109. Investopedia requires writers to use primary sources to support their work. [94], In a 2005 paper for the New York University Law Review, Michael S. Barr, professor at the University of Michigan Law School, presented evidence to demonstrate that the CRA had overcome market failures to increase access to credit for low-income, moderate-income, and minority borrowers at relatively low cost. Jeffrey W. Gunther, Kelly Klemme, and Kenneth J. Robinson. 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". 95128; 91 Stat. [134], The Financial Crisis Inquiry Commission formed by the US Congress in 2009 to investigate the causes of the 2008 financial crisis, concluded "the CRA was not a significant factor in subprime lending or the crisis". 1148), effective October 12, 1977; as amended by section 358(2) of title III of the Act of July 21, 2010, (Pub. BankThink We Have a Once-In-A-Generation Chance To Revamp CRA. The HOLC created maps that classified neighborhoods across the country on a "perceived level of lending risk" based on information gathered from various sources, including local appraisers, loan officers, city officials, and real estate agents. For example, the physical location of bank branches remains a component in the scoring process, even though an increasing number of consumers are conducting their banking online. L. No. 526), effective August 9, 1989; amended by section 222 of title II of the Act of December 19, 1991 (Pub. In a 2018 op-ed piece, former Comptroller of the Currency Joseph Otting asserted that the CRAs outdated approach had led to investment deserts, where "CRA activity often fails to reach by preventing banks from receiving consideration when they want to lend and invest in communities with a need for capital.". [77] Former Atlantic associate editor Daniel Indiviglio attributes increasing noncompliance with the CRA to the tightening of lending requirements. L. No. They 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. Upon the addition of section 808 (12. [97], Politico has reported that the Community Reinvestment Act may sometimes push poor people out of their own neighborhoods by facilitating investment by outsiders. He charged that "approximately 50 percent of CRA loans for single-family residences [had] characteristics that indicated high credit risk", yet, per the standards used by the various government agencies to evaluate CRA performance at the time, were not counted as "subprime" because borrower credit worthiness was not considered. The Community Reinvestment Act (CRA) helps ensure that federally insured banks meet the credit needs of the communities in which they are located, consistent with safe and sound banking practices. 103328; 108 Stat. Extensions of Credit by Federal Reserve Banks (Reg A), Limitations on Interbank Liabilities (Reg F), Privacy of Consumer Financial Information (Reg P), Transactions Between Member Banks and Their Affiliates (Reg W), This page was last edited on 21 June 2022, at 03:49. Will Kenton is an expert on the economy and investing laws and regulations. The CRA requires federal banking agencies to assess how well each institution fulfills its obligations to these communities. 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. Most of the loans made by depository institutions examined under the CRA have not been higher-priced loans, and studies have shown that the CRA has increased the volume of responsible lending to low- and moderate-income households. In response many institutions established separate business units and subsidiary corporations to facilitate CRA-related lending. 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. However, credit unions backed by the National Credit Union Share Insurance Fund and other non-bank entities are exempt from the legislation. The CRA applies to FDIC-insured depository institutions, including national banks, state-chartered banks, and savings associations. 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. [73] Another hearing was held on April 15, 2010 on "Perspectives and Proposals on the Community Reinvestment Act" with eight witnesses. 1148), effective October 12, 1977; as amended by section 909(1) of title IX of the Act of October 28, 1992 (Pub. [4], In July 1993, President Bill Clinton asked regulators to reform the CRA in order to make examinations more consistent, clarify performance standards, and reduce cost and compliance burden. [1][2][3] Congress passed the Act in 1977 to reduce discriminatory credit practices against low-income neighborhoods, a practice known as redlining. Still, each bank is given one of the following ratings: The FDIC maintains an online database where the public can see a particular banks score. More recently, some economists and policymakers have suggested the law needs to be revised to keep up with changes in the industry and make the evaluation process less onerous for banks. FDIC policy currently states that "predatory lending can have a negative effect on a bank's CRA performance. and community development loans as defined in the CRA regulations that may have some higher risk characteristics, but are otherwise mitigated by guarantees from government programs, private credit enhancements, or other appropriate risk mitigation techniques. Niskanen believed that the primary long-term effect would be an artificial contraction of the banking system. 1147), effective October 12, 1977, as added by section 1212(b) of title XII of the Act of August 9, 1989 (Pub. They contend that banks and other lenders relaxed certain standards for mortgage approvals to satisfy CRA examiners. 1148), effective October 12, 1977], [Source:Section 806 of title VIII of the Act of October 12, 1977 (Pub. The Bank Merger Review Modernization Act seeks to overhaul the review and approval process for mergers between financial institutions. Conversations with experts on their research and topics in the news, Podcast featuring economists and others making their marks in the field, Economic history from our digital library, Scholarly research on monetary policy, macroeconomics, and more. [109] According to Manhattan Institute scholar Howard Husock, the CEO of a midsize bank reported that 20% of his institution's CRA-related mortgages were delinquent in their first year and probably 7% would end in foreclosure. Congressional Findings and Statement of Purpose, [Source:Section 802 of title VIII of the Act of October 12, 1977 (Pub. 106102; 113 Stat. ", U.S. Department of Housing and Urban Development. 1469), effective November 12, 1999]. [3] The law does not list specific criteria for evaluating the performance of financial institutions. Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). [96], According to a 2012 study "credit markets enabled a substantial fraction of Hispanic families to live in neighbourhoods with fewer black families, even though a substantial fraction of black families were moving to more racially integrated areas.

