Community Reinvestment Act: Evolution and Current Issues

Home , Bank Holding Company Act, National Bank Act

April 1993

The Community Reinvestment Act: Evolution and Current Issues

Griffith L. Garwood and Dolores S. Smith, of the tainty in the law's application. But it also continues Division of Consumer and Community Affairs, to offer each depository institution wide opportuni- prepared this article. Jane E. Ahrens, Michael S. ties for meeting its CRA responsibilities creatively, Bylsma, and Adrienne D. Hurt provided research in a manner that best accommodates the institution assistance. and the community it serves.

The Community Reinvestment Act took effect in November 1978. How well is it working? The answer is, probably a lot better than is often recog- BACKGROUND nized. The legislation has had a major influence on reinvestment activity throughout the country and In the mid-1970s, a prevalent view among some has brought greater attention to local needs, espe- members of the Congress was that many financial cially in low-income and minority areas. It has also institutions accepted deposits from households and engendered creative strategies and techniques to small businesses in inner cities while lending and stimulate lending for community development. In investing those deposits primarily elsewhere. They many parts of the country, community groups and believed that, given this disinvestment, or "redlin- financial institutions have moved from adversarial ing," credit needs for urban areas in decline were relations to cooperation in pursuit of mutual goals. not being met by the private sector; moreover, the Yet many financial institutions complain that problem was worsening because public resources complying with the Community Reinvestment Act were becoming increasingly scarce. (CRA) is costly and burdensome. Some criticize In January 1977, the original Senate bill on com- the law's requirements as too vague; others say that munity reinvestment was introduced. In the hear- its implementation amounts, de facto, to credit ings that followed, opponents of the legislation allocation. Some also are adversely affected by the voiced serious concerns that the bill threatened to law's existence when they seek to expand opera- allocate credit to geographic areas, according to the tions, particularly if a public protest is filed. Many volume of deposits coming from those areas, or to community and consumer groups, on the other specific types of loans, without regard for credit hand, believe that financial institutions are not demand or the merits of loan applications. The law doing enough to help meet the credit needs of would therefore disrupt the normal flow of capital residents and businesses in low- and moderate- from areas of excess supply to areas of strong income areas. In part, they blame the supervisory demand and undermine the safety and soundness of agencies for being too lenient in assessing CRA depository institutions. Proponents of the bill stated performance and too generous in assigning grades. that it was meant to ensure only that lenders did not Caught in the middle, the agencies over the years ignore good borrowing prospects in their communi- have addressed the divergent views and expanded ties and that they treated creditworthy borrowers the guidance they offer while seeking to maintain evenhandedly. Senator William A. Proxmire, the the flexibility called for by the law. bill's sponsor, stressed that it would neither force Today the act remains a source of concerns com- high-risk lending nor substitute the views of regula- mon to regulators, bankers, and community tors for those of banks. He said that safety and activists—the paperwork burden, the disproportion- soundness should remain the overriding factor ate effect on small institutions, and a lack of cer- when agencies evaluate applications for corporate

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expansion; meeting the credit needs of the commu- regarding a deposit facility—a charter, a merger, nity was only one of the criteria to consider. an acquisition, a branch, an office relocation, or Believing that systematic, affirmative programs deposit insurance. would encourage lenders to give priority to credit The act sets no criteria or guidelines for assess- needs in their home areas, the Congress passed the ing the performance of an institution. It does not Community Reinvestment Act, and the President explain how an institution's "community" should signed it into law on October 12, 1977.1 The CRA be selected, how credit needs are to be determined, reaffirmed the principle that financial institutions how to define low- and moderate-income neighbor- must serve "the convenience and needs" of the hoods, or what constitutes satisfactory compliance. communities in which they are chartered to do With little guidance available from the statute, the business by extending credit in these communities. agencies held hearings in 1978 to elicit the public's This principle is one that federal law governing suggestions on how the CRA should be interpreted deposit insurance, bank charters, and bank mergers and implemented. Not surprisingly, views differed. had embodied long before the enactment of the Consumer groups favored specific rules—for exam- CRA. Likewise, the Bank Holding Company Act— ple, the application of loan-to-deposit ratios for passed initially in 1956—requires the Board, in evaluating CRA performance—whereas industry acting on acquisitions by banks and bank holding witnesses voiced concerns about credit allocation companies, to evaluate how well an institution and focused on the need for flexible standards. meets the convenience and needs of its communi- The joint regulations subsequently adopted by ties within the limits of safety and soundness. Thus, the agencies reflected a set of principles that contin- the mandate of the CRA was, in many respects, ues to mark the administration of the CRA: Flexi- already in place. bility is important, agency rules should not allocate credit, and institutions in different communities may approach the CRA in various ways. To deal BASIC PROVISIONS with the lack of standards in the law, the regulations established twelve factors against which the The CRA is directed primarily at the four federal agencies would assess the performance of institu- agencies that supervise the institutions covered by tions (see box). the law—the Board of Governors of the Federal In assessing an institution's CRA record, the Reserve System (the Board), the Office of the supervisory agency examines for technical compli- Comptroller of the Currency (OCC), the Federal ance with a few specific rules and qualitatively Deposit Insurance Corporation (FDIC), and the evaluates the institution's performance in serving Office of Thrift Supervision (OTS, formerly the its entire community. The rules call for an institu- Federal Home Loan Bank Board). First, the tion to do the following: agencies are to use their supervisory authority to encourage financial institutions to help meet local • Formulate and adopt a public "CRA state- credit needs in a manner consistent with safe and ment" that delineates the communities it serves, sound operation. Second, as part of their examina- lists the principal types of credit it offers, and tions, the agencies are to assess an institution's indicates where a person should write to comment record of serving its entire community, including on the institution's CRA performance low- and moderate-income neighborhoods. Third, • Maintain a file of comments from the public they must take that record into account when they about its CRA performance (as of 1990, this "pub- assess an institution's application for approval lic comment file" also must contain the supervisory agency's most recent assessment of the institution's CRA record) 1. In retrospect, the Congress enacted the CRA with surprising ease. In the Senate, a markup of the original bill was reported out of • Publicly display a notice about the availability the Banking Committee and adopted as part of the Housing and of the CRA statement and the public comment file. Community Development Act of 1977. No companion reinvestment bill was introduced in the House; after minimal floor debate, House members adopted the Senate bill as amended by a confer- The agencies also adopted uniform examination ence committee of the two houses. procedures. Like the regulations, the procedures

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The Community Reinvestment Act: Evolution and Current Issues 253

