The purpose and design of the Community Reinvestment Act (CRA): An examination of the 1977 hearings and passage of the CRA

A version of this article appeared first in Conference of Consumer Finance Law, Quarterly Report, Vol. 72, No. 4

Introduction

In 2019, the Community Reinvestment Act (CRA) will be forty-two years old.[1]  Congress enacted the CRA in 1977 as a community development initiative that sought to leverage the financial resources of private sector institutions.  Senator William Proxmire of Wisconsin was the primary architect of the CRA.  In the wake of the large public sector Great Society programs of the Johnson years in the 1960s, the public was wary of massive new government programs to revitalize communities.  The genius of the CRA is that it was designed from its inception to tap into the financial might of the banking industry.

Government and the banking industry played a major role in creating distressed and impoverished neighborhoods in prior decades.  During the New Deal, the Roosevelt Administration established the Home Owners Loan Corporation (HOLC).  HOLC examiners classified neighborhoods on the basis of risk.  Over time, banks did not lend in the riskiest and most hazardous neighborhoods, where a majority of residents were often people of color and also recent immigrants from southern and eastern Europe.  The redlines on the maps delineating neighborhoods deemed risky by mortgage lenders was the origin of the term redlining.  In subsequent years, the Federal Housing Administration (FHA) would not insure loans in redlined neighborhoods.[2]  The private sector—including banks—adopted and expanded the practice of redlining.

The CRA can be thought of as an effort to atone for the public and private sector sins of discrimination, segregation, and the perpetuation of poverty in communities of color and working class communities.  The CRA imposes an affirmative obligation on banks to serve all communities, including low- and moderate-income communities.  Examiners from federal bank agencies scrutinize lending, investment, and services to low- and moderate-income (LMI) neighborhoods and rate banks.  The CRA’s teeth are mostly applied during the merger application process.  Low or failing CRA grades can result in delays or denials of merger applications.

The public accountability mechanism in the CRA has motivated banks to increase their lending and investing in LMI neighborhoods.  Members of the public and community groups can comment on both CRA exams and merger applications.[3]  Federal agencies take these comments into consideration as they rate banks in CRA exams and render decisions on merger applications.  As a result, banks work harder in LMI communities because they are being graded and publicly watched.  A recent Federal Reserve Bank of Philadelphia study found that when CRA exams no longer cover a metropolitan area or county, home lending in LMI census tracts can decline up to twenty percent.[4]  Since 1996, the National Community Reinvestment Coalition (NCRC) has found that banks have made almost $2 trillion in small business loans and community development loans in LMI neighborhoods.[5]

The tremendous benefits of the CRA accord with Senator Proxmire’s purpose and intent.  This paper reviews the 1977 hearings on the CRA, statements made on the Senator floor, and debate among Senators to provide background into how Senator Proxmire and others perceived that the CRA would be instrumental for rectifying redlining and disinvestment in the 1970s.  During 2019, the federal bank agencies will be embarking on a process of updating and reforming the CRA regulations. Speaking at the Just Economy Conference this past March in Washington DC, Federal Reserve Governor Lael Brainard discussed the issues involved in a reform process.[6]  This paper will not examine the details of these proposals but will offer insights regarding the appropriateness and effectiveness of some of these proposals in light of the intent of the CRA statute.

Premise and Purpose of CRA

As Chairman of the Senate Banking, Housing, and Urban Affairs Committee, Senator Proxmire convened three days of hearings on the CRA starting on March 23, 1977.  In his opening statement, the Senator outlined his four premises necessitating the CRA.  The four premises are:

  • The government cannot and should not revitalize cities with its own resources;
  • Financial institutions are the main source of capital for economic development in cities and rural areas;
  • Financial institutions do not need to engage in risky lending to serve communities, and can often do so with relatively little risk because of their first-hand knowledge of communities; and
  • A public charter bestows economic benefits and “in return it is legitimate for public policy and regulatory practice to require some public purpose, without the need for costly subsidies, or mandatory quotas, or a bureaucratic credit allocation scheme.”[7]

In his hearing statements, Senator Proxmire elaborated on each of the four premises.  He defined redlining and indicated that the devastation wrought by redlining is large scale and cannot be remedied solely by government funding.  Specifically regarding redlining, Senator Proxmire stated:

By redlining let me make it clear what I am talking about.  I am talking about the fact that banks and savings and loans will take their deposits from a community and instead of reinvesting them in that community, they will actually or figuratively draw a red line on a map around the areas of their city, sometimes in the inner city, sometimes in the older neighborhoods, sometimes ethnic and sometimes black, but often encompassing a great area of their neighborhood.[8]

Systemic discrimination and disinvestment requires both private and public resources be directed to revitalize redlined areas.  Proxmire stated:

