Consumer Compliance Outlook: Second Quarter 2009

Revisiting the Community Reinvestment Act

Congress enacted the Community Reinvestment Act (CRA) in 1977 to encourage depository institutions to meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound banking operations.1 Today, 32 years later, and in the aftermath of the worst financial crisis since the Great Depression, Congress has been examining ways to update the CRA to address the dramatic changes in the financial landscape since the CRA was enacted.2 Policymakers are debating several key issues: has the CRA solved the problem it was intended to address? Is it still an effective way to address access-to-credit issues in low- and moderate-income (LMI) neighborhoods and for LMI consumers? What role, if any, did the CRA play in the mortgage crisis?

To address these and other questions, the Federal Reserve Banks of Boston and San Francisco jointly published a collection of CRA essays from bankers, community advocates, former regulators, and academics titled Revisiting the CRA: Perspectives on the Future of the Community Reinvestment Act.3 The Reserve Banks' aim in publishing these essays is to inform the discussion about ways of making the CRA more effective.

The essays discuss several key issues, including the primary goal of the CRA and whether its rationale is valid. Another issue explored in the essays is whether the CRA's scope should be expanded to include other types of financial institutions. The CRA currently applies only to state banks, national banks, and savings associations.4 For depository institutions already subject to the CRA, the oft-cited rationale for requiring them to comply is a quid pro quo: In exchange for meeting the credit needs of the communities in which they are chartered, they receive benefits such as deposit insurance, bank charter status, and/or access to the federal discount window. If taxpayer support is the primary rationale for requiring banks and thrifts to comply with the the CRA, other industries that also enjoy taxpayer support should be subject to the same requirements.

While many of the essays in this volume grapple with detailed questions about enforcing the CRA, several ask whether the CRA is the best way to correct the problem that prompted the CRA's enactment: access to fair credit in LMI communities. For example, Lawrence White suggests that vigorous enforcement of the Equal Credit Opportunity Act and antitrust laws can remove discrimination and make financial markets competitive.5

The essays suggest three different approaches for analyzing the CRA issues. The first suggests reforming the existing CRA regulation and evaluation process. This approach would examine the areas in which the CRA has been effective and ineffective. With feedback from key stakeholders, this approach would re-examine questions such as the relative weight of the lending, investment, and service tests; the definition of community development; and the use of assessment areas. Several authors argue in support of including affiliates and outside assessment area lending in the CRA performance evaluations (PEs).6 Currently, banks and thrifts are given the choice of including their nondepository affiliates in their CRA PEs, while in principle the OCC considers a bank's subsidiaries' assets in the CRA performance context.7 Community advocates have suggested that "[b]anks are tempted to include affiliates on CRA exams if the affiliates perform admirably, but they will opt against inclusion if the affiliates are engaged in risky lending or discriminatory policies." The advocates argue for closing this loophole.8 Others argue that risk-based examinations of affiliates may be most appropriate.9

The second approach considers whether the CRA obligations should be extended to other financial institutions currently not subjected to the CRA, including investment banks, bank holding companies, insurance companies, nonbank lenders, and credit unions. Expansion of CRA beyond insured depository institutions is an area that would necessitate amending the CRA statute. In considering this approach, lawmakers would likely consider the justification for why the CRA should apply to these institutions. Liz Cohen and Rosalia Agresti argue that investment banks, broker-dealers, and other financial institutions should be required to comply with an updated CRA in return for access to the Federal Reserve's discount window, a benefit provided to bank holding companies.10 The authors offer examples of the kinds of LMI financial services that each could provide. They argue that all institutions should provide fair access to financial services in exchange for the federal safety net.

Meanwhile, Mark Pinsky argues that the congressional bailout program brings with it an implicit CRA standard to serve all markets equally well and without discrimination,11 while Josh Taylor and John Silver argue that the CRA should be expanded to credit unions, nonbank institutions, and securities firms.12 Eugene Ludwig recommends expansion to broker-dealers, insurance companies, and credit unions at a minimum, and to all other major financial institutions, such as hedge funds and private equity firms, given the benefits they receive implicitly and explicitly from the government.13 He also suggests that nonbanks and other newly regulated entities could partner with banks and thrifts that currently meet the CRA requirements or with community development financial institutions (CDFls).

The third approach looks at modern financial and credit markets and their relationship to the financial services needed to promote strong families and neighborhoods. This approach requires stakeholders to take a holistic approach to the financial services universe, and the role the industry can play in ensuring equal and fair access to credit and financial services for all Americans and in promoting community and economic development. For example, Mark Pinksy suggests establishing a new investment class to facilitate CRA financing,14 while Michael Barr borrows from behavioral economics to recommend an "opt-out" mortgage plan that would offer all borrowers a standard mortgage unless they opted out.15

Michael Klausner suggests a market-based approach using tradable obligations along the lines of a "cap-and-trade" system.16 Banks would have CRA obligation quotas that they would either fulfill on their own or pay another institution to provide. This system could allow expanding the CRA to nonbank lenders, who could more cost effectively transfer their obligations to institutions with CRA lending expertise. This approach could also involve paying community development financial institutions to fulfill the CRA quotas.

This interesting debate about the CRA's future raises more questions than it answers. Revisiting the CRA and a follow-up conference provide CRA stakeholders, banks, regulators, and communities with a provocative set of facts and ideas to start the discussion.

The book is available for download from both the Boston External Site and San Francisco External Site websites. To order hard copies of the book, please e-mail Ian Galloway. E-mail An audio recording of the February 24 policy forum is available on the Federal Reserve Bank of San Francisco website External Site.