Twelve Performance Factors ijliisisi

The federal supervisory agencies consider the following • The institution's record of opening and closing factors in assessing an institution's record of perfor- offices and providing services at offices mance under the Community Reinvestment Act: • The institution's participation, including investment, in local community development and redevelopment • Activities conducted by the institution to ascertain projects or programs the credit needs of its community, including the extent of • The institution's origination of residential mortgage the institution's efforts to communicate with members of loans, housing rehabilitation loans, home improvement its community regarding the credit services being pro- loans, and small business or small farm loans within its vided by the institution community, or the purchase of such loans originated in • The extent of the institution's marketing and special the community credit-related programs to make members of the commu- • The institution's participation in government in- nity aware of the credit services offered by the institution sured, guaranteed, or subsidized loan programs for hous- • The extent of participation by the institution's board ing, small businesses, or small farms of directors in formulating the institution's policies and • The institution's ability to meet various community reviewing its performance with respect to the purposes of credit needs based on its financial condition and size, the Community Reinvestment Act legal impediments, local economic conditions, and other • Any practices intended to discourage applications for types of credit set forth in the institution's CRA • Other factors that, in the supervisory agency's judg- statement ment, reasonably bear upon the extent to which an insti- • The geographic distribution of the institution's credit tution is helping to meet the credit needs of its entire extensions, credit applications, and credit denials H • Evidence of prohibited discriminatory credit practices or other illegal credit practices PI stressed that financial institutions could use various approval. A poor CRA performance may, however, means to learn about, and help meet, the financial be outweighed by other factors, such as the need to needs of the surrounding community. The CRA did merge a weak institution into a strong one, in not establish hard and fast rules or ratios by which which case the application may still be approved. to judge an institution's performance. But an institution could expect negative marks if its pattern of loan applications, extensions, and rejections Policy Statements of 1980 and 1989 showed a concentration of credit approvals in high- income neighborhoods that was inappropriate given In December 1979 the Federal Reserve Board the institution's delineated service area and the issued a policy statement on the CRA to guide state presence of qualified applicants in lower-income member banks; the Board also forwarded the state- areas. ment to the Federal Financial Institutions Examina- In considering an application for a deposit facil- tion Council (FFIEC) for consideration by the three ity, the supervisory agency assesses the applicant's other supervisory agencies responsible for imple- CRA record—including its CRA rating and any menting the CRA. In September 1980 the FFIEC actions taken to improve performance following an adopted a statement similar to the Board's and examination—as part of its decision to approve or covering these principal points: deny the application. In the past, the agencies at times approved an application even though CRA • Although directed toward meeting community performance was unsatisfactory if the applicant credit needs, the CRA does not impose credit offered substantial commitments for future perfor- allocation. mance. Today, an institution generally is expected • Disparities in loan-to-deposit ratios are not, on to have a satisfactory CRA program in place and their face, evidence of discrimination or poor per- working well before its application can receive formance under the CRA.

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254 Federal Reserve Bulletin • April 1993

• In the absence of substantial efforts to ascer- A crucial feature of the 1989 policy statement tain credit needs and publicize credit services, a was its emphasis on an institution's management of lack of applications is not an adequate explanation CRA performance as part of day-to-day activities. for little or no lending in a particular neighborhood. The statement reaffirmed the value of an institu- • Institutions are expected to offer throughout tion's discretion in developing the products best their communities the types of credit listed on their suited to its expertise and the specific needs of its CRA statements. community. It stressed that the CRA requires an • Favorable weight will be given to an institu- ongoing effort by an institution to ascertain the tion's conceited effort to tailor and adapt programs needs of its entire community, develop products and services to the needs of low- and moderate- in response, and market them throughout the income neighborhoods in its community. community. • Commitments for future action will not be The statement also dealt with the CRA in the viewed as part of the CRA record of performance, context of protested applications. It stressed that an but they may receive weight as an indicator of institution's CRA evaluation rating would receive potential for improvement. great weight. It encouraged community groups to • Communication between applicants and pro- bring CRA issues to the attention of banks and testing parties is encouraged, but the agencies will regulators without delay rather than to wait until an not approve or enforce agreements. application was pending. Given the desirability of processing cases in a timely manner, the statement made clear that extensions of comment periods In subsequent years the CRA attracted increasing would be the exception, not the rule. The agencies public attention. Reduced federal funding for also cautioned institutions to address their CRA community and housing programs and charges of responsibilities and to have policies in place and discriminatory lending patterns intensified interest working well before they filed an application, sig- in bank performance. Community groups grew in naling a shift away from approving applications on number and experience and became more sophisti- the strength of promised performance. In general, cated in dealing with information about lending institutions could not hope to use commitments patterns. Challenges to applications multiplied, made in the application process to overcome a the handling of CRA protests became a significant seriously deficient record. aspect of the application process, particularly in major acquisitions by bank holding companies, and the volume and complexity of the CRA issues rose Guidelines for CRA Evaluations as the number of low CRA ratings grew. The growing pressure on institutions increased In August 1989 the Congress amended the CRA to their demands for guidance regarding the adequacy require public release of examination assessments of a CRA record and what to expect in the applica- and change the CRA rating scale, effective July 1, tion process. In April 1989 the agencies released a 1990. To define the standards, the FFDEC issued second CRA policy statement based on their "Guidelines for Disclosure of Written Evaluations decade of experience in evaluating applications, and Revised Assessment Rating System" in April dealing with protests, and conducting examina- 1990. The guidelines detailed performance require- tions. Given the discomfort caused, on the one ments and information about how examiners would hand, by any notion of credit allocation and, on the evaluate institutions. They placed emphasis on the other, by a perceived lack of detailed direction, the need for a managed CRA program: Were proce- 1989 statement attempted to give more guidance dures in place at the institution to promote commu- to institutions but not hamstring them with rigid nity dialogue? How did the institution take its requirements. The statement added specificity assessment of community needs into account in about the responsibilities of institutions under the product design and marketing? If it analyzed its CRA, the manner in which the agencies would geographic distribution of credit on an ongoing assess performance, and some of the elements basis, what were the institution's own goals for found in effective programs. lending distribution, and had they been met?

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The Community Reinvestment Act: Evolution and Current Issues 255

Although this approach steered clear of any sem- institutions are serving the credit needs of minority blance of credit allocation, it created a different populations in their local communities. The provi- problem by appearing to place undue emphasis on sions of the CRA focus on issues broader than the documentation. Widely reported statements from financing of low- and moderate-income housing, some regulators that "if it isn't documented, it but community activists have always emphasized didn't happen" contributed to that belief. So did mortgage lending, in large part because of the some efforts of trade associations and CRA con- combination of unmet needs in low-income areas sultants, who prepared elaborate check lists of the and the ready availability of mortgage data.2 As documentation that institutions should provide to amended in 1989, HMDA calls for lenders to examiners. The requirement that public assess- record the race, sex, and income of applicants for ments be factually supported by "facts and data"— all mortgages and home improvement loans, a provision added to the law in 1991—brought including loans denied and withdrawn; lenders pre- other requests for recorded activities that the exam- viously reported only loans that they originated or iners could cite. purchased.3 For both 1990 and 1991, the HMDA In 1992, amid rising concerns about excessive data have shown the rate of loan denials to be reliance on paperwork, the agencies issued new generally higher for minority and Hispanic loan examiner guidelines. These made clear that exam- applicants than for Asian and white applicants. The iners should base the evaluation of CRA perfor- data also show that the rate of such denials gener- mance primarily on how well an institution was ally increases in neighborhoods as the percentage helping to meet credit needs, not on the amount of of nonwhite residents increases.4 documentation it maintained. A lack of documenta- Other factors have contributed to an intensified tion was not a sufficient basis for assigning a poor focus on the CRA. The financial support of federal rating if satisfactory performance was otherwise programs for low- and moderate-income housing, demonstrated or apparent. The agencies also for example, has dropped significantly over the emphasized their expectation that documentation past decade. In constant dollars, the total budget for would normally be found in a well-managed pro- low-income housing programs was reduced by gram and that it would generally be less formal and more than half between 1980 and 1991, and federal less extensive in small and rural institutions. support for rental housing also contracted sharply. These cutbacks have placed yet greater pressure on

PUBLIC FOCUS ON THE CRA

2. Bills to expand HMDA to other types of credit, such as small In recent years, interest in CRA activities has business loans and personal loans, have been introduced over the increased dramatically, especially since the CRA years. For example, in 1992 Representative Maxine Waters of evaluations became publicly available. Public dis- California introduced a bill to expand the types of loans for which applicant characteristics are collected under HMDA and to expand closure in some respects has further empowered the analysis required to evaluate an institution's CRA performance community groups and individuals concerned about (Community Credit Improvement Act of 1992, H.R. 6206 § 101, financial institutions' lending practices. Applica- 102 Cong. 2 Sess., 1992). 3. To maximize use of the expanded data, the Federal Reserve tion activities, marking a movement toward inter- has developed a system that facilitates access and provides analyses state banking and the industry's restructuring, have of the data by demographic characteristics, such as race, gender, provided a ready forum in which to raise CRA and income levels, and by geographic boundaries. Examiners are able to compare the HMDA data for a single reporting lender with issues. Those interested in the CRA, moreover, the HMDA data for others within a defined geographic market. now include not just the traditional groups of com- They also can compare the income levels and race of applicants munity activists but also local government officials, with characteristics of the census tracts where the properties that secure the loans are located. unions, churches, the media, and others. 4. Glenn B. Canner and Dolores S. Smith, "Home Mortgage Coverage of mortgage lending issues by news Disclosure Act: Expanded Data on Residential Lending," Federal organizations, particularly of the data produced Reserve Bulletin, vol. 77 (November 1991), pp. 859-84; and Can- ner and Smith, "Expanded HMDA Data on Residential Lending: under the Home Mortgage Disclosure Act One Year Later," Federal Reserve Bulletin, vol. 78 (November (HMDA), has fueled the debate over how well 1992), pp. 801-24.

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financial institutions to support local efforts to tions Reform, Recovery and Enforcement Act of create housing.5 1989 (FIRREA). FIRREA amended the CRA to Some state governments require commitments to give the public access to examination assessments community reinvestment before out-of-state institu- and CRA ratings prepared by federal regulators. tions can operate in their localities. They premise The disclosure mandated by FIRREA had implica- entry on a standard of net new benefits to the state, tions for depository institutions and examiners: such as increased in-state lending and investments. Institutions with a negative CRA assessment now To encourage CRA-related programs, some munic- had to face the public display of the rating; and ipalities, too, condition their placement of deposits examiners preparing CRA reports were under much upon the institution's making specific types of greater pressure to be precise and to be able to loans. In Chicago, for example, institutions must substantiate their findings. file reports on their residential and commercial The agencies' written evaluations have two sec- lending in the Chicago metropolitan area before tions: public and confidential. The public section they can qualify for the city's deposits. Even pri- discloses the examiner's conclusions, using the vate organizations may evaluate potential deposito- assessment factors developed jointly by the four ries using CRA factors; in 1991, the American Bar supervisory agencies, and supporting facts; it gives Association resolved to place its accounts when- a rating and explains the basis for it. The amended ever possible in financial institutions that have CRA mandates four possible choices ("outstand- shown outstanding or satisfactory performance in ing," "satisfactory," "needs to improve," and helping to meet the credit needs of their communi- "substantial noncompliance") from which agen- ties, including low- and moderate-income neigh- cies are to select in assessing the record of deposi- borhoods. tory institutions. The confidential portion includes All this interest has turned the public and con- references to customers, employees, or other mem- gressional spotlight on the agencies' process for bers of the community who provided information examining the CRA performance of institutions to the examiner and comments of a supervisory and encouraging economic development efforts. nature that the agencies believe ought not be public. To implement these rules and promote uniformity in evaluations, the FFIEC published inter- EXAMINATIONS agency guidelines and a rating system. The guidelines group the regulation's twelve assessment The CRA relies primarily on the examination pro- factors into five performance categories: cess to ensure that depository institutions meet the credit needs of their local communities. The federal • What the institution does to ascertain commu- agencies have virtually identical CRA regulations, nity needs and they work together to promote uniform mea- • How the institution markets products and what sures of performance among depository institutions types of credit are offered and actually extended and consistent results within and among agencies. • Where the institution makes loans and where it A major change for the CRA examination pro- has placed offices or closed them cess occurred with passage of the Financial Institu- • Whether evidence of discrimination or other illegal credit practices exists 5. For data on HUD's budget for low-income housing, see • To what extent the institution participates in Cushing N. Dolbeare, "At a Snail's Pace, FY 1993: A Source Book community development. on the Proposed 1993 Budget and How it Compares to Prior Years" (Washington: Low Income Housing Information Service, 1992). See also, Marion A. Cowell, Jr., and Monty D. Hagler, "The The guidelines provide examiners and institu- Community Reinvestment Act in the Decade of Bank Consolida- tions with sample profiles of CRA records of per- tion," Wake Forest Law Review, vol. 27 (1992), p. 90, note 64. For data on the participation of the Federal Housing Administra- formance; these profiles correlate the quality and tion in insuring mortgages on multifamily residential projects, see quantity of certain actions and efforts to the ratings Report on the Status of the Community Reinvestment Act, before the for each assessment factor. Subcommittee on Housing and Urban Affairs of the Senate Com- mittee on Banking, Housing and Urban Affairs, 102 Cong. 2 Sess., The public can influence an agency's evaluation p. 21 (Government Printing Office, 1992). of an institution's CRA record. Examiners review

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The Community Reinvestment Act: Evolution and Current Issues 257