We have the appalling facts of our cities.  President Carter was right when he said . . . in Milwaukee that the number one economic problem in this country,is our cities.  I think you would agree with me.  We don’t want to solve the problem with Government money.  We couldn’t do it.  We couldn’t do it with a Marshall plan for the cities.  We have to do it with the people who are there, people who understand the city, live in the city, who know the economy, loan officials who understand the value of the property, who understand what it is to require effective discipline.[9]

While banks know their localities, they often do not exercise their talents to meet credit needs of underserved communities.  Senator Proxmire did not directly say why this is the case, whether it is out of laziness or outright discrimination.  He implies, however, that banks are not trying hard enough:

When the committee did a survey of banking services here in Washington, we found one bank with a policy of making no home mortgage loans.  This same bank was making a great volume of loans to the outside real estate interests of its own board.  We found a savings and loan chartered in Washington with [ninety-nine] percent of its mortgage loans in the suburbs, and this story is repeated throughout the country.  Banks that claim there is no demand for local housing and small business and agricultural credit, or who argue that they need to protect depositors’ money precludes such lending, are often the same banks that have squandered money on speculative real estate loans or credits to shaky foreign regimes.

Demand in our economy is not a passive, fixed thing.  It is manipulated and promoted. If a banker is willing to get out of the office he will find it.  This bill would encourage him to do so.[10]

If a banker hustles, he can find safe and sound lending opportunities.  Lending in his or his community does not entail risk.  On the contrary, a community and country cannot prosper if banks are not lending in them.  On this point, Senator Proxmire stated:

Moreover, there is no reason to assume that a higher degree of community reinvestment is incompatible with bank safety.  Financial institutions cannot prosper in the long run unless we have balanced growth and development throughout America.  Finally, there is no evidence that banks and thrift institutions have gotten into financial difficulty by overinvesting in their local communities.  On the contrary, most of the recent financial difficulties suffered by banks arose from making insider loans to affiliated persons.[11]

The extra push for banks to lend in their communities needs to come from the federal bank agencies.  The agencies should view conferring a bank charter to be a privilege, not a right.  In the hearings on the CRA, Senator Proxmire stated: “The Community Reinvestment Act, which I am introducing today, is intended to establish a system of regulatory incentives to encourage banks and savings institutions to more effectively meet the credit needs of the localities they are chartered to serve, consistent with sound lending practices.”[12]

When considering bank mergers, the agencies must consider the convenience and needs of communities.  The agencies, however, only consider the needs for deposit accounts, and not credit needs.  Senator Proxmire explained: “The federal bank regulatory agencies have considerable influence over financial institutions.  One of the most significant powers is the authority to approve or deny applications for deposit facilities.  Persons wishing to organize a bank or savings institution must apply for a charter.”[13]  The agencies, however, do not fully assert their influence over banks.  Senator Proxmire continued:

The regulators have thus conferred substantial economic benefits on private institutions without extracting any meaningful quid pro quo for the public.  Other regulatory agencies have not been as timid when awarding charters.[14]  But the other side of the coin—the credit needs of the locality and the applicant’s capacity to service these needs—have been almost ignored by the regulatory agencies.[15]

Why Senator Proxmire Felt Banks Needed to be Pushed to Make Loans in Neighborhoods

Several witnesses during the three days of hearings on the CRA explained that banks were not meeting the needs for credit in communities of color and working class neighborhoods.  Their descriptions of unmet credit needs made a compelling case that the public sector needed to intervene to remedy market imperfections and impediments to access to credit.

In his testimony, renowned consumer protection advocate Ralph Nader provided statements from Advisory Neighborhood Commissioners (ANC) in Washington D.C. regarding the barriers neighborhood residents confronted in accessing credit. Neighborhood residents seeking home purchase loans from banks often had to put down twenty-five percent down payments, which were prohibitive in many instances.[16]  The neighborhood residents then had to rely on the inferior option of mortgage companies. Mortgage companies foreclosed faster than banks when borrowers fell behind.  Also, reliance on mortgage companies impeded neighborhood markets.  Mortgage companies usually used FHA insured mortgage loans.  These loans discouraged home sellers from offering homes to neighborhood residents since FHA required sellers to pay points on the loan.

Small business owners also confronted frustrations in securing loans. In a survey of seventy-four small businesses in ANC neighborhoods, only twelve percent had loans while forty-nine percent tried unsuccessfully to apply for loans.[17]  Banks were generally not responsive to neighborhood credit needs.  For example, branch personnel in two AS&T branches told neighborhood residents that they did not have the authority to make mortgage loans.  AS&T had issued only five mortgage loans in the ANC neighborhoods in a four-year time period.[18]  While shunning the ANC neighborhoods west of Rock Creek Park, the institution made millions of dollars of mortgage loans east of the park in affluent and Caucasian neighborhoods.[19]

Bank reluctance to offer low cost loans in communities of color occurred across the country.  Gale Cincotta of National People’s Action discussed a 1975 study from Northwestern University documenting racial disparities in lending in Chicago neighborhoods.  Hispanic residents of the Logan Square neighborhood had to rely on high down-payment FHA loans while mostly white residents of an adjacent neighborhood received low down payment conventional loans.[20]

