing before the full House Committee on Financial Services examined the impact of CRA on the provision of loans, investments and services to under-served communities. In addition to exploring CRA's success, the hearing hoped to examine challenges that prevent the law from being more effective for the future. | Printed Hearing: 110-90 (PDF).
- Prepared Testimony, Member Statements & Transcripts:
- Prepared Statement by Sandra F. Braunstein, Director of the Division of Consumer and Community Affairs, Federal Reserve Board (FRB)
- Prepared Statement by Ann F. Jaedicke, Deputy Comptroller for Compliance Policy, Office of the Comptroller of the Currency (OCC)
- Prepared Statement by Sandra L. Thompson, Director of the Division of Supervision and Consumer Protection, Federal Deposit Insurance Corporation (FDIC)
- Prepared Statement by Montrice Godard Yakimov, Managing Director of Compliance and Consumer Protection, Office of Thrift Supervision (OTS)
- Prepared Statement by Ellen Seidman (PDF), Director of the Financial Services and Education Project, New America Foundation
- Prepared Statement of Lawrence J. White (PDF), Professor of Economics, New York University – Stern School of Business
- Prepared Statement by Michael S. Barr (PDF), Professor, University of Michigan Law School
- Statement by Congressman Marchant (PDF)
-
- Federal Financial Institutions Examination Council, (FFIEC), contains detailed information on the CRA and its implementing regulations, including CRA National Aggregate Reports for the years 1996 to 2009
- Survey of the Performance and Profitability of CRA-Related Lending, September 19, 2002. Section 713 of the Gramm-Leach-Bliley Act of 1999 (Public Law 106-102) directs the Board of Governors of the Federal Reserve System to study and report to the Congress on the default rates, delinquency rates, and profitability of lending activities undertaken in conformance with the Community Reinvestment Act of 1977 (CRA). The Board asked the 500 largest retail banking organizations to voluntarily complete a comprehensive survey focusing on their CRA-related lending activities and prepared a report summarizing survey responses. The Board was directed to make the report and supporting data available to the public (linked above).
- Overview of the Community Reinvestment Act from the Federal Register.
- Truth in Lending Acts Amendments of 1995.
- George Benston, The Community Reinvestment Act: Looking for Discrimination That Isn't There, Cato InstituteCato InstituteThe Cato Institute is a libertarian think tank headquartered in Washington, D.C. It was founded in 1977 by Edward H. Crane, who remains president and CEO, and Charles Koch, chairman of the board and chief executive officer of the conglomerate Koch Industries, Inc., the largest privately held...
Policy Analysis No. 354, October 6, 1999. - Seidman, E., "CRA in the 21st century", originally published in Mortgage banking, Washington, D.C., October 1, 1999.
- Steven A. Holmes, Fannie Mae Eases Credit To Aid Mortgage Lending, New York Times, 30 Sept 1999
- The Community Reinvestment Act by economist Jim Campen, Dollars & SenseDollars & SenseDollars & Sense is a magazine dedicated to providing left-wing perspectives on economics.Published six times a year since 1974, it is edited by a collective of economists, journalists, and activists committed to the ideals of social justice and economic democracy.It was initially sponsored by the...
, Nov/Dec 1997. - CRA Didn’t Cause the Sub-Prime Mess
- It's Still Not CRA, comment by Ellen Seidman, former director of the US Office of Thrift SupervisionOffice of Thrift SupervisionThe Office of Thrift Supervision was a United States federal agency under the Department of the Treasury that charters, supervises, and regulates all federally- and state-chartered savings banks and savings and loans associations. It was created in 1989 as a renamed version of another federal agency...
during the Clinton administration, now at the New America FoundationNew America FoundationThe New America Foundation is a non-profit public policy institute and think tank with offices in Washington, D.C. and Sacramento, CA. It was founded in 1999 by Ted Halstead, Sherle Schwenninger, Michael Lind and Walter Russell Mead....
. - Fed’s Kroszner: Don’t Blame CRA from the Real Time Economics section of the Wall Street Journal
- Study Details How Big Banks Are Avoiding Lending Obligations Under Community Reinvestment Act - video report by Democracy Now!Democracy Now!Democracy Now! and its staff have received several journalism awards, including the Gracie Award from American Women in Radio & Television; the George Polk Award for its 1998 radio documentary Drilling and Killing: Chevron and Nigeria's Oil Dictatorship, on the Chevron Corporation and the deaths of...