CRA comments from persons in the community adopting jointly developed examination standards placed in the institution's public comment file, and and guidelines, and even reviewing examination may contact such persons directly. The examiners reports across agencies to identify any lack of also seek out local officials, community groups, comparability in approach. Within the Federal and others knowledgeable about local credit needs Reserve, staff members at the Board participate so that they can make an informed judgment about regularly in CRA examinations of state member those needs and the institution's responsiveness. banks in connection with reviews of each Reserve The Federal Reserve uses consumer compliance Bank and sample reports from each Reserve Bank examinations—as distinct from the commercial District to test for the consistent application of the examinations for safety and soundness—to assess Board's examination policy. the CRA records of state member banks and their Nonetheless, institutions and the public alike compliance with fair lending and other consumer express concern that, among the regulatory agen- statutes. These consumer examinations are con- cies and between different regions, examiners may ducted, in general, every eighteen months. Banks apply differing standards when they assign ratings with a demonstrated need for greater oversight are for CRA performance. Given the subjective nature examined more often; the lowest CRA rating of of the CRA and the thousands of institutions "substantial noncompliance" can bring a reexami- examined—each with its own business goals and nation within six months. Banks with exemplary strengths, in communities with different needs and records may be examined every twenty-four characteristics—some unevenness is probably months. The frequency with which other regulators unavoidable. Even though consistency remains examine their respective institutions may differ elusive, it is an important goal. somewhat from the Federal Reserve schedule. Critics of the agencies' enforcement of the CRA The CRA examinations take into account the also complain about the current ratings results, size, location, and organizational structure of the which in the aggregate are roughly comparable individual institutions and the nature and needs of across agencies (table 1). About 10 percent of the communities they serve. Size and financial examined institutions receive an "outstanding" rat- strength will affect the expected scope of an institu- ing, and another 70 percent to 80 percent receive a tion's efforts to identify and respond to credit "satisfactory." Some community groups see a con- needs. For example, examiners would generally tradiction between these results and public data expect large institutions to undertake specialized indicating that even highly rated institutions have CRA-related activities to a greater extent, given significant racial disparities in their home mortgage their relative resources and expertise. Institutions lending. that are part of a multibank holding company may There probably is good reason for the current be able to draw on the resources of the parent and distribution of CRA ratings. All banks and thrift affiliates. institutions pledge to meet the "convenience and Expectations also vary about how banks of vari- needs" of their communities when they are char- ous sizes demonstrate CRA performance in differ- tered; this was so long before the CRA came on the ent settings. For example, CRA recordkeeping and scene. The fact that regulators have been assessing documentation will generally be less formal and their CRA performance since 1978 also could be extensive in small and rural banks than in large expected to have a positive effect. In addition, the urban institutions. This also holds true for the "satisfactory" category—into which the vast extent and sophistication of analyses of lending majority of institutions fall—is quite broad and patterns for the CRA and other purposes. includes some with good performance and some with marginal but still satisfactory records. Adding a fifth rating has been suggested; doing so might Consistency and Level of Ratings permit a finer distinction in rating activities at the high or low end of a "satisfactory" rating and help The agencies have worked to promote uniformity produce a wider array of ratings. in CRA enforcement—using a common rating The reliability of the rating system takes on scheme, conducting interagency examiner training, special importance in light of legislation proposed

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258 Federal Reserve Bulletin • April 1993

1. Distribution of CRA ratings, by supervisory agency and asset size of institution, January 1-September 30, 1992 Number except as noted

in recent years to reward institutions for good CRA a bank holding company of similar size, but struc- ratings. Institutions that have a "satisfactory" or tured as a single bank with multiple branches, will "outstanding" CRA rating—and meet other statu- have a single CRA rating, and deficiencies in a few tory criteria—could be eligible for expedited branches might have no major effect on that rating. approval procedures for opening new branches or If legislation for interstate branching is enacted, could self-certify their compliance with the CRA the concept of a single CRA rating for a multistate, and avoid routine examination. They could estab- multibranch depository institution becomes more lish branches across state lines, or engage in new troublesome. Would the agency simultaneously expanded powers, or enjoy a "safe harbor" from examine branches in each state for compliance with protests. the CRA? If examinations were not contemporane- Given the current rating distribution, the tying of ous, how would a "moving" rating be determined? legislative rewards to CRA ratings does raise cer- One answer would be to change the nature of the tain concerns, however. If the standard for any focus and of the examination itself from the bank reward were set at a rating of "satisfactory" or to the areas that it serves. Some legislative propos- better, almost all institutions would qualify; yet als, for example, call for separate evaluations for limiting the rewards to the "outstanding" category each metropolitan area in which an institution could be overly restrictive. maintains a branch, or separate evaluations for branches in each state, all to be factored into a single rating or used to assign separate ratings for Ratings Anomalies each major locality.

The CRA rating system—one rating per depository institution—may affect similar institutions differ- ently depending on their corporate structure. A APPLICATIONS bank holding company with ten subsidiary banks will have ten separate CRA ratings because each The CRA offers a very big carrot—or stick—for bank is examined and assigned a rating. A poor encouraging depository institutions to meet their rating for even one bank, depending on its size, communities' credit needs. Agencies consider an may cause problems for the holding company. Yet institution's record when evaluating an application

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The Community Reinvestment Act: Evolution and Current Issues 259

to start a new facility, open or relocate a branch, or demands" for lending commitments, financial con- merge, consolidate with, or acquire another institu- tributions, and other concessions. At times, the tion. Thus, depository institutions and holding com- applicants themselves may want to negotiate, rather panies wanting to expand banking operations must than stand on their record. assess their CRA performance, as well as financial, Few applications filed with the Federal Reserve managerial, and competitive factors, when gauging are protested on CRA grounds—between 1 percent their chances for approval. and 2 percent since 1988. If a protest is received, Because the 1989 policy statement gives guide- the Federal Reserve stands ready to facilitate pri- lines for evaluating the CRA aspects of applica- vate meetings between the applicant and the protes- tions, a common thread runs through the agencies' tant. These meetings are not required. Their pur- evaluation procedures, although timing and other pose is to collect information and find areas of processing rules may differ. In the case of the agreement or misunderstanding, not to force nego- Federal Reserve, Federal Reserve Banks decide tiated settlements. Neither the Federal Reserve nor most applications under authority delegated by the the other agencies will defer action pending negoti- Board. Often, a prospective applicant may discuss ation between the parties. Nor will the agencies its proposed application with Reserve Bank offi- enforce agreements that may be reached between cials in advance of its submission. Once an applica- an institution and a protestant; the agencies' CRA tion is filed, the depository institution publishes enforcement extends only to commitments made notices in local newspapers and the Federal by applicants directly to the agencies. Reserve publishes a notice in the Federal Register. Agencies may hold public meetings to obtain The Board's public comment period is thirty days information not available otherwise or to expedite for most applications, but because the notices in the the application process. For example, the Board in newspaper and in the Federal Register generally the past two years held public meetings and are not published concurrently, the public usually received testimony from numerous witnesses on has a longer period in which to comment. the application by Mitsui Taiyo Kobe Bank, Lim- ited, to convert Taiyo Kobe Bank and Trust Com- pany from a nonbank trust company into a bank; on Protests of Applications the application by NCNB Corporation to acquire C&S/Sovran Corporation; and on the application Protests of applications are received from many by BankAmerica Corporation to acquire Security sources and on many grounds. Protests from the Pacific Corporation. insurance industry have commonly been made, for The Board is required to consider CRA perfor- example, when bank holding companies seek to mance in all applications to acquire or expand a engage in insurance activities, on the ground that depository institution. Not all applications that raise doing so is unlawful. Disgruntled shareholders may CRA issues for the agencies involve protests. At challenge the adequacy of the price offered for the Federal Reserve in the past three years, 63 per- shares. Other protestants may raise antitrust issues. cent of applications with CRA issues were sub- Protests of applications are therefore neither new jected to an intensive analysis, not because of a nor restricted to CRA matters. Nonetheless, the protest but because of deficiencies brought to light linkage between the approval of an application and during the examination process. the evaluation of CRA performance raises the polit- In holding company cases, CRA evaluations may ical and economic stakes of the application process especially complicate the application process be- both for community groups and for applicants. cause of the likely involvement of several agencies. The restructuring of the financial industry has Outdated or incomplete CRA examinations can involved high-profile expansion moves, and com- cause delays. If a protest is filed, the agencies will munity groups have used protests aggressively to evaluate the merits and investigate allegations. If a apply leverage on applicants. In private negotia- public meeting is held, the volume of information tions, protestants may threaten to create regulatory to be considered can be formidable. In BankAmer- delays—and perhaps impediments to approval— ica's application to acquire Security Pacific, for and applicants often complain of "unreasonable example, the Board received almost 350 comments

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and heard the testimony of about 175 witnesses in grounds an application from Continental Bank Cor- public hearings held in four cities.6 poration and Continental Illinois Bancorp, Inc., to In a contested application, the ability to request acquire an Arizona bank despite commitments from and obtain information to conduct an evaluation Continental to improve its CRA performance in can be slowed by procedural rules governing com- specific ways. The Board stated that such commit- munication that includes some parties to the dis- ments could be taken into account only "when pute but not others. Once an application is pro- there has been a basic level of compliance on tested, the Federal Reserve generally must notify which the commitments can be evaluated."8 In all parties before discussing issues raised in the Continental's case, the inadequacy of past CRA protest with any one of them. The agency may performance made it inappropriate to consider such communicate with the parties individually about commitments. purely procedural matters or matters unrelated to More recently, the Board denied an application the protest, but isolating issues that are not related from Gore-Bronson Bancorp, Inc., to acquire a in some substantive way to the protest is often Chicago bank despite Gore-Bronson's commit- difficult. Thus, whereas ordinarily the information ment to address CRA deficiencies at two subsidiary needed to complete an application record might banks. The CRA record had been less than satisfac- readily be obtained from an institution, the process tory for two examination cycles for one bank, and in a contested application is more formal and time- for the other bank the CRA record had actually consuming. deteriorated under Gore-Bronson's ownership.9 In dealings between applicants and protestants, And in February 1993 the Board denied the appli- the agencies are sometimes caught in the middle. cation of Farmers & Merchants Bank of Long Their responsibility is to evaluate fairly the entire Beach to establish another branch and make addi- record on an application, including the issues raised tional investments in bank premises. The denial by protestants. Throughout the application process, was based on the bank's prolonged compliance they attempt to balance the need for a thorough problems in the consumer lending area (which had review of the statutory factors with the necessity led to a cease-and-desist order) and a deficient for an orderly process and a timely decision. In the CRA program. Although the bank had begun tak- case of the Federal Reserve, a substantive written ing corrective measures during the application pro- protest has the potential to extend the processing cess, the Board was unconvinced that the bank's period somewhat. In general, however, the worry compliance and CRA programs were viable and about delay is exaggerated. Significant delay as the successful.10 result of a CRA protest or a rating issue is the Still, the Board may deem commitments appro- exception, not, as commonly assumed, the rule. For priate when the proposed acquisition involves a example, of the cases acted on by the System in troubled institution whose loss would be a detri- 1992 that involved CRA issues, only about 9.5 per- ment to the convenience and needs of its commu- cent took longer to process than 60 days—the nity. For example, the Board approved the applica- Board's internal deadline.7 tion of First Union Corporation, Charlotte, North Carolina, and First Union Corporation of Florida, Jacksonville, Florida, to acquire Florida National Commitments Banks of Florida, Inc., a financially weak institution. The CRA performance of First Union's sub- Since 1989 the supervisory agencies have viewed sidiary banks showed problems in certain specific commitments for future action as largely inapplica- areas; but under section 3 of the BHC Act, the ble to an assessment of the applicant's CRA performance. In February 1989 the Board denied on CRA 8. "Legal Developments," Federal Reserve Bulletin, vol. 75 (April 1989), Continental Bank Corporation and Continental Illi- nois Bancorp, Inc., p. 305. 6. "Legal Developments," Federal Reserve Bulletin, vol. 78 9. "Legal Developments," Federal Reserve Bulletin, vol. 78 (May 1992), BankAmerica Corporation, pp. 338-69. (October 1992), Gore-Bronson Bancorp, Inc., pp. 784-86. 7. Some of the cases may have involved proposals that required 10. "Legal Developments," Federal Reserve Bulletin (this the applicant to file more than one application. issue), Farmers & Merchants Bank of Long Beach, p. 365.

