Community Reinvestment Act Ensuring Credit Adequacy Or Enforcing Credit Allocation?

Community Reinvestment Act Ensuring Credit Adequacy or Enforcing Credit Allocation? Vern McKinley n a July 15, 1993 speech on the South Lawn Greenspan, the Reagan-appointed Chairman of of the White House, President Clinton dis- the Federal Reserve Board (Fed), has recently Icussed the availability of credit to low and taken a more active role regarding CRA issues. middle-income areas, and mentioned what has He recently gave his first speech on the subject been a relatively obscure statute for most of its after seven years as Chairman, and cast an seventeen-year existence—the Community instrumental vote against an application for a Reinvestment Act (CRA). This statute requires proposed acquisition by Shawmut National financial institutions to reinvest deposit funds Corporation of Massachusetts. The denial was back into the communities in which they are based upon the powers granted to the Fed by located. Clinton claimed that the CRA has not the CRA. lived up to its potential. In line with this con- Rather than being a positive trend, these cern, the bank and thrift regulatory agencies, recent actions allow government and special primarily under the leadership of Clinton- interest groups to influence and even dictate appointee Eugene Ludwig of the Office of the lending decisions. Instead of being expanded, Comptroller of the Currency (OCC), have spent the CRA should be repealed. most of the past year and a half revising their regulations interpreting this statute. Even Alan Statutory Authority The CRA is based upon the underlying notion that Vern McKinley has worked at the Federal Deposit institutions have a continuing and affirmative Insurance Corporation, the Federal Reserve Board, obligation to help meet the credit needs of the local and is currently employed at the Resolution Trust communities in which they are chartered. The fed- Corporation. The opinions expressed in this paper are eral supervisory agencies undertake a two- solely attributable to the author. This article was pronged effort to ensure that the obligation man- adapted from a more extensive paper available from dated under CRA is fulfilled. First, CRA requires the author at 1730 N. Lynn St., Suite A-67, that the appropriate federal supervisory agency Arlington, VA 22209. use its authority when conducting supervisory REGULATION, 1994 NUMBER 4 25 COMMUNITY RE-INVESTMENT ACT examinations to encourage institutions to meet the tions avoid doing business in certain geographic credit needs of the local communities in which they areas. The CRA was enacted as a follow-up to are chartered, consistent with safe and sound oper- the HMDA, in part in response to instances in ation of the institution. The various regulatory which a poor white applicant had a significantly agencies, such as the Fed and the OCC, give each better chance of getting a mortgage loan than a institution a written evaluation of its record in wealthy black applicant. These four statutes are meeting community needs and assign a rating of designed to assure credit availability for persons either “outstanding,” “satisfactory,” “needs to of all income levels and demographic groups. improve,” or “substantial noncompliance.” A por- tion of the written report, as well as the rating, is The Regulatory Record released to the public. Second, the CRA requires that the appropri- The vagueness of the CRA is a direct result of ate financial supervisory agencies take the insti- the legislative process at work behind the devel- tution’s record into account when they evaluate opment of the statute. The CRA was proposed during the Carter Administration by Senator William Proxmire (D-Wisc.), whose primary The CRA utilizes fairly vague terms such purpose in enacting the legislation was to elimi- nate the practice of redlining. The bill focused as“convenience and needs” and “meet the on this practice because of the perceived unfair- credit needs of the local community,” and ness of “credit exportation,” whereby money thenthen explicitlyexplicitly delegatesdelegates toto thethe individuaindividuall was taken from the community in the form of agencies the power to define these terms,, deposits, but lent to borrowers outside of the while using the threat of denying applica-- community. CRA supporters thought that insti- tionstions toto assureassure compliancecompliance withwith ththe tutions should avoid such credit exportation as part of the quid pro quo for deposit insurance agency-created definition.. and a government charter. Proponents of the bill compared this requirement to the FCC requirement that radio and TV stations serve the public an application for a deposit facility such as the in exchange for their licenses. opening of a branch, relocation of a home office, The original form of the bill that was to a merger, or acquisition. This is the “stick” the become the CRA has been described as having a agencies can wield to enforce the CRA. In short, substantive and a procedural section. The sub- the CRA utilizes fairly vague terms such as stantive section required institutions to serve the “convenience