Senator Proxmire and witnesses at the hearing had access to new data required by the Home Mortgage Disclosure Act (HMDA) passed in 1975 that effectively documented stark racial disparities in lending compelling policy responses and action.  Senator Proxmire declared on the floor of the Senate that “The data provided by [the HMDA] remove any doubt that redlining indeed exists, that many credit-worthy areas are denied loans.  This denial of credit, while it is certainly not the sole cause of our urban problems, undoubtedly aggravates urban decline.”[21]  He noted that extensive HMDA data analysis revealed stark lending disparities across the country.  For example, newspapers in New York presented a series of reports pointing out that only eleven percent of the deposits in Brooklyn remained in the borough while eighty-nine percent was loaned outside of the borough.  Similarly, ninety percent of the deposits in District of Columbia neighborhoods were loaned elsewhere.  This pattern was repeated in Chicago, Los Angeles, and St. Louis.[22]

The Senator maintained his position that disinvestment occurred in smaller towns as well as larger cities.  He stated, “We also know that small town banks sometimes ship their funds to the major money markets in search of higher interest rates, to the detriment of local housing, to the detriment of small business, and farm credit needs.”[23]

Notable neighborhood-based efforts dispelled the notion that lending in underserved neighborhoods was risky and that combating redlining was futile.  The Philadelphia Mortgage Plan (PMP), for instance, involved a partnership between the Neighborhood Housing Service (NHS) nonprofit organization and thirteen banks.  On a proactive basis, the PMP reviewed results every two months and adjusted lending criteria as necessary.  They also used smaller areas (block areas as opposed to the entire neighborhood) to conduct appraisals.  This appraisal procedure presumably overcame common perceptions of unsound and unsafe housing stock in older neighborhoods.  According to the hearings testimony, delinquency rates were low despite millions of dollars being loaned out.[24]  In eighteen months, the program extended 1,500 loans with a default rate of six tenths of one percent.[25]

Another instance of a well-intentioned bank highlighted by the hearings was the South Shore Bank based in Chicago whose Chairman was Ronald Grzywinski.  Grzywinski testified that his team purchased the bank after the Office of the Comptroller of the Currency (OCC) denied a request by former owners to relocate the bank out of a neighborhood experiencing racial transition from white to African-American.[26]  Instead of fleeing a transitioning neighborhood, Mr. Grzywinski adopted a neighborhood-based lending model that featured extensive dialogue between the community and senior officials of the bank. Grzywinski and his team had countless meetings with the community to regain their trust.  He also established review committees composed of senior officials including himself that carefully reviewed loan applications seeking to promote neighborhood development through home ownership and small business ownership while at the same time assuring that the loans were safe and sound.[27]  At the end of the first year of operation, his bank had made fifty-two loans in the surrounding neighborhood and only two were delinquent.  This was in stark contrast to other banks located in city neighborhoods that used local deposits to make the vast majority of their loans in the suburbs.[28]

Grzywinski realized that his model of banking would not organically replicate itself since it involved more costs than the typical bank at that time would incur.  Most banks sought to maximize their earnings via deposit activity rather than concentrating on lending, particularly in underserved neighborhoods.  In advocating for the CRA, Grzywinski stated:

The unfortunate conclusion I have come to is that bank managers may be well-intentioned on that issue, but the simple fact of the matter is that the system rewards earnings, and development or reinvestment in neighborhood is an additional short-term cost.  If any bank decides to do that by itself, it is, in effect, self-imposing a tax on its earnings.  Therefore, what is needed is a universally applied system of incentives and/or sanctions to encourage development.[29]

Market failure caused by years of discrimination and disinvestment made it difficult for banks to assess creditworthiness in underserved neighborhoods.  The banks encountered barriers to underwriting due to a lack of information on borrower creditworthiness, housing stock quality, and neighborhood characteristics.  Neither banks nor other real estate professionals had accumulated data and knowledge on these essential facts for lending because they had not served these neighborhoods.  Many banks were unwilling to roll up their sleeves and do the background work necessary for lending like South Shore Bank.  Hence, Senator Proxmire and others felt a federal law was needed to compel an entire industry to reinvest time and energy to serving neglected neighborhoods.

Early Precedents for CRA – Experiences of Massachusetts and Connecticut

Senator Proxmire asked the Banking Commissioners from Massachusetts and Connecticut to testify about their experiences implementing reinvestment obligations on banks as a means of demonstrating that a federal law would be feasible and effective.  The Massachusetts Commissioner of Banks, Carol Greenwald, testified that before allowing banks to branch into the suburbs, they were required to serve all the areas in which they did business.  She observed that one bank responded by saying that mortgage loans would now be available in all of its branches.[30]  Massachusetts also stipulated that banks applying for permission to open new branches or merge were required to analyze the socioeconomic and credit needs of their service areas.  The state implemented this requirement according to Greenwald because banks were misjudging demand in neighborhoods for loans.  Banks would maintain that demand for mortgage loans were low but “we have found that there were a number of home sales; there just wasn’t a substantial number of bank mortgages being made in the area.”[31]  Like the studies cited above, the Massachusetts Banking Commissioner found that mortgage companies were doing brisk business because neighborhood residents had concluded that banks would not loan to them.

