Community Reinvestment Act (1977) (Major Acts of Congress)
Congress adopted the Community Reinvestment Act (CRA) (P.L. 95-128, 91 Stat. 1147) in 1977 to combat "redlining," the "systematic denial of credit to persons living within a certain area." CRA prohibited redlining by requiring regulated financial institutions to show that their depository facilities met the "convenience and needs of the communities in which they are chartered to do business."
The lack of adequate lending, coupled with the depletion of available government funds, had caused economic decay in poor neighborhoods and left the urban areas crime ridden and economically devastated. Congress hoped by codifying an affirmative obligation to meet the needs of local communities that financial lending mandated by CRA would foster neighborhood stability and revitalization.
Originally, Congress intended CRA to respond to problems associated with depository institutions transferring funds they received as savings deposits from local residents to borrowers outside the communities regardless of whether the communities were rural, urban, or suburban. Thus, at its inception, Congress's intent was to improve the banking services in poorer communities, although Congress knew the likely beneficiaries would be racial minorities. However, regulators soon discovered that CRA had little real power, and that the law was difficult to enforce because of its vague language. In its first twelve years (between 1977 to 1989), the CRA merely required banks to show a good faith effort in becoming more aware of the needs of the communities they served.
This situation changed in 1989 when Congress amended the CRA as a part of the Financial Institutions Reform, Recovery Enforcement Act (FIRREA). FIRREA amended the CRA by mandating public disclosure of all CRA reviews. This was a substantial change because it allowed the American public to have access to a banking industry "report card."
FIRREA established the four-tiered grading system that is still in effect today to evaluate a bank's CRA performance. The rating system is: (1) "outstanding," (2) "satisfactory," (3) "needs to improve," or (4) "substantial noncompliance." After Congress adopted FIRREA the regulatory agencies issued a joint statement that outlined a set of twelve new assessment factors that would be used to examine the banks for CRA compliance.
Congress implemented another change to the CRA as a part of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). FDICIA required public discussion regarding the regulator's assessment of an institution's CRA performance in the public portion of the CRA evaluation. Under FDICIA, regulators must consider this record when the agency is examining an application for a deposit facility by the financial institution. The institution's performance may be a basis for denying or conditioning that application on further activities.
In response to a growing number of bank complaints regarding the intensive documentation required under CRA, President Clinton proposed changes that made the CRA less burdensome to the banking industry, while still preserving its intended purpose. The new regulations replaced the twelve assessment factors with a more quantitative system based on actual performance as measured by various tests. These new regulations emphasize performance, not process. Many experts argue that the new, revised approach to the CRA enables banks to focus more on the lending, and less on the paperwork.
CRA IMPACT ON AVAILABILITY OF LOANS
Public and administrative efforts have succeeded in getting money to individuals in poor neighborhoods. By 1993, 14 percent of the 152 banks examined in their first six months of 1993 did an "outstanding" job under the CRA. That was up from only 8 percent of those banks examined between July 1990 and December 1992, prior to the implementation of the new regulations. Moreover, the CRA has decreased the racial disparities in lending practices. Between 1991 and 1995, while conventional home-purchased loans to whites increased by two-thirds, loans to blacks tripled (from 45,000 to 138,000 a year) and loans to Hispanics more than doubled. During the same period, loans in predominantly minority neighborhoods rose by 137 percenthile loans in areas where population was almost all white grew by just 37 percent.
LITIGATION AND CONTROVERSY
The Justice Department has sought to enforce the fair lending laws, and this may also have had a positive impact on banks' willingness to invest in minority neighborhoods. The utility and fairness of the CRA, however, continues to generate substantial debate in congress and among advocacy groups. Former Senator Phil Gramm, Republican of Texas, for example, stated that "I want to get back to lending and end these kickbacks whereby you give the protesting organization money, but you don't make loans in the community." Senator Gramm was claiming the community groups were using the CRA rating as a way of unfairly taking money from banks.
However, John Taylor, president of the National Community Reinvestment Coalition questioned this criticism. In testimony to the House Committee on Banking and Financial Services, he admitted there might have been a few instances of "greenmail." However, his organization and its membership renounce this practice as counterproductive, since it creates adversity and may not produce long lasting collaborations among banks and community groups. He states that because these partnerships involve a high degree of cooperation and trust, extortion is simply not a part of the partnership.
The Community Reinvestment Act is good legislation for all involved. The banks make profits from loans they probably would not have made unless the government assisted the credit transfers. Consumers win because they have the much-needed resources to keep their communities economically viable. This leaves our country in a more democratic and economically fair place for all.
See also: COMMUNITY DEVELOPMENT AND BANKING FINANCIAL INSTITUTIONS ACT OF 1994; FAIR HOUSING ACT OF 1968.
Baldinucci, E.L. "The Community Reinvestment Act: New Standards Provide New Hope." Fordham Urban Law Journal 23 (Spring 1996): 831, 84656.
Canner, Glenn B., and Wayne Passmore. "Home Purchasing Lending in Low-Income Neighborhoods and to Low-Income Borrowers." Federal Reserve Bulletin 81 (February 1995): 7103.
Garwood, M., et al. "The Community Reinvestment Act: Evolution and Current Issues." Federal Reserve Bulletin (1993): 25167.
Johnson, Marcia, et al. "The Community Reinvestment Act: Expanding Access." Kansas Journal of Law & Public Policy 12 (2002): 8923.