Community Reinvestment Act

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The Community Reinvestment Act (or CRA, (Public Law 95-128), title VIII, (US Statute 91:1147), (US Code 12:2901) et seq.) is a United States federal law that requires banks and thrifts to offer credit throughout their entire market area and prohibits them from targeting only wealthier neighborhoods with their services, a practice known as "redlining." The purpose of the CRA is to provide credit, including home ownership opportunities to underserved populations and commercial loans to small businesses.

The CRA was passed into law by the U.S. Congress in 1977 by a liberal Congress under President Jimmy Carter to encourage those earning low incomes to obtain mortgages." Only one banker, Ron Grzywinski from ShoreBank in Chicago, testified in favor of the act. [1]

Thomas J. DiLorenzo said, "The original lobbyists for the CRA were the hardcore leftists who supported the Carter administration and were often rewarded for their support with government grants and programs like the CRA that they benefited from. These included various 'neighborhood organizations,' as they like to call themselves, such as the Association of Community Organizations for Reform Now (ACORN)." [1]

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, including mergers and acquisitions. The CRA is enforced by the financial regulators (FDIC, OCC, OTS, and FRB). In 1995, as a result of interest from President Clinton's administration, the implementing regulations for the CRA were strengthened by focusing the financial regulators' attention on institutions' performance in helping to meet community credit needs. These changes were very controversial and as a result, the regulators agreed to revisit the rule after it had been fully implemented for five years. Thus in 2002, the regulators opened up the regulation for review and potential revision.

Clinton Administration's Changes of 1995

The Clinton Administration's regulatory revisions [2] with an effective starting date of January 31, 1995, were credited with substantially increasing the number and aggregate amount of loans to small businesses and to low- and moderate-income borrowers for home loans. Massive new provisions to CRA that forced banks to issue $1 trillion in bad loans and indirectly fund the work of radical left-wing organizations."[3] Part of the increase in home loans was due to increased efficiency and the genesis of lenders, like Countrywide, that do not mitigate loan risk with savings deposits as do traditional banks using the new subprime authorization. This is known as the secondary market for mortgage loans. The revisions allowed the securitization of CRA loans containing subprime mortgages. The first public securitization of CRA loans started in 1997.[4]

Howard Husock wrote the following: "The Clinton administration has turned the Community Reinvestment Act, a once-obscure and lightly enforced banking regulation law, into one of the most powerful mandates shaping American cities and, as Senate Banking Committee Chairman Phil Gramm memorably put it, a vast extortion scheme against the nation's banks. Under its provisions, U.S. banks have committed nearly $1 trillion for inner-city and low-income mortgages and real estate development projects, most of it funneled through a nationwide network of left-wing community groups..."

"Crucially, the new CRA regulations also instructed bank examiners to take into account how well banks responded to complaints. The old CRA evaluation process had allowed advocacy groups a chance to express their views on individual banks, and publicly available data on the lending patterns of individual banks allowed activist groups to target institutions considered vulnerable to protest. But for advocacy groups that were in the complaint business, the Clinton administration regulations offered a formal invitation. The National Community Reinvestment Coalition, a foundation-funded umbrella group for community activist groups that profit from the CRA, issued a clarion call to its members in a leaflet entitled 'The New CRA Regulations: How Community Groups Can Get Involved.' 'Timely comments,' the NCRC observed with a certain understatement, 'can have a strong influence on a bank's CRA rating.'"

"'To avoid the possibility of a denied or delayed application,' advises the NCRC in its deadpan tone, 'lending institutions have an incentive to make formal agreements with community organizations.' By intervening, even just threatening to intervene, in the CRA review process, left-wing nonprofit groups have been able to gain control over eye-popping pools of bank capital, which they in turn parcel out to individual low-income mortgage seekers. A radical group called ACORN Housing has a $760 million commitment from the Bank of New York; the Boston-based Neighborhood Assistance Corporation of America has a $3-billion agreement with the Bank of America; a coalition of groups headed by New Jersey Citizen Action has a five-year, $13-billion agreement with First Union Corporation. Similar deals operate in almost every major U.S. city. Observes Tom Callahan, executive director of the Massachusetts Affordable Housing Alliance, which has $220 million in bank mortgage money to parcel out, "CRA is the backbone of everything we do." [5]

George W. Bush administration's proposed changes of 2003

In 2003, the Bush Administration recommended what the NY Times called "the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago." [6] The change was to place two of the primary agents guaranteeing subprime loans, Fannie Mae and Freddie Mac under supervision of a new agency created within the Department of the Treasury. The changes were generally opposed along Party lines and eventually failed to happen as a result of Democrat efforts in opposition.[7] Representative Barney Frank(D-MA) claimed of the thrifts "These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis, the more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing." Representative Mel Watt (D-NC) added "I don't see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing."

Changes of September 2005

Among banks and the regulatory agencies, there was a consensus that data collection, recordkeeping, and reporting requirements imposed a heavy burden on small community institutions. As a result of a 2002 review of the CRA regulations, and revision of an initial Federal Deposit Insurance Corporation (FDIC) proposal following a public commenting period that was largely negative, the FDIC, Office of the Comptroller of the Currency (OCC) and the Federal Reserve Board (FRB), made substantive changes to the implementation of regulations for the CRA for banks (not thrifts).

Previously, all institutions over $250 million in assets were subject to a three-part CRA test that covered lending (including community development loans), qualified investments, and services (including community development services) to their assessment areas. Institutions less than $250 million were subject only to a lending test.

However, as of September 1, 2005, only those institutions with more than $1 billion in assets were subject to the three-part test. Institutions below $250 million remain subject to only a lending test, and a new CRA test was created for institutions with assets between $250 million and $1 billion. This latter category, referred to as Intermediate Small Banks, is subject to the same lending test to which institutions under $250 million were subject; along with a new combined community development test that covers community development loans, qualified investments, and community development services. The $250 million and $1 billion asset thresholds also were indexed to the consumer price index and could change annually. Thus, all institutions remain subject to the CRA test. These substantive changes were intended to be a compromise between changes advocated by banks and community groups.

However, the changes were not received positively by all community groups. Changes to tests conducted on the Intermediate Small category were viewed by some as decreasing the institutions' obligations to meet lending requirements of low- and moderate-income households. Racial inequities in mortgage acceptance rates (as reported by Inner City Press, the National Community Reinvestment Coalition, ACORN and other groups) are cited as a primary reason to maintain or even increase the scope of the CRA.

CRA and the Fannie Mae crisis

Equality of opportunity vs equality of result

Subprime lending
Critics claim that government policy encouraged the development of the subprime debacle through legislation like the CRA, which in effect forces banks to lend to the same otherwise uncreditworthy consumers they are now being criticized for accepting.[8][9] Defenders of CRA disagree, pointing out that half of all subprime loans were made by institutions that are not subject to CRA and another substantial share of subprime loans were made by subsidiaries of banks that do not fully come under CRA. They estimate that the substantial number of riskier loans banks were forced to accept by CRA were not enough to be a problem.[10]

See also


  • Canner, G. and W. Passmore, 1997 The Community Reinvestment Act and the profitability of mortage-oriented banks, Finance and economics discussion series, 1997-7
  • Schwartz, A., 1998. From confrontation to collaboration? Banks, community groups, and the implementation of community reinvestment agreements, Housing policy debate, 9, 3, pp. 631–662
  • Seidman, E., 1999 "CRA in the 21st century," Mortage banking, Washington, DC, October
  • Elizabeth Warren and Amelia Warren Tyagi. The Two Income Trap: Why Middle Class Parents are Going Broke 2003 (New York: Basic Books).

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