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. ", Board of Governors of the Federal Reserve System. [52], 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), to satisfy Gramm's concerns. "Did the Community Reinvestment Act (CRA) Lead to Risky Lending? Additionally, this guidance will generally not apply to: . [89][90] 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. The Community Reinvestment Act (CRA, P.L. As part of the subsequent general reform of the banking industry, FIRREA added section 807 (12. He charged the Federal Reserve with ignoring the negative impact of the CRA. L. No. 1548), effective July 21, 2011], [Source:Section 807 of title VIII of the Act of October 12, 1977 (Pub. Several statutes comprise federal fair lending laws and regulations, including the: Redlining is the now-illegal discriminatory practice of denying credit to residents of certain areas based on their race or ethnicity. 95128; 91 Stat. 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. We also reference original research from other reputable publishers where appropriate. [76], The Obama administration has increased scrutiny of the provision of credit to poor and African American neighbourhoods. 802. 1", "Home Mortgage Disclosure (Regulation C)", "Home Mortgage Disclosure Act (HMDA) Information", "Federal Reserve Regulations (1995) pt. "[116] In a The Wall Street Journal opinion piece, economist Russell Roberts wrote that the CRA subsidized low-income housing by pressuring banks to serve poor borrowers and poor regions of the country. [6], 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). 3874), effective October 28, 1992; section 103(b) of title I of the Act of November 12, 1999 (Pub. HOLC deemed the red communities hazardous, describing them as "characterized by detrimental influences in a pronounced degree, undesirable population, or an infiltration of it." "File a Complaint. Community groups submitted a position paper[86] on March 1, 2022, to the OCC, FDIC and Federal Reserve about the key reforms they wanted to see. U.S.C. Federal Reserve Board. Fair lending laws prohibit lenders from discriminating based on specific protected classes during any aspect of a credit transaction. On May 5, 2022, the agencies jointly proposed a new rule intended to account for the ubiquity of online banking and distribute reinvestment more broadly across the country. As a result, Bhutta and Ringo concluded, the law was not a major factor in the housing markets subsequent downturn. [33] The CRA was passed as a result of national pressure to address the deteriorating conditions of American citiesparticularly lower-income and minority neighborhoods. The Federal Reserve uses one of five methods to rank a banks performance based on its size and mission. [40] Regulatory changes during the Clinton administration allowed these community groups better access to CRA information and enabled them to increase their activities. 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." [53][54], In conjunction with the Gramm-Leach-Bliley Act changes, smaller banks would be reviewed less frequently for CRA compliance by the addition of 2908. The agencies jointly reported their final amended regulations for implementing the Community Reinvestment Act in the Federal Register on May 4, 1995. An additional 10,000 comments from individuals, submitted through an online petition campaign, also supported NCRCs point of view. Financial Institutions; Evaluation, [Source:Section 804 of title VIII of the Act of October 12, 1977 (Pub. clarifying the adverse impact on a savings association's CRA rating where the OTS finds evidence of discrimination or other illegal credit practices. [11][29] Information about the CRA ratings of individual banking institutions from the three responsible agencies (Federal Reserve, FDIC, and OCC), is publicly available from the website of the FFIEC.

", American Banker. ", "Fed Chairman Bernanke Confirms To Menendez That Community Reinvestment Act Is Not To Blame For Foreclosure Crisis", "Opening Remarks, 2008 National Interagency Community Reinvestment Conference", "Comptroller Dugan Says CRA Not Responsible for Subprime Lending Abuses", "The Community Reinvestment Act and the Recent Mortgage Crisis", "The 25th Anniversary of the Community Reinvestment Act: Access to Capital in an Evolving Financial Services System", "Prepared Testimony, Serial No. "Community Reinvestment Act: Final Rule to Rescind and Replace Community Reinvestment Act Rule Issued in 2020. ", Office of the Comptroller of the Currency. Operation of Branch Facilities by Minorities and Women, [Source:Section 808 of title VIII of the Act of October 12, 1977 (Pub.

[30] These ratings were first made available by the Clinton administration to enable public participation and public comment on CRA performance. L. No. 111203; 124 Stat. Three federal regulatorsthe Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve Boardshare oversight of the CRA. [124] Law professor Michael S. Barr, a Treasury Department official under President Clinton,[58][125] stated that approximately 50% of 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. Critics of the CRA, including some conservative politicians and pundits, allege the law contributed to the risky lending practices that led to the financial crisis of 2008. These research-based essays offer insight and analysis focused on advancing an economy where all can thrive. 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." [5], 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 loans. 95128; 91 Stat. L. No. ", University of Chicago Law School. [4], Community activists, such as Gale Cincotta of National People's Action in Chicago, led the national fight to pass, and later to enforce the Act.

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. 1351), effective March 12, 2000; section 1031(a) of title X of the Act of August 14, 2008 (Pub.