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Board also must consider the convenience and the CRA record of a quite small banking subsidi- needs of the communities the applicant will serve. ary. The deficiencies in that case were serious and The Board reasoned that maintaining services to substantive; they had continued through successive Florida National's customers—including those in examinations, and steps taken over a significant low- to moderate-income neighborhoods—was an period of time had been insufficient to cure the overriding factor; the Board also noted that First problems.13 Union recently had taken significant steps to Over the years, questions have been raised about improve its CRA performance.11 the bearing of the CRA on various kinds of applica- The Federal Reserve Board has denied few appli- tions. The obligation to help meet the credit needs cations on CRA grounds, but it denies relatively of local communities rests with insured depository few applications generally. In 1992, only six appli- institutions and their deposit facilities. Thus, the cations were turned down, one of them because of CRA does not apply to applications by bank hold- CRA deficiencies. This record does not, however, ing companies to acquire most nonbanking entities fully reflect the influence that the CRA has had. under section 4(c)(8) of the BHC Act. The Board Institutions with poor CRA records often do not had determined, however, that the terms and pur- file an application with their supervisory agency. poses of the CRA and the BHC Act indicate that Others take concrete steps to address weaknesses in the Board has to consider CRA performance in a their CRA performance before filing an applica- section 4(c)(8) application by a bank holding com- tion. Still other applications are withdrawn if appli- pany to acquire a savings association. As a deposi- cants anticipate an adverse finding after the agen- tory institution, a savings association is subject to cy's preliminary review. the CRA, and consequently its acquisition as a 14 What happens when some subsidiaries of a bank deposit facility is covered by the CRA. holding company have less than satisfactory records and the other subsidiaries have adequate, or better, records? In the application of SunTrust COMMUNITY AFFAIRS PROGRAM Banks, Inc., to acquire shares of Peoples Bank of Lakeland, substantially all of SunTrust's subsidiary The CRA mandates that the regulators encourage banks had ratings that were satisfactory or better. institutions to help meet local credit needs. In fur- The four subsidiaries identified as having CRA therance of this mandate, the Board established a problems represented less than 10 percent of Sun- community affairs program more than a decade Trust's assets, and the problems did not indicate ago. The community affairs staff of each Reserve either chronic institutional or CRA deficiencies. Bank routinely assists institutions with information The Board approved the application, noting that about community development strategies and tech- whenever problems were identified in the CRA niques and other reinvestment issues. They work performance of its banks, SunTrust had taken with financial institutions, banking associations, immediate steps to correct them and had done so in government, businesses, and community groups to the case of these four institutions. The Board create programs for community development lend- applied the principle that weight can be given to ing that help finance affordable housing, small and CRA commitments in addressing specific problems when the institution has an otherwise satisfactory 12 CRA record. 13. "Legal Developments," Federal Reserve Bulletin, vol. 77 In the case of First Interstate BancSystem of (December 1991), First Interstate BancSystem of Montana, Inc., pp. 1007-10. Montana, on the other hand, the Board denied an 14. Similarly, regulators consider CRA performance when a application for a corporate reorganization based on bank holding company acquires the assets and liabilities of a thrift institution in a merger that is subject to the so-called Oakar amend- ment to the Federal Deposit Insurance Act. See "Legal Develop- ments," Federal Reserve Bulletin, vol. 79 (February 1993), letter, Jennifer J. Johnson, Associate Secretary of the Board of Governors 11. "Legal Developments," Federal Reserve Bulletin, vol. 76 of the Federal Reserve System, to John H. HufFstutler, Assistant (February 1990), First Union Corporation, p. 88. General Counsel, BankAmerica Corporation, pp. 148-52. Con- 12. "Legal Developments," Federal Reserve Bulletin, vol. 76 versely, the Board has determined that the CRA does not apply to (July 1990), SunTrust Banks, Inc., pp. 542^5. applications under the Change of Bank Control Act.

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minority business, and other community revitaliza- and technical assistance to its members. The center tion projects. has already published an educational guide, and in Reserve Banks help facilitate the broad-based 1993 it expects to sponsor workshops and publish a offering of credit through conferences for bankers compendium of contacts at community lending on topics such as barriers faced by minority bor- agencies and organizations. The center is also rowers, steps to ensure that credit is offered on an involved in credit counseling outreach, offering equitable basis, ways of participating in economic camera-ready copies of a five-part series of bro- development programs, and credit issues affecting chures on such issues as home buying and credit Native Americans. Reserve Banks also provide rights for member banks to publish and distribute technical assistance, helping institutions to create in their communities. community development corporations (CDCs) and Two recent surveys illustrate the banking indus- multibank lending consortiums and, in the case of try's efforts. In a survey of banks, thrifts, and institutions with unsatisfactory CRA ratings, help- holding companies, the Consumer Bankers Associ- ing them to strengthen their CRA program. Reserve ation found that roughly 90 percent of its respon- Banks publish descriptions of CDCs, limited part- dents have programs that target purchase-money nerships, and other community development lending for low- to moderate-income housing. projects in which bank holding companies have Nearly 95 percent of the programs include mort- been allowed to invest. They prepare profiles that gage products with flexible requirements for down- identify key community and economic develop- payment, loan-to-value ratios, and debt-to-income ment needs and describe resource organizations in ratios designed to make home financing more avail- major communities. able and affordable.15 And in late 1992, the OCC For example, the Federal Reserve Banks of San announced the results of a survey to which nearly Francisco and Philadelphia have produced commu- 55 percent of all national banks responded. A ma- nity profiles used by local financial institutions to jority of the respondents engaged in community address specific issues and projects. The Federal development lending and financed low- to Reserve Bank of Boston has developed a training moderate-income housing, small businesses, and curriculum on community-development finance for small farms. The type of lending tended to differ bankers. Reserve Banks also publish a variety of according to their asset size. For instance, among other brochures and manuals that assist lenders in the largest banks (assets of more than $1 billion), community development activities. Their commu- 86 percent focused on low- to moderate-income nity affairs newsletters have a combined circulation housing, whereas among the smallest banks (assets of more than 40,000. of less than $100 million), 72 percent reported Other federal banking agencies also have com- making small-farm loans. munity affairs programs. The OCC's Community Depository institutions have access to various Development Division, for instance, oversees CDC forms of assistance to support their CRA activities. and investment programs and approves applica- For example, the Federal Home Loan Bank System tions by national banks to invest in CDCs in accor- offers two loan programs to its membership of dance with the National Bank Act and its interpre- savings banks, savings and loan associations, and tations. The FDIC has a community affairs program banks. It advances funds or subsidizes below- that, like the Federal Reserve's, has a regional market-rate loans originated for low- to moderate- presence. income families and for businesses in low- to moderate-income neighborhoods. Its Community Investment Program provides home lending funds INDUSTRY INITIATIVES to projects aimed at individuals with incomes of up to 115 percent of an area's median income; an The CRA has stimulated an abundance of activity Affordable Housing Program provides home lend- by financial institutions and others. For example, in late 1992 the American Bankers Association estab- 15. Consumer Bankers Association, Affordable Mortgage Sur- lished a Center for Community Development vey: A Survey of Bank Mortgage Programs as of June 30, 1992 whose primary mission is to provide information (Washington: CBA, 1992), pp. 2,4.