The Bank Commissioner of Connecticut, Lawrence Connell, testified regarding differential service at bank branches in the city compared to the suburbs.  The banking department’s survey of branch hours found that evening and weekend hours were much more likely in the suburbs than in the cities of major metropolitan areas including Hartford, New Haven, Stamford, and Danbury, CT.  In the cities, only about thirty percent of the branches were open in the evenings and Saturdays whereas in the suburbs more than fifty percent were open for extended hours.[32]  In response to the survey findings, the Connecticut Bank Commission placed a moratorium on branch applications.  Eighteen savings banks and six commercial banks then indicated that they would change branch hours of operation.[33]

Precursors to CRA at the state level seemed to be having their desired impact of reducing inequities in bank lending and service.  It would stand to reason that a federal CRA would create a more level playing field nationwide.

Criticism of CRA as Bureaucratic Government Interference and Credit Allocation

Despite the comprehensive data analysis showing disparities in lending, and despite positive indications of banks responding to state law, federal bank regulatory agencies opposed Senator Proxmire’s proposed CRA legislation during the three-day hearings.  Robert Bloom, the Acting Comptroller of the Currency, testified that CRA would be largely duplicative of existing bank merger law and regulations.  The OCC already required banks to describe how they would respond to credit and deposit needs.  He asserted that “[The OCC] [does] not agree with your assertion that the credit needs of a locality and the applicant’s capacity to serve these needs have been almost ignored by the regulatory agencies.”[34]  In addition to being duplicative, a CRA law would be too restrictive and would not allow the regulatory agencies to exercise discretion in evaluating bank applications.  Requiring banks to indicate how they will serve local needs was not appropriate in all cases.  Mr. Bloom stated, “Geography plays a limited role in the operations of the largest commercial banks which are national and international in scope.  Also, people make deposits on their way to work rather than in their home communities.”[35]

The Chairman of the Federal Reserve Board, Arthur F. Burns, echoed Mr. Bloom’s concerns. Mr. Burns stated:

To restrict the activities of these institutions through Federal regulation could well prove counter-productive.  It could block the flow of funds, for example, mortgage credit or new funds for capital investment from an established community with excess savings to a growing community unable to generate sufficient savings to meet its expanding financial needs.[36]

Burns continued, “Each time a particular credit use is mandated by law or regulation, some other credit use that otherwise would have been accommodated must go unsatisfied.”[37]  He tempered his concerns about government restriction of optimal use of capital for lending by saying, “We recognize, of course, that markets do not always work in ways that maximize social priorities and that thus there may be particular needs that public policy will need to encourage.”[38]

A.A. Milligan, testifying on behalf of the American Bankers Association, seconded the concerns of the Federal Reserve Chairman about inadvertently restricting lending to where it was needed most.  Mr. Milligan stated:

Banks in urban areas such as Milwaukee, Chicago, or Minneapolis, that are providing the necessary funds for rural community development in Wisconsin would not be considered to be meeting the needs of their own communities.  They would be labeled derelict in their responsibilities to their own communities even if their communities had no current need.[39]

Growing frustrated during the hearing, Senator Garn ratcheted up the criticism of the proposed CRA, declaring that it would be: “Building up a regulatory burden that is going to destroy the housing industry in this country.”[40]  He calmed down later during the hearings and confessed, “Redlining does exist.  I may surprise you after hearing my initial outburst.  What I disagree with is how do we solve the problem of redlining.”[41]  He then discussed how deteriorated neighborhood conditions made banks reluctant to lend and that comprehensive solutions must include code enforcement, eliminating neighborhood health hazards, as well as advocating for government grants for community development.

The essential debate between the proponents and opponents of the CRA was whether market failure existed that was a significant cause of neighborhood deterioration and whether government regulation was needed to rectify market failure.  Opponents of the CRA subscribed to the views of the bank regulatory agencies that markets worked well to identify areas of credit excess and scarcity and that regulations would interrupt the optimal flow of capital from areas of excess to areas of need.  Proponents of the CRA, in contrast, maintained that market failure was pervasive in inner city areas and that credit was not flowing to where it was needed.  Banks located in inner city areas were receiving deposits but refusing to meet pent up demand for loans.  According to this view, it was not the case that these banks were judging that needs were greater in rural areas for loans and therefore directing their deposits there.

Reasonable observers and stakeholders can disagree about the problems and the needed solutions. But it would seem that today, inner city areas as well as rural counties continue to be underserved and that CRA still needs to address market barriers to lending.  Contrary to Senator Garn’s assertion, it is also clear that forty years after Congress passed CRA, the law has not destroyed the housing industry.

