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What is the Community Reinvestment Act?
Congress enacted the Community Reinvestment Act (CRA) in 1977 in response to the unjustified “redlining” of lower income and minority neighborhoods by banks and thrift institutions during the 1960s and early 1970s. The purpose was to ensure that for-profit financial institutions (including both federal and state-chartered commercial and savings banks) were adequately meeting the financial service needs of all parts of the communities from which they draw deposits. Periodic CRA examinations and ratings assess the extent to which banks and thrifts are meeting the credit needs of lower income and minority consumers, providing needed and affordable services to all customers and investing in local economic and community development projects. CRA ratings are taken into consideration by the banking regulatory agencies when banks or thrifts seek to open new branches, initiate mergers or acquire other financial institutions.
Background of CRA
For more than 30 years, the Community Reinvestment Act has been a major tool in the successful preservation and improvement of communities in the Bronx and other communities around the country. In 1974, Bronx tenant and community leaders decided that they could not depend on government funding and support to save their communities. They formed a community organization, the Northwest Bronx Community and Clergy Coalition. One of the group's priorities was to bring bank money back into their communities. They had anecdotal evidence of banks refusing to re-finance mortgages and knew that the continuation of that trend would doom their communities.
The Home Mortgage Disclosure Act passed in 1975 provided the information that confirmed the suspicion that mortgage availability was inconsistent and scarce in many low income and minority communities. This evidence bolstered the case for the passