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The Community Reinvestment Act (or CRA, Pub.L. 95-128, title VIII, 91 Stat. 1147, 12 U.S.C. §?2901 et seq.) is a United States federal law that requires banks and savings and loan associations to offer credit throughout their entire market area. (See full text of Act and current regulations.^[1]) The act prohibits financial institutions from targeting only wealthier neighborhoods with their services, a practice known as "redlining." The purpose of the CRA is to ensure that under-served populations can obtain credit, including home ownership opportunities and commercial loans to small businesses. The Act was passed in 1977 and has been subjected to important regulatory revisions since then.

Contents [hide] 1 Original Act 2 Congressional Changes 1989 - 1994 3 Clinton Administration Changes 1995 4 Congressional Changes 1999 5 GW Bush Administration Changes 2005 6 Controversies 6.1 Effectiveness 6.2 Housing advocacy groups 6.3 Predatory Lending 6.4 Relation to 2008 financial crisis 7 References 8 External links

[edit] Original Act

The CRA was passed by the 95th United States Congress and signed into law by President Jimmy Carter in 1977 as a result of national pressure for affordable housing.^[2] In Congressional debate on the Act, critics charged that the law would "distort credit markets, create unnecessary regulatory burden, lead to unsound lending, and cause the governmental agencies charged with implementing the law to allocate credit." In response Congress included little prescriptive detail and gave agencies considerable regulatory flexibility.^[3]

The CRA mandates that each banking institution be evaluated to determine if it has met the credit needs of its entire community. That record is taken into account when the federal government considers an institution's application for deposit facilities. The Act charged the Federal Reserve System to implement the CRA through ensuring banks and savings and loans met their CRA obligations.^[2] The CRA is also enforced by the Federal Deposit Insurance Corporation ("FDIC") CRA Statute. Community groups only slowly organized to take advantage of their right under the Act to complain about law enforcement of the regulations.^[4][5]

[edit] Congressional Changes 1989 - 1994

The Financial Institutions Reform Recovery and Enforcement Act of 1989 (FIRREA) was enacted by the 101st Congress and signed into law by President G. H. W. Bush in the wake of the savings and loan crisis of the 1980s. As part of a general reform of the banking industry, it increased public oversight of the process of issuing CRA ratings to banks. It required the agencies to issue CRA ratings publicly and written performance evaluations using facts and data to support the agencies' conclusions. It also required a four-tiered CRA examination rating system with performance levels of "Outstanding," "Satisfactory," "Needs to Improve," or "Substantial Noncompliance."^[3]

According to Ben S. Bernanke, Chair of the Federal Reserve System since 2006, 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. He also states that CRA was affected by the United States Congress passing the Federal Housing Enterprises Financial Safety and Soundness Act of 1992. It required the Federal National Mortgage Association, commonly known as Fannie Mae, and the Federal Home Loan Mortgage Corporation, commonly known as Freddie Mac, to devote a percentage of their lending to support affordable housing. This in part, contributed to increased Fannie Mae and Freddie Mac pooling and selling of such loans as securities , (i.e. securitization), and expanded the secondary market for those loans.^[2]

In 1997, Bear Stearns did the first securitization of CRA loans^[6], issuing over 2 billion dollars worth over the next 10 months. Between 2000 and 2002 Fannie Mae securitized $394 billion in CRA loans with $20 billion going to securitized mortgages."^[7]

In 2000, in order to expand the secondary market for affordable community-based mortgages nationwide, Fannie Mae committed to purchase and securitize $2 billion of "MyCommunityMortgage" loans. Such loans allowed “variances that borrowers need to qualify for loans.” Its goal was to create increased liquidity for CRA-eligible loans.^[8][9]

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 repealed restrictions on interstate banking, beginning a wave of bank mergers. This gave housing advocacy community groups such as the Association of Community Organizations for Reform Now (ACORN),^[10] power to demand more loans to their constituents because CRA allowed them to charge noncompliance and stop such mergers. Bernanke stated that over time community groups and nonprofit organizations established "more-formalized and more-productive partnerships with banks."^[2]

[edit] Clinton Administration Changes 1995

In July 1993 President Clinton asked regulators to reform the CRA in order to reduce paperwork and reward performance.^[11] The CRA regulations were substantially revised and featured requiring numerical assessments to get a satisfactory CRA rating; using federal home-loan data broken down by neighborhood, income group, and race; encouraging community groups to complain when banks were not loaning enough to specified neighborhood, income group, and race; allowing community groups that marketed loans to targeted groups to collect a fee from the banks.^[3]

During March 1995 congressional hearings William A. Niskanen, chair of the Cato Institute, criticized the proposals for political favoritism in allocating credit and micromanagement by regulators, and that there was no assurance that banks would not be expected to operate at a loss. He predicted they would be very costly to the economy and banking system, and that the primary long term effect would be to contract the banking system. He recommended Congress repeal the Act.^[12]

Responding to concerns that 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".^[13]

Howard Husock, vice-president of the market-oriented conservative Manhattan Institute and author of a book on American housing policy, writes that once in effect, the new rules substantially increased the number and aggregate amount of loans to low- and moderate-income borrowers for home loans. The Senate Banking Committee estimated that as of 2000, as a result of CRA, such groups had received $9.5 billion in services and salaries. As of that time such groups also had received tens of billions of dollars in multi-year commitments from banks to loan to local communities, including the ACORN housing advocacy organization $760 million; Boston-based Neighborhood Assistance Corporation of America $3 billion; a New Jersey Citizen Action-led coalition $13 billion; the Massachusetts Affordable Housing Alliance $220 million.^[14]

According to a United States Department of the Treasury study of lending trends in 305 U.S. cities between 1993 and 1998, 467 billion dollars in mortgage credit flowed from CRA-covered lenders to CRA-eligible borrowers. The number of CRA mortgage loans increased by 39 percent. Other loans increased by only 17 percent.^[15]

[edit] Congressional Changes 1999

In 1999 the Congress enacted and President Clinton signed into law the Gramm-Leach-Bliley Act, also known as the "Financial Services Modernization Act," which repealed the part of the Glass-Steagall Act prohibiting a bank from offering a full range of investment, commercial banking, and insurance services. The bill was killed in 1998 because Senator Phil Gramm wanted the bill to expand the number of banks which no longer would be covered by CRA. He also demanded full disclosure of any financial deals which community groups had with banks, accusing such groups of "extortion." In 1999 Senators Christopher Dodd and Charles E. Schumer broke another deadlock by forcing a compromise between Gramm and the Clinton administration which wanted to prevent banks from expanding into insurance or securities unless they were compliant with CRA. In the final compromise CRA would cover bank expansions into new lines of business, community groups would have to disclose certain kinds of financial deals with banks, and smaller banks would be reviewed less frequently for CRA compliance.^[16][17][18] On signing the 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".^[19]

[edit] GW Bush Administration 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.^[3] In early 2005, the Office of Thrift Supervision (OTS) implemented new rules that – according to Congressional Democrats – substantially weakened the CRA.^[20] This culminated when the Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve System, and the Office of the Controller of the Currency put a new set of regulations into effect in September 2005.^[21] In April 2005, a contingent of Democratic Congressmen issued a letter protesting these changes, as they undercut the ability of the CRA to "meet the needs of low and moderate-income persons and communities".^[20]

The regulations included less restrictive new definitions of "small" and "intermediate small" banks.^[2] "Intermediate small banks" were defined as banks with assets of less than $1 billion, which allows these banks to opt for examination as either a small bank or a large bank.^[21] 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.^[3]

In April of 2008 an FDIC official stated the FDIC was exploring offering incentives for banks to offer low-cost alternatives to payday loans. 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.^[22]

[edit] Controversies

The effects of the Community Reinvestment Act on the housing markets are controversial for a variety of issues.

[edit] Effectiveness

Some economists and financial experts 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 lenders.^[23][24] 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.^[5] A 2008 Competitive Enterprise Institute study resulted in a similar finding.^[25]

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.^[26]

[edit] Housing advocacy groups

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.^[27] Michelle Minton noted that Chase Manhattan and J.P. Morgan donated hundred of thousands of dollars to ACORN at about the same time they had were to apply for permission to merge and needed to comply with CRA regulations.^[25]

[edit] Predatory Lending

In 1980, Congress passed the Depository Institutions Deregulation and Monetary Control Act exempting federally chartered savings banks, installment plan sellers and chartered loan companies from state usury limits.^[28] The 1968 Truth in Lending Act does not regulate rates, except in the cases of some mortgages, but it does require uniform or standardized disclosure of costs and charges.^[29]

In 2002 Kathleen C. Engel and Patricia A. McCoy published a study of the predatory lending implications of the CRA, noting that by the late 1990s, predatory high cost mortgages to “gullible borrowers” were leading to foreclosures against low-income people of color and the elderly. They found evidence of such lending practices by CRA covered banks, both directly in their own lending and indirectly in buying other parties’ predatory loans as investments or to help them obtain CRA compliance credit. They criticized CRA regulators for not punishing such predatory lending and recommended changes to make it do so.^[30] Other analysts and community groups also complained about this problem in the early 1990s.^[31][32]

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."^[33]

[edit] Relation to 2008 financial crisis

See also: Subprime mortgage crisis

In an article for the New York Post, economist Stan Liebowitz wrote that the CRA encouraged a loosening of lending standards throughout the banking industry despite warnings of default. Banks were allowed to loan to consumers who were not credit worthy with "no verification of income or assets; little consideration of the applicant's ability to make payments; no down payment." According to Liebowitz, the chief executive of Countrywide said that in order to approve minority applications, "lenders have had to stretch the rules a bit."^[27]

In a piece for CNN, Congressman Ron Paul, who serves on the United States House Committee on Financial Services, partially attributed the current economic downturn to the Community Reinvestment Act, charging it with "forcing banks to lend to people who normally would be rejected as bad credit risks."^[34]

A Wall Street Journal editorial on the 2008 financial crisis argued that "Washington is as deeply implicated in this meltdown as anyone on Wall Street" because politicians "promoted housing and easy credit". The editorial lists the CRA as as one of the "subsidies and policies," and stated that it "compels banks to make loans to poor borrowers who often cannot repay them".^[35]

In an article for the Wall Street Journal, Austrian school economist Russell Roberts blamed the combined effects of excessive Federal Reserve credit expansion, the CRA, the implied guarantee to Fannie Mae and Freddie Mac, the Taxpayer Relief Act of 1997, and other policies for causing the crisis.^[36]

Others dispute the CRA's involvement in the crisis.

In congressional testimony in 2008, University of Michigan law professor Michael S. Barr, a Treasury Department official under President Bill Clinton,^[37][19] 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. Another 25% to 30% came from only partially CRA regulated bank subsidiaries and affiliates. He stated that institutions fully regulated by CRA made "perhaps" one in four sub-prime loans. Referring to CRA and abuses in the subprime market, Michael Barr stated that in his judgment "the worst and most widespread abuses occurred in the institutions with the least federal oversight". ^[38]

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."^[39]

According to Janet L. Yellen, President of the Federal Reserve Bank of San Francisco, independent mortgage companies made "high-priced loans" at more than twice the rate of the banks and thrifts. She states that most CRA loans have been responsibly made, and are not the higher-priced loans that have contributed to the current crisis.^[40]

In 2008, Traiger & Hinckley LLP, a law firm that counsels financial services entities on CRA compliance, conducted a study of loans made by institutions covered under the CRA. The study 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 to other parties.^[41]

Ellen Seidman, former director of the US Office of Thrift Supervision during the Clinton administration, who works at the New America Foundation,^[42] has stated that the CRA did not have an effect on the United States housing bubble.^[43] She noted that CRA banks were particularly warned to make responsible investments, and cited one of her own speeches as an example.^[44]

[edit] References

[edit] External links

• FDIC Law, Regulations, Related Acts section 6500 Consumer Protection
• Federal Financial Institutions Examination Council, contains detailed information on the CRA and its implementing regulations
• Overview of the Community Reinvestment Act from the Federal Register.
• Truth in Lending Acts Amendments of 1995.
• 2000 edition of the 12 USC 2901 after changes were made in during the Clinton era. Use this to compare to the present version of the code.^{[dead link]}
• George Benston, The Community Reinvestment Act: Looking for Discrimination That Isn't There, Cato Institute Policy Analysis No. 354, October 6, 1999.
• Seidman, E., "CRA in the 21st century", originally published in "Mortage banking," Washington, DC, 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 & Sense, Nov/Dec 1997.
• Community Reinvestment Act had nothing to do with subprime crisis by Aaron Pressman, BusinessWeek, September 29, 2008