This article will focus on the practice of community reinvestment by financial institutions. Community reinvestment, which became mandatory for lending institutions, such as banks and thrifts, as legislated in the Community Reinvestment Act (CRA) of 1977, will be introduced as a remedy to economic underdevelopment, economic disinvestment, and redlining in minority communities. The Community Reinvestment Act's implementation, compliance, and examination procedures will be discussed in detail. In addition, issues related to Community Reinvestment Act compliance management will be covered.
Keywords Community Reinvestment Act (CRA); Community Reinvestment Act Compliance Management; Economic Disinvestment; Economic Underdevelopment; Lending Institution; Redlining; Thrifts
Management: Community Reinvestment
Minority communities in the United States experienced unequal and lagging economic growth and development throughout the twentieth century. The economic inequality experienced by minority communities, in part, was created or exacerbated by the unwillingness of banks to fully service minority communities. The federal government responded to the reported bias and neglect by banks in low and moderate-income neighborhoods by passing the Community Reinvestment Act (CRA). The Community Reinvestment Act, enacted by Congress in 1977 (U.S. Code, Title 12 Chapter 30) and implemented by Regulations 12 CFR parts 25, 228, 345, and 563e, encourages economic development in low and moderate-income neighborhoods. The Community Reinvestment Act requires depository institutions, such as federally insured banks and thrifts, to help meet the credit needs of the communities in which they operate with safe and sound business practices and operations. The federal government passed the Community Reinvestment Act to ensure that banks and thrifts were meeting the lending and credit needs of all people and groups within their communities regardless of income, age, or race.
The Community Reinvestment Act was enacted to eliminate the practice of redlining and the resulting disinvestment that occurs when banks export deposits from one community in order to provide credit in another community. The practice of redlining creates a flow of funds from low to moderate-income neighborhoods to middle to high-income communities. Redlining refers to the practice of denying or increasing the cost of services, such as banking and insurance, to residents in low-income areas. Mortgage discrimination is one of the forms of redlining most responsible for lagging economic development. The Community Reinvestment Act, along with the Fair Housing Act (1968), which prohibited housing discrimination based on race, religion, gender, familial status, disability, or ethnic origin, effectively stopped the practices of redlining and mortgage discrimination in many minority neighborhoods.
The Community Reinvestment Act has affected lending institutions and the communities in which they operate in equal measure. The Community Reinvestment Act has affected lending institutions in numerous ways. Lending institutions, their practices, procedures, goals, and objectives, are altered by increased Community Reinvestment Act regulatory oversight, the public release of Community Reinvestment Act performance ratings, and the relationship between Community Reinvestment Act performance and possible denial or delay of an institution's application for a merger or acquisition (Bostic & Robinson, 2003).
The Community Reinvestment Act has changed banking practices and communities throughout America. The Community Reinvestment Act has resulted in significant economic growth and opportunity for underserved and underdeveloped communities as well as strengthened relationships between banks and the communities they serve. The Community Reinvestment Act has encouraged banks to open new branches, provide expanded services, adopt more flexible credit underwriting standards, and increase lending to underserved segments of local economies and populations. The Community Reinvestment Act has begun to remedy the problems of economic disinvestment and economic underdevelopment in minority neighborhoods and communities (Matasar, 2004).
The following section will describe regulatory oversight and implementation of the Community Reinvestment Act. This section will serve as the foundation for later discussions of Community Reinvestment Act compliance, examination, and management procedures. In addition, Community Reinvestment Act agreements, a new form of voluntary partnership that unites lending institutions, community-based organizations, and low to moderate income neighborhoods, will be introduced.
Community Reinvestment Act: Oversight
The Community Reinvestment Act is an inter-agency initiative that is overseen and implemented by four different federal bank regulatory agencies. The four federal bank regulatory agencies responsible for enforcing the Community Reinvestment Act include the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve System FRB, the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS). The Community Reinvestment Act requires these four agencies to analyze and evaluate banking activity and performance in two main areas: First, the Community Reinvestment Act requires financial institution regulators to assess whether individual banks are meeting the needs and fulfilling the obligations of the communities in which they operate. Second, the Community Reinvestment Act requires financial institution regulators to assess whether proposed bank mergers, acquisitions, and branch openings meet the needs of the communities in which they operate.
The Community Reinvestment Act is implemented through Regulations 12 CFR parts 25, 228, 345, and 563e. These regulations establish the framework and criteria by which the agencies assess an institution's record of helping to meet the credit needs of its community (Matasar, 2004).
- Regulation 12 CFR Part 25 refers to the Officer of the Comptroller of Currency's Community Reinvestment Act and Interstate Deposit Production Regulations. The OCC is required to assess, through national examination every three years, a national bank's record of helping to meet the credit needs of its entire community regardless of income or race. The Office of the Comptroller of the Currency performs Community Reinvestment Act audits for banks to which it has issued a national charter.
- Regulations 12 CFR Part 228 refers to the Federal Reserve Board's Disclosure and Reporting of CRA-Related Agreements. The FRB is required to implement the Gramm-Leach-Bliley Act that requires reporting and public disclosure of written agreements between insured depository institutions and nongovernmental entities or persons made in connection with fulfillment of Community Reinvestment Act requirements. The Federal Reserve Board performs Community Reinvestment Act audits for state chartered banks that have joined the Federal Reserve System.
- Regulation 12 CFR Part 345 refers to the Federal Deposit Insurance Corporation's community reinvestment responsibilities. The regulation establishes standards for assessing performance as well as records, reporting, and disclosure requirements. The FDIC, which provides banks with deposit insurance, performs Community Reinvestment Act audits for state chartered institutions that have not joined the Federal Reserve System.
- Regulation 12 CFR Part 563e refers to the requirement of the Office of Thrift Supervision to maintain a searchable database including a complete list of publicly released Community Reinvestment Act ratings and recent public evaluation documents available for savings associations regulated by the OTS.
Community Reinvestment Act Compliance
Community Reinvestment Act regulations and requirements were substantially revised in 1995. The new regulations focused on and measured performance rather than process. Lending institution Community Reinvestment Act compliance procedures changed completely as a...
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