The Structure of the CRA Statute Passed in 1977

The debate over the CRA influenced Senator Proxmire’s design of the bill.  After listening to the criticism, he changed the bill to make it less prescriptive and instead sought to emphasize that banks must serve the needs of the community.[42]  As originally introduced, the CRA started by affirming that banks have a continuing and affirmative obligation to serve the convenience and needs of the community in which they are chartered to do business.  The convenience and needs of the community include the needs for credit as well as deposit services.  When chartering, supervising, and examining banks, the federal regulatory agencies must encourage banks to meet needs consistent with “safe and sound” operation of banks.

When banks applied for charters, deposit insurance, opening branches, or merging with other banks, they were required to indicate in their applications how they will serve convenience and needs.  In particular, banks were required to designate a primary service area in which they anticipated they would receive more than one half of their deposits.  They were then supposed to indicate the proportion of loans that they would reinvest into their primary service area.  Also, banks were to indicate how they were meeting the needs of their primary service area.[43]

When considering applications from banks, the federal agencies were to assess the extent to which banks were meeting needs in their existing primary service areas as well as how they would meet needs in any new or enlarged primary service areas associated with their application.  The agencies were to permit and encourage members of the public to testify regarding how well the banks or their subsidiaries were meeting needs in their primary service areas.  Finally, the agencies were to obtain periodic data from banks regarding how many deposits they obtained from their primary service areas and how many loans they made in those areas.[44]

Congress passed the CRA on October 12, 1977.  The final version of CRA became Title VIII of the Housing and Community Development Act of 1977.  The purpose of the CRA remained the same, that is, requiring banks to meet credit needs.  However, the final version shifted its emphasis from details expected from the banks in applications to requiring agencies to examine banks.  During regularly scheduled examinations, the agencies were to assess the record of banks of meeting the credit needs of their entire community, including low- and moderate-income communities.  The agencies were then to take bank records of meeting needs into consideration when they were considering bank applications.  The details required on bank applications regarding bank designation of primary service areas and the proportion of loans expected in service areas were deleted from the final version.  Also, deleted were bank data reporting requirements regarding their deposit and lending activity in their primary service areas.[45]

Senator Proxmire altered CRA in response to criticism that it would be difficult for banks to determine how many loans they would make in their primary service areas.  He was also probably sensitive to the issues of not deterring banks from lending in underserved rural areas if they thought they were adequately serving the urban areas in which they were doing business.  The examination regime established in the final version of the bill would help ensure that banks were meeting credit needs in all areas in which they were chartered to do business.  On the first day of hearings in March of 1977, the Senator stated:

[The proposed CRA bill] does not provide for credit allocation.  To criticize reinvestment incentives as a form of credit allocation is disingenuous.  It would not allocate credit, nor would it require any fixed ratio of deposits to loans.  But it would provide that a bank charter is indeed a franchise to serve local convenience and needs, including credit needs.[46]

From the inception of CRA bill, Proxmire was insistent that CRA was not establishing a system of credit allocation.  Even though the primary service area requirement did not require a fixed ratio of deposits to loans, it did require banks to estimate such a ratio for their primary service areas.  Hence, the Senator most likely dropped this requirement in response to the criticism.  Perhaps he calculated that regular exams would catch any bank that was not meeting the needs for credit in the areas in which they are chartered to do business.  In response to Senator Morgan’s question, Senator Proxmire stated on the Senate floor that the revised bill “also redefine[d] the primary service area to be served on a broader basis, so that there be no question that it is not simply the immediate community where the bank was located.”[47]

It is not clear what the broader basis was for the primary service area because the final bill makes no mention of a primary service area.  The final version discusses the requirement for banks to meet credit needs in all communities in which they are chartered, including low- and moderate-income communities.  Perhaps, this was the Senator’s shorthanded way of saying that the specific primary service area requirement was deleted.

Amendments to CRA Bolster’s Senator Proxmire’s Objectives of Public and Local Accountability

After the passage of the CRA in 1977, Congress has strengthened Senator’s Proxmire’s objectives of bank accountability to the public and to local areas.  The first time Congress amended CRA was in 1989 when it passed the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA).  FIRREA was focused on the bailout and rescue of the savings and loans industry.  Section 1212 of Title XII of the law included an amendment to CRA requiring the federal agencies to make publicly available CRA exams including the rating awarded to banks.  The exams were to include specific analysis discussing the extent to which banks were meeting credit needs of low- and moderate-income people and communities.  For example, the exams were required to reach conclusions about the assessment factors described in the CRA regulations for evaluating banks.[48]

Before this amendment, CRA exams were not publicly available.  Exams were not only to be publicly available but were to include ratings and specific analyses.  This is instrumental for public accountability.  In contrast to CRA exams, other bank exams, including fair lending and safety and soundness exams, are not currently publicly available.

The next time Congress amended the CRA was when it enacted the Riegle-Neal Interstate Banking and Branching Efficiency Act in 1994.  Prior to Riegle-Neal, bank holding companies were not allowed to buy out-of-state banks or branches across state lines but served the state in which they were chartered.[49] Interestingly, in 1977 Senator Proxmire predicted that the CRA would facilitate interstate banking by reassuring the public that banks would reinvest back into the communities making deposits instead of taking the deposits across state lines for investing and lending.[50]  Section 110 of Riegle-Neal requires federal agencies to conduct evaluations in each state in which a bank has a branch and to reach conclusions about performance for metropolitan and non-metropolitan areas of each state where banks have branches.  Evaluations are also to be conducted for multistate metropolitan areas in which banks have branches.  Since Riegle-Neal anticipated that banks would serve multiple states, it insisted that CRA retain a local focus and conduct evaluations in metropolitan and rural parts of each state they served.[51]

Regulatory Changes to CRA Since 1994

The federal bank agencies implemented a significant change to the regulations implementing CRA in 1995, in part to codify the requirements of Riegle-Neal regarding the geographical areas to be examined.  The other major thrust of the changes was to increase the objectivity of CRA performance measures.  The agencies developed standardized exams for banks of various sizes.  For example, large banks with assets above $1 billion now undergo the most comprehensive exams that include a lending test, an investment test, and a service test.  The lending test routinely examines home and small business lending and includes performance measures such as the percent of loans to LMI borrowers and census tracts.  The investment test scrutinizes the number, dollar amount, and responsiveness to community needs of investments such as those in Low-Income Housing Tax Credits or Small Business Investment Corporations (SBICs).  Lastly, the service test examines the number and percent of branches in LMI tracts, the availability of basic services, and the provision of community development services like financial counseling.

Over the years, banks and community groups would ask the federal agencies questions about what activities would count under CRA.  The agencies responded by developing an interagency question and answer (Q&A) document describing various activities and types of financing that would qualify in CRA exams.  For example, the Q&As have specified that environmental clean-ups, foreclosure prevention, international remittance payments, and Individual Development Accounts helping to finance education or homeownership are activities that would receive favorable consideration on CRA exams.[52]

Possible Regulatory Changes in 2019

Most recently, the OCC has made it clear that it wants to embark on CRA reform by issuing an Advance Notice of Proposed Rulemaking (ANPR) in the late summer 2018.[53]  An ANPR is not a specific proposal to change the CRA regulation, but rather consists of a series of questions for stakeholders to consider and answer.  The responses to the ANPR then inform any proposed changes to the CRA regulations; the agencies must then ask the public to comment on any proposed changes before they become final.

The banking landscape has undergone profound changes since Congress enacted the CRA in 1977.  One obvious impact is the internet and the provision of lending and banking services via the internet.  While many banks still make the great majority of their loans via branches, a number of newer banks and non-banks operate mainly or solely through the internet.  How can the CRA effectively measure whether such banks serve local communities when CRA exams focus on geographical areas containing bank branches?[54]  As discussed above, even in Senator Proxmire’s time, the CRA hearings involved discussion of how the CRA would measure the performance of national and international banks that engage in substantial amount of business beyond bank branches.[55]  These types of issues have prompted the OCC to consider changing the CRA regulations.

As legitimate as the needs are to update the CRA regulations, changing the regulations needs to be executed carefully to retain Senator Proxmire’s focus on local needs, responding to LMI borrowers and neighborhoods, and avoidance of credit allocation.  In the ANPR, the OCC promoted a concept that became commonly called the one ratio.  The one ratio’s numerator would be the dollar amount of CRA activities (loans, investments, and services) divided by a bank’s dollar amount of assets or some other measure of bank resources.[56]  The OCC was looking for a performance measure that could readily assure a bank that it was in compliance with CRA.  The one ratio also has the surface appeal of efficiently dealing with uncertainties regarding a bank’s geographical footprint.  Instead of examiners spending considerable time figuring out where a bank engages in business, a one ratio would immediately capture CRA activities compared to bank resources.

The difficulty with the one ratio concept is that it runs headlong into the goals of promoting responsiveness to local needs.  Various localities served by a bank have different needs; one high-cost locality may have an affordable housing shortage whereas another one may have high unemployment rates.  Current CRA exams have separate assessments of performance for localities that measure responsiveness to needs like affordable housing and job training for the unemployed.  A one ratio focused exam, however, may encourage the bank to respond to the need that is easier for them and to ignore needs in other localities.

The one ratio is also inconsistent with Senator Proxmire’s change to the original CRA bill.  In response to concerns of credit allocation, the Senator dropped the requirement that banks indicate the ratio of loans to deposits they anticipate will be in their primary service areas.  Now, four decades later, the OCC is contemplating a similar ratio that could be a major determinant of a bank’s CRA rating.  The OCC is not necessarily saying that the banks would need to hit a particular ratio to pass, but could adopt benchmarks that would be ranges of ratio values that would correspond to various ratings.  Even ranges, however, could resemble credit allocation, especially if the ranges are inflexible and do not account for sudden changes in economic conditions that make achieving them difficult.  Similarly, during the 1977 hearings, one of the lenders, Todd Cooke, critiqued the original requirement for banks to indicate a ratio of loans to deposits in their primary service areas on the grounds that banks could not easily anticipate future economic conditions.[57]

Overall, a one ratio focused exam would turn the CRA into a mechanical exercise in which banks aim to make sure their ratio is at least at the level of “Satisfactory” performance.  They may end up emphasizing the financing of larger dollar value projects regardless of whether this type of financing is best at meeting various needs such as those for smaller dollar consumer loans to respond to family emergencies or microcredit for small businesses.

Another possible departure from Senator Proxmire’s intentions is a movement away from focusing on the credit and community development needs of LMI consumers and communities.  The OCC asks whether favorable CRA consideration should be provided for financing that benefits a number of communities, including those that are not LMI and whether activities can include broad philanthropic endeavors that do not necessarily focus on the provision of credit or revitalizing neighborhoods.  Some banks responded in their ANPR comments that they should receive favorable consideration for grants to organizations like the Special Olympics and that financing infrastructure projects like sewers that span LMI and non-LMI neighborhoods should receive credit.  While organizations like the Special Olympics are admirable, they do not respond to the original needs cited by the authors of CRA which was to end redlining and discrimination against working class communities and communities of color.  Also, broad credit for infrastructure projects would also likely result in less CRA funding being channeled to LMI communities.  Instead, there have been sensible proposals to pro-rate dollar amounts of financing for infrastructure and other projects that benefit LMI and non-LMI areas; CRA exams would consider the portion of the dollars that benefit LMI areas.[58]

Some banks and trade associations argue that the CRA does not focus entirely on LMI communities since it says that federal agencies should measure bank responsiveness to community needs including LMI communities.  However, if an impartial observer reads the hearing transcript and floor statements by Senator Proxmire, it becomes clear that the focus was on LMI and minority communities.  A movement away from LMI communities would not be consistent with Senator Proxmire’s intentions.

Lastly, methods can be devised that do not involve the one ratio for examining performance in geographical areas served by banks that make considerable numbers of loans beyond bank branches.  Data can reveal the geographical areas in which these banks make a large number of loans, receive deposits, and/or make investments.  Geographical areas receiving a concentration of bank activities can then become the areas on CRA exams.

In sum, CRA reform can be undertaken that further Senator Proxmire’s intention to increase the responsiveness of banks to the needs of local communities and their LMI residents even in this era of the internet.  In addition to careful regulatory reform, Congress can help by updating the CRA statute.  Recently, Senator Warren introduced a CRA modernization bill that addresses geographical challenges in CRA exams as well as extending CRA to non-banks including independent mortgage companies and credit unions.[59]  Following its pioneering efforts in the 1970s as discussed above, Massachusetts continues to innovate as its state CRA law provides a workable model about how to apply CRA to mortgage companies and credit unions.  CRA remains a cost effective method to channel a considerable amount of capital in a safe and sound manner to LMI and underserved communities.  The challenge is whether we will continue to follow the wisdom of Senator Proxmire in updating, and therefore utilizing, the full potential of this innovative law.


[1] President Jimmy Carter signed CRA into law on October 12, 1977, see https://en.wikipedia.org/wiki/Community_Reinvestment_Act

. For a reference to the text of the statute, see https://www.fdic.gov/regulations/community/community/12c30.html

[2] Bruce Mitchell & Juan Franco, Nat’l Cmty. Reinvestment Coal., HOLC “Redlining” Maps: The Persistent Structure of Segregation and Economic Inequality 7 (Mar. 20, 2018), https://ncrc.org/wp-content/uploads/dlm_uploads/2018/02/NCRC-Research-HOLC-10.pdf [https://perma.cc/JXW4-Q9UE].

[3] CRA regulation at §25.29(c) discusses effect of CRA on applications and references consideration of comments from interested parties on applications including merger applications submitted by banks. The regulation at §25.43 describes the procedures for banks retaining public comments on their CRA performance. The webpages of the federal agencies have descriptions of how members of the public can comment on CRA exams and merger applications. The OCC CRA regulation can be accessed here: https://www.ffiec.gov/cra/regulation.htm

[4] Lei Ding & Leonard Nakamura, “Don’t Know What You Got Till It’s Gone” — The Effects of the Community Reinvestment Act (CRA) on Mortgage Lending in the Philadelphia Market 1 (Fed. Reserve Bank of Phila. Research Dep’t, Working Paper No. 17-15, 2017), https://www.philadelphiafed.org/-/media/research-and-data/publications/working-papers/2017/wp17-15.pdf [https://perma.cc/KDR5-TC9X].

[5] See Reports, Fed. Fin. Inst. Examinations Council, https://www.ffiec.gov/reports.htm [https://perma.cc/2562-LG67] (providing national aggregate reports on the impact of the CRA).