and needs” and “meet the credit convenience and needs of the communities in needs of the local community,” and then explic- which they were chartered. The procedural sec- itly delegates to the individual agencies the tion detailed very specific procedures for insti- power to define these terms, while using the tutions to follow in connection with an applica- threat of denying applications to assure compli- tion for a deposit facility. ance with the agency-created definition. Ultimately, the procedural section was Closely related to the CRA are three sibling doomed by opposition from those who were statutes, the Equal Credit Opportunity Act concerned that the bill was thinly-disguised (ECOA), the Home Mortgage Disclosure Act credit allocation and would represent a foot in (HMDA), and the Fair Housing Act (FHA), all the door toward the mandatory allocation of aimed towards eliminating “discrimination” in credit. Opponents of the bill feared that one day the lending process. The close relationship arises banks would be required to make unsound from the near-automatic determination that if loans to meet their local credit quotas. An exam- ECOA or FHA are violated, the institution is not ple of such criticism came from Arthur Burns, serving its community. The Department of chairman of the Fed at the time, who noted that Housing and Urban Development (HUD) and the proposed statutory language interfered with the Justice Department complement the efforts the first principle of the banking system model: of the bank and thrift agencies in enforcing the to facilitate the market flow of credit from areas FHA and ECOA. The HMDA focuses on the of supply to areas of demand. He argued that practice of “redlining,” whereby lending institu- this interference might inhibit lenders from 26REGULATION, 1994 NUMBER 4 COMMUNITY RE-INVESTMENT ACT opening depository institutions in locales where made by Continental Bank Corporation and they would be cornered into maintaining certain Continental Illinois Bancorp, Inc. to acquire 100 levels of credit. percent of the voting shares of Grand Canyon The final version of the CRA that was signed State Bank in Scottsdale, Arizona. The Fed into law reflected deference to the concerns of claimed that Continental did not have a plan to those who feared mandated credit allocation. meet its responsibilities under CRA, and that it However, in a compromise move, the regulatory made no effort to ascertain the credit needs of its agencies were delegated the power to assess the community. The denial was issued despite the institutions’ records in meeting the needs of fact that between 1986 and 1989 the Federal their communities, thus moving away from a Reserve had allowed Continental to acquire results-oriented approach. three banks in the Chicago area. Early CRA regulations promulgated by the Finally, the late 1980s saw an explosion of agencies directed institutions to define their CRA-related examinations by financial regulato- communities, make available information about how they serve the financial needs of these communities, and post notices requesting public Expressing discontent at public hearings in comments on their CRA performance. Quantitative targets were specifically rejected March 1989, Senator Proxmire com-- because it was believed they would inevitably plained that, despite passage of the CRA,, result in credit allocation and uneconomic inner-cityinner-city neighborhoodsneighborhoods werewere “starvin“starving investments. forfor credit.credit.” The Late 1980s A number of actions by Congress and the regu- ry authorities. For example, examinations by the latory agencies in the late 1980s signaled a turn- FDIC, the agency that conducts the largest num- ing point for the CRA. Expressing discontent at ber of CRA examinations, jumped from 1,251 in public hearings in March 1989, Senator 1985 to 4,282 in 1988. Proxmire complained that, despite passage of the CRA, inner-city neighborhoods were “starving for credit.” The 1990s: Studies and Surveys A number of changes were made in response of Lending Discrimination to these hearings. In March 1989, the OCC, the Federal Deposit Insurance Corporation (FDIC), The trend toward utilizing the CRA more the Office of Thrift Supervision (OTS), and the aggressively accelerated in the early 1990s. Fed issued a joint policy statement on CRA that Consumer surveys show that recent homebuy- set forth a more detailed framework to follow in ers strongly believe there is bias in mortgage formulating an effective CRA program. The lending (whites-60 percent, hispanics-60 per- statement gave general guidelines similar to cent, and blacks-83 percent) though few had those previously issued by the regulatory agen- experienced it themselves (whites-3 percent, his- cies, and also outlined highly detailed recom- panics-7 percent, blacks-16 percent). Data col- mendations for institutions’ CRA plans. lected under the HMDA continues to show that In August 1989, Congress passed the blacks are more than twice as likely to be reject- Financial Institutions Reform, Recovery, and ed for mortgages as whites or asians, 34 percent Enforcement Act.

Load more