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ing funds to support housing for people with law's administration, including potential conflict incomes of 80 percent of an area's median income with safety and soundness, continue to be raised— and rental housing funds where at least 20 percent as do numerous proposals for better definitions of of the units are occupied by very low income standards, easing of the regulatory burden, and tenants.16 incentives for superior performance. Increasingly, attention has turned to the role of the secondary markets in funding loans to low- to moderate-income applicants or in low- to Concern with Safety and Soundness moderate-income neighborhoods. Secondary markets provide liquidity to lenders by purchasing the The mandate of the CRA, that institutions are to loans that lenders originate, enabling them to meet help meet community credit needs in a manner additional credit needs. For example, more than consistent with safety and soundness, requires lend- half of the "affordable mortgages" reported by the ing choices in which some lenders believe they are respondents to the Consumer Bankers' survey are "damned if they do and damned if they don't." sold to the secondary market. Loans in low- to moderate-income neighborhoods, The Federal National Mortgage Association whether residential or commercial, often require (Fannie Mae) and the Federal Home Loan Mort- underwriting standards or terms that differ from an gage Corporation (Freddie Mac) have both an- institution's more traditional products and from an nounced initiatives in recent years to purchase agency's loan classification standards. loans with underwriting guidelines or payment Anecdotal evidence suggests that, by and large, terms that do not meet their more traditional loan the losses on lending that addresses CRA responsi- purchase programs. The Congress has spurred these bilities is not significantly different from the losses corporations to support low- and moderate-income on other product lines. But lenders express frustra- loans by setting specific volume goals over a two- tion that federal financial regulatory agencies may year period beginning with 1993. For example, for criticize the very loans the agencies are otherwise all the loans they purchase, 30 percent of the units encouraging. They argue that the nontraditional financed must be for low- to moderate-income bor- loans may satisfy examiners monitoring CRA com- rowers, 30 percent must be located in central urban pliance, but the loans could well be downgraded areas, and $3.5 billion ($1.5 billion for Freddie internally by the bank's loan committee or by Mac, $2 billion for Fannie Mae) must finance loans commercial examiners unfamiliar with special to low-income and very low income home features—such as "equity substitutes" in the form buyers.17 of government guarantees—that may in fact make them very sound loans. The agencies have repeatedly emphasized that OTHER ISSUES the CRA does not contemplate the erosion of safety and soundness. To reduce the perception that com- Throughout its fifteen-year history, the CRA's mercial and CRA examiners work at cross pur- seemingly simple but vague and imprecise charge poses, for example, the Federal Reserve provides has caused much consternation. The act, after all, is training to commercial examiners on the CRA. not an arcane banking matter of interest only to Nevertheless, there is a widespread impression that specialists in finance; in practice, it touches on institutions are being "whipsawed," and the agen- social issues of great sensitivity and complexity, cies are having to take special care not to send including issues of race and economic class, and its mixed messages. day-to-day influence on covered institutions has been significant. As a result, questions about the

Lack of Certainty 16. Federal Home Loan Bank Act, 12 U.S.C. § 1430(i),(j) (Supp. Ill 1992). 17. Housing and Community Development Act of 1992, Rules that are more precise would, of course, ease P.L. 102-550, 106 Stat. 3672, §§ 1332-34 (1992). the task of examiners, institutions, and the public in

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determining the adequacy of CRA performance. and tie CRA ratings to minimum specified amounts Many lenders express frustration at the business of of such investments.18 translating the broad mission of the CRA into Moving toward a cafeteria-style menu of value- specific actions. To be sure, most lenders would weighted, "approved" CRA activities—in a man- oppose overt credit allocation and would resist ner similar to what New York has proposed—has being told what products to offer, or in what vol- some appeal in that it would offer certainty. Poten- ume, or on what terms, or to whom. But many want tially it also could increase desirable CRA-related to know, from the start, exactly what the "right" activities in local communities. At the same time, activities might be for CRA performance and what creating such a list would inevitably transfer deci- it takes to get an "outstanding" CRA rating. Exam- sionmaking in some measure from an institution to iners who judge performance, and community the government. As it stands, the CRA's broad groups who evaluate institutions, likewise would standard allows each depository institution to be be more comfortable with greater certainty. creative in meeting credit needs within its lending The problem lies in preserving flexibility and community. The incentive to offer innovative ser- providing precision at the same time. The CRA can vice may be lost if institutions find it necessary to be criticized for its ambiguities, but that same choose between engaging in services they know "flaw" allows for variations by institutions in will earn them CRA credit and taking a chance on meeting their responsibilities under the law. Over something that does not quite fit into a pre- the years, the regulators have emphasized their approved pigeonhole. Also, the CRA is meant to position that no single community reinvestment encourage institutions to meet the credit needs of program is perfect for every institution. Financial their entire community. Communities could be left institutions can design CRA programs that fit then- with unmet credit needs if institutions were able to own business orientation and the special needs of fulfill their total CRA responsibilities by a single their communities. Still, the agencies have offered CRA-related action, such as a passive investment extensive guidance on the CRA—policy state- in one community development organization in a ments, examination procedures, assessment factors sole low- to moderate-income neighborhood. considered in evaluations, elements of successful CRA programs, and advice through community affairs programs. Throughout, they have empha- Paperwork Burden sized flexibility, seeking to give detailed guidance without imposing specific mandates. Among lenders, and even community representa- Initially the industry wanted flexible CRA rules tives, one major source of dissatisfaction with the out of concern about regulatory credit allocation. CRA is the paperwork that they believe the agen- The industry argued that neither the law nor the cies require to demonstrate an institution's record regulations should set minimums or mandate the of performance. Small institutions, in particular, types of loans an institution must offer. Increas- complain that the documentation provided to ingly, however, depository institutions and trade agency examiners is costly and unnecessary. groups have asked for more precise rules. Recent Recent studies by trade groups among banks of all interest in community development banks has even sizes point to the CRA as imposing substantial brought suggestions that institutions be allowed to compliance costs. In a June 1992 study by the meet their CRA obligations by specified invest- American Bankers Association on the sources of ments in such institutions. regulatory burden, the CRA topped the list as the The State of New York, which has a community most significant. A study by the Independent Bank- reinvestment law much like the federal law, is ers Association of America estimated that compli- considering a proposal that would identify specific

activities for which depository institutions covered 18. The state's community reinvestment law is in N.Y. Banking by the state's statute could earn CRA "credit." The Law §28-b (McKinney 1990). The proposal for earning CRA system would require institutions to establish credits is in New York State Banking Department, "Proposed Comprehensive Policy Statement Relating to the New York State investment targets for the CRA, measure these Community Reinvestment Act: Request for Public Comment" investments in relation to the institution's assets, (September 9, 1992).

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ance with the CRA cost about $1 billion annually meeting credit needs, not on process, and that an out of a total $3 billion for selected laws. institution's size has a bearing on how formal the Some community groups, too, criticize regula- proof of performance needs to be. Regarding geo- tors for elevating form over substance. More atten- graphic analysis, the FFIEC stated that the extent tion is focused on documenting community out- and sophistication of analyses expected by the reach, they say, than on whether an institution agencies will depend on the size and location of the actually is making loans. While they may have a institution. What may be required for a large insti- common complaint with some in the industry, how- tution to track its loans, for instance, is not required ever, their suggested correction for the problem is for a small institution, which could be served by a likely to be more mandated lending—a result most more informal system. in the industry would oppose. Any well-conceived, ongoing CRA process will The technical "hard paper" burden of the CRA involve normal business documentation. To recog- is in fact rather small: a CRA statement listing the nize the credit needs in their communities, as well types of loans the institution is willing to make; a as to know whether they are meeting those needs, map showing the boundaries of the local communi- institutions must have a process in place that pro- ties it serves; evidence (usually a notation in the vides relevant information. This is certainly the minutes) that the board of directors has reviewed case for most large institutions, especially those the statement at least annually; a lobby notice with widespread branch networks. Smaller institu- describing how the public can comment on the tions, too, need to demonstrate performance, but institution's CRA performance; and a file with its their documentation may not have to be as sophisti- CRA statement, agency assessment, and public cated or extensive. comments available for inspection. All are modest Despite agency efforts to contain the problem of requirements, but they do not, of course, reflect the CRA paperwork, it remains troubling. Through the true extent of the documentation actually needed. FFIEC, the federal regulators continue to evaluate Other paperwork is unavoidable. The statute calls the paperwork issue as well as other CRA enforce- for the public CRA assessments to contain "facts ment matters to see whether clarification or addi- and data" to support the examiner's conclusions, tional change is warranted. and as a practical matter most of these "facts and data" can come only from the institution. One of the twelve assessment factors for CRA Exempting Small Institutions performance requires the examiner to evaluate the geographic distribution of the institution's credit The agencies generally have tried to be sensitive to extensions, applications, and credit denials. After the complaints of small institutions that they are considerable debate on this point, the FFIEC in disproportionately affected by the CRA. The insti- December 1991 issued a policy that strongly tutions say they must serve the needs of their entire encourages institutions to analyze the geographic community just to exist as viable businesses, and distribution of their major product lines as part of that, therefore, CRA requirements are unnecessary their CRA planning process. Institutions also are for them. Exemptions for small institutions are not encouraged to collect lending data and correlate a novel concept. For example, a depository institu- them with the relevant demographic facts relating tion's size determines whether it is covered by to the institution's community. The board of direc- HMDA and, if it is covered, the data that it must tors and senior management are expected to review report. the analyses in setting and evaluating the institu- Community groups do not believe that small tion's CRA program. Understandably, this geo- institutions necessarily meet the credit needs of graphic tracking also has contributed to complaints their communities as a matter of course, and they about CRA paperwork. point to the low loan-to-deposit ratios of some In June 1992 the FFIEC issued examination pro- small banks.19 They say small institutions need to cedures to address the outcry about unnecessary

paperwork burden. The revised procedures empha- 19. FFIEC, Study on Regulatory Burden (Washington: FFIEC, size that examiners should focus on performance in 1992), Appendix A, p. 2.

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do more, not less, to comply with the CRA, and mance should bring its own rewards—new busi- therefore they strongly oppose proposals for a ness and enhanced public relations. But after small-institution exemption and for self- assessing what it might cost to be rated outstand- certification. ing, some institutions believe the payoff is not Apparently, the size of an institution is not a worth the extra effort under current law. good indicator of CRA performance. Most institu- Various ideas have been proposed for adding tions in all asset-size categories received "out- statutory "carrots" to the CRA to increase the standing" or "satisfactory" ratings in examina- incentives, including a "safe harbor." A safe har- tions in the first three quarters of 1992 (table 1). bor might limit formal protests against applica- Some members of the Congress have taken up tions, for instance, except when the evidence of the proposal to exempt small institutions from the a CRA performance problem is substantial and CRA. One bill would exempt an institution from specific. the CRA if it is in a small town, has assets (aggre- The state of New York is taking public comment gated with the assets of its holding company) of on establishing a safe harbor in the application $75 million or less, and can show that its loans process. A bank with an outstanding rating on its come to 50 percent or more of deposits. Such a three most recent CRA examinations would be proposal would exempt about one-fourth of the assured that its CRA performance would not bar 12,000 institutions supervised by the Federal application approval. The theory is that such a Reserve, the FDIC, and the OCC, but it would scheme would encourage banks to make the CRA a maintain CRA coverage of almost all banking part of their overall, day-to-day business plans. assets. Of the total group's $3.6 trillion in assets, They would strive for outstanding performance and the banks that would be exempted account for not view the CRA primarily in the context of about 3 percent, or $107 billion. applications. The Banking Department acknowl- Another proposal would allow institutions with edges that a safe harbor might be perceived as total assets of $250 million or less to certify their reducing community groups' involvement in the compliance with the CRA—provided, among other CRA. But state officials believe that if public com- things, that they have a "satisfactory" or higher ment were part of CRA examinations and not lim- rating and remain in compliance with the Equal ited to the application context, its influence could Credit Opportunity Act. Self-certification would be greatly enhanced. take the place of agency examinations. The regula- The Congress has taken a first step in providing tors would be required to examine an institution incentives. Under the Bank Enterprise Act of 1991, only in response to an allegation that it was not insured depository institutions that do business in meeting the credit needs of its entire community. If economically distressed communities can earn banks with assets of up to $250 million were assessment credits for application against their exempted from the CRA, as many as 87 percent of deposit insurance premiums.20 all financial institutions in the country could be excluded. But again, in terms of total dollars of community lending and investments, the likely CONCLUSION effect of the exemption would not be major. Thus, such an exemption might respond to much of the From modest beginnings and minimal legislative concern about paperwork without undermining the review, the CRA has grown in national importance. force of the CRA. At the same time, the vague nature of the act has bedeviled its implementation through the years. In essence, instead of imposing hard and fast rules, Lack of Incentives

Financial institutions complain about the lack of 20. 12 U.S.C.A. § 1834 (Supp. 1992). The Congress has pro- incentives for outstanding performance, noting that vided funds for establishing a Community Enterprise Assessment Credit Board, which will create the guidelines for qualifying activ- even a superior CRA rating offers no protection ities. The program cannot be implemented, however, until addi- from a protest. Ideally, of course, good perfor- tional money is appropriated to fund the assessment credits.

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the statute relies on individual institutions and their low- and moderate-income communities. Indeed, local communities to define credit needs, with the many financial institutions have discovered that expectation that the agencies will encourage this complying with the CRA helps them to compete process and assess its success. To make up for the for new customers and generate profitable lack of precision, the agencies charged with enforc- business. ing the CRA have sought to measure CRA perfor- Although progress in community reinvestment mance in a fair and comprehensive manner and to marks the evolution of the CRA, unresolved prob- provide increasing guidance while avoiding any lems remain and frustrations abound for financial appearance of credit allocation. institutions, supervisory agencies, and the public. Through a combination of efforts, the CRA has In many cases, the major source of frustration rests stimulated loans for home purchase, construction, on the law's lack of specificity. Yet that very lack and rehabilitation and for the development of small also may be the law's most important strength. business and minority-owned business in low- and While providing strong incentives for institutions moderate-income areas. It has brought increased to reach out to their entire communities, it leaves participation in public-private partnerships in the question of "how" largely in the hands of the urban and rural communities and has encouraged institution and its community. In so doing, it con- support for community development corporations tinues to encourage and produce important rein- and multibank lending consortiums that benefit vestment efforts throughout the nation. •

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