[6] Governor Lael Brainard, The Community Reinvestment Act: How Can We Preserve What Works and Make it Better? At the 2019 Just Economy Conference, National Community Reinvestment Coalition, Washington, D.C., March 12, 2019,  https://www.federalreserve.gov/newsevents/speech/brainard20190312a.htm

[7] Community Credit Needs: Hearings on S. 406 Before the S. Comm. on Banking, Housing, and Urban Affairs, 95th Cong. 9 (1977) (statement of Sen. William Proxmire, Chairman, S. Comm. on Banking, Housing, and Urban Affairs) [hereinafter Banking Committee Hearings].

[8] 123 Cong. Rec. 17630 (1977).

[9] Banking Committee Hearings, supra note 7, at 323.

[10] Id. at 2.

[11] Id. at 11.

[12] Id. at 9.

[13] Id.

[14] Id. at 10.

[15] Id. at 9.

[16] Id. at 44.

[17] Id. at 48.

[18] Id. at 50–51.

[19] Id. at 58–59.

[20] Id. at 136.

[21] 123 Cong. Rec. 17630 (1977).

[22] Id.

[23] Id.

[24] Banking Committee Hearings, supra note 4, at 193.

[25] 123 Cong. Rec. 17630 (1977).

[26] Banking Committee Hearings, supra note 4, at 297.

[27] Id. at 308.

[28] Id. at 305–06.

[29] Id. at 299.

[30] Id. at 166

[31] Id. at 168.

[32] Id. at 177.

[33] Id.

[34] Id. at 12.

[35] Id. at 13.

[36] Id. at 14.

[37] Id. at 15.

[38] Id. at 14.

[39] Id. at 315.

[40] Id. at 324.

[41] Id. at 330.

[42] 123 Cong. Rec. 17604 (1977).  Senator Proxmire noted that the bill was “drastically revised” during Committee markup and he believed that “the substantive objections have been satisfied.”  Id.

[43] Banking Committee Hearings, supra note 7, at 6-7 (providing the text of the draft CRA bill).

[44] Banking Committee Hearings, supra note 7, at 3–8 (providing the text of the draft CRA bill).

[45] 123 Cong. Rec. 17632 (1977).  During a discussion, Senator Proxmire confirmed that reporting requirements were deleted.

[46] Banking Committee Hearings, supra note 4, at 2.

[47] 123 Cong. Rec. 31888 (1977).

[48] Financial Institutions Reform, Recovery, and Enforcement Act, H.R. 1278, 101st Cong. (1989).

[49] Patrick Mulloy, The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994: Responding to Global Competition, 21 J. Legis. 255, 270–71 (1995).

[50] Banking Committee Hearings, supra note 4, at 11.

[51] Riegle-Neal Interstate Banking and Branching Efficiency Act, H.R. 3841, 103d Cong. § 110 (1994).

[52] Community Reinvestment Act; Interagency Questions and Answers Regarding Community Reinvestment; Guidance, 81 Fed. Reg. 48506, 48507–24 (July 25, 2016) (to be codified at 12 C.F.R. pt. 345).

[53] Office of the Comptroller of the Currency (OCC), Advance Notice of Proposed Rulemaking (ANPR), Federal Register, Vol. 83, No. 172, Wednesday, September 5, 2018, https://www.gpo.gov/fdsys/pkg/FR-2018-09-05/pdf/2018-19169.pdf

[54] Josh Silver, Nat’l Cmty. Reinvestment Coal., The Community Reinvestment Act and Geography: How Well do CRA Exams Cover the Geographical Areas That Banks Serve? 4 (Apr. 2017), https://ncrc.org/wp-content/uploads/2017/05/cra_geography_paper_050517.pdf [https://perma.cc/46XL-WRUQ].

[55] Banking Committee Hearings, supra note 4, at 12.

[56] U.S Dep’t Treasury, Comptroller of the Currency, OCC-2018-0008, Reforming the Community Reinvestment Act Regulatory Framework (2018), https://www.regulations.gov/docket?D=OCC-2018-0008 [https://perma.cc/2BEQ-TGLS] (providing access to the ANPR and related comments responding to the ANPR).

[57] Banking Committee Hearings, supra note 4, at 291.

[58] Josh Silver, Nat’l Cmty. Reinvestment Coal., Analysis of Public Comments on the Community Reinvestment Act (Dec. 7, 2018), https://ncrc.org/analysis-of-public-comments-on-the-community-reinvestment-act/ [https://perma.cc/U8J6-XP73].

[59] American Housing and Economic Mobility Act, S. 3503, 115th Cong. (2018).


Josh Silver is Senior Advisor at the  National Community Reinvestment Coalition and has more than 25 years of experience in the housing and community development field. He produces white papers on the Community Reinvestment Act (CRA) and fair lending policy and issues. He also serves as an expert and provides advice and resources on affordable housing and community reinvestment.

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