The Truth About CRA and Plans to Eviscerate an Effective Law



The Truth about CRA and Plans to Eviscerate an Effective Law

The Community Reinvestment Act (CRA) is a civil rights law prohibiting discrimination by banks against low- and moderate-income neighborhoods. CRA imposes an affirmative and continuing obligation on banks to serve the needs for credit and banking services of all the communities in which they are chartered. Federal examiners grade banks on their performance in making loans, investments, and services available to low- and moderate-income communities. Numerous studies, including those done by the Federal Reserve Board and Harvard University, have demonstrated that CRA is a win-win proposition: CRA has increased lending to minority and low- and moderate-income communities, and CRA lending is profitable for banks.

Despite this success, two federal agencies, the Federal Deposit Insurance Corporation and the Office of Thrift Supervision, are proposing changes to the CRA regulation that will dramatically decrease the effectiveness of CRA. This bad public policy will frustrate the Bush administration’s goal to increase minority homeownership and neighborhood economic development. The Federal Deposit Insurance Corporation's (FDIC’s) and the Office of Thrift Supervision’s (OTS’) changes to the Community Reinvestment Act (CRA) regulations for mid-size banks will significantly reduce the number of loans and investments in affordable housing and economic development in lower income and minority communities.

The OTS has already implemented the harmful change; the FDIC is proposing a similar change to the CRA regulations. Both the FDIC and the OTS are led by Bush Administration appointees.

Myth: The FDIC’s and the OTS’ Changes Streamline Exams without Hurting CRA and Diminishing Access to Fairly Priced Credit

Fact: The FDIC proposes an easier exam for banks with assets between $250 million and $1 billion. Currently, mid-size banks are required to make community development loans, investments, and services. The FDIC proposes that they can choose to offer only one of the three types of community development activities in low and moderate-income communities. The result will be less community development financing by the mid-size banks.

Just considering investments, NCRC estimates that mid-sized banks make about $4 billion in community development investments every two to three years. This level of investments could be cut by at least half should the current CRA investment test be eliminated (see NCRC letter to the agencies in the spring of 2004).

The FDIC proposes that the exams will no longer evaluate how many branches the mid-size banks are placing in low- and moderate-income communities. The result will be fewer loans and checking and savings accounts for people of modest incomes. In the last few years, predatory lending and payday lending has exploded in lower income communities. The FDIC’s and OTS’ changes will only worsen the problems of predatory and payday lending since banks will provide fewer affordable alternatives to minority and lower income neighborhoods.

Myth: The Changes Will Not Hurt Rural Areas

Fact: The FDIC proposes that the community development loans and investments in rural areas can benefit any group of individuals, not just low- and moderate-income individuals. Currently, banks have to finance affordable housing and economic development projects that target low- and moderate-income borrowers and neighborhoods. Under the proposed changes, nothing in the CRA regulations would prevent banks from earning CRA points for financing golf courses and other amenities for the well-heeled. Moreover, the easier exams would cover 99 percent of all FDIC-supervised banks located in rural areas.

Myth: The Proposed Changes Only Apply to a Small Segment of the Banking Industry

Fact: The bank trade associations like to claim that the proposed changes apply to only a small segment of the lending industry. It’s interesting that the bank trade associations minimize the importance of their member banks by belittling the large number of assets that they have.

The easier exams would apply to more than 5,000 banks, or 96 percent of the

banks supervised by the FDIC. These 5,000 banks have $754 billion in

assets, which is almost equal in size to JP Morgan Chase, which is the third largest bank holding company in America. In combined assets, the 5,000 banks have almost twice the assets of Wells Fargo, the fourth largest bank holding company in America. The OTS’ final change now means that easy exams apply to 814 savings and loans or 88 percent of all thrifts with combined $158 billion in assets. These 814 thrifts have combined assets greater than ABN Amro has, which is the tenth largest bank holding company.

Myth: CRA is Burdensome, Unprofitable, and Ineffective

Fact: The Gramm-Leach-Bliley Act of 1999 required the Federal Reserve Board to study the profitability of CRA loans. The Federal Reserve Board found in this study that CRA loans are profitable. Studies conducted by Harvard University and Federal Reserve economists concluded that banks made more home loans to minorities and low- and moderate-income borrowers in geographical areas that are covered by their CRA exams than in areas not covered by their exams. The Treasury Department found that bank’s home lending to low- and moderate-income borrowers increased twice as fast than bank home lending to middle- and upper-income borrowers. The last several years have been among the most profitable for banks in history. The tremendous increases in CRA-related lending to low- and moderate-income borrowers occurring during years with record profits suggests that CRA enables banks to find profitable markets. Certainly, CRA does not interfere with bank profitability.

CRA regulations are the wrong thing to cut. Banks complain much more vociferously about the USA Patriot Act and the Bank Secrecy Act than CRA.

Myth: The FDIC and OTS Process has Been Fair

Fact: The Federal Reserve Board (FRB) and the Office of the Comptroller of the Currency (OCC) concluded that the proposed changes to CRA would decrease levels of community development financing, and would not reduce banks’ costs in any significant manner. The OCC and FRB then withdrew changes that had been proposed in the spring of 2004. Among other elements, the spring proposal would have applied “wink and nod” CRA exams to banks with up to $500 million in assets.

The OTS then proceeded with far worse changes than the spring 2004 proposal. In mid-August, during a traditional summer vacation month, the FDIC announced an unjustifiably short 30-day public comment period for its new proposed changes. Historically, the agencies have acted together and in a very deliberate and fair manner, providing ample opportunity for public comment and public hearings over a time period of several months. As a result, changes to the CRA regulations achieved a level of acceptance among industry and community groups. Now, in contrast, a haphazard and chaotic process will significantly damage CRA unless the agencies re-group and find a way to re-assert order in the process. Furthermore, the U.S. Congress has rejected the changes proposed by the FDIC and OTS when the Congress passed the Gramm-Leach-Bliley Act in 1999. The opponents of CRA are trying to weaken an effective anti-discrimination law via un-elected regulatory bodies after the failure to obtain their objectives through Congress.

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