Community Reinvestment Act

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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 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 as a result of national grassroots pressure for affordable housing, and despite considerable opposition from the mainstream banking community. Only one banker, Ron Grzywinski from ShoreBank in Chicago, testified in favor of the act. [[1]]

Not suprisingly, home foreclosures have tripled within these past 25 years, as shown by Harvard Law Processor Elizabeth Warren in the Two-Income Trap.

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.

The 1995 revisions were credited with helping to substantially increase the amount of loans to small businesses and to low- and moderate-income borrowers for home loans. Part of the increase in the latter type of lending was no doubt due to increased efficiency in the secondary market for mortgage loans. See FRB studies on FRB web site.

[edit] Changes of September 2005

Despite continuing racial inequities in mortgage acceptance rates, as reported by Inner City Press, ACORN and other groups, banks regularly seek to weaken the Community Reinvestment Act. They succeeded in August of 2004, when the Federal Deposit Insurance Corporation proposed rules to weaken enforcement of the Act.

As a result of the 2002 review of the CRA regulations, in July 2005, the FDIC, along with the Office of the Comptroller of the Currency (OCC) and the Federal Reserve Board (FRB), made substantive changes to the implementing regulations for the CRA for banks (not thrifts). Previously, all institutions over $250 million 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 less than $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 of institutions is subject to the same lending test that the very smallest institutions were subject to; along with a new community development test that covers community development loans, qualified investments, and community development services together. The $250 million and $1 Billion asset-size thresholds were also 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.

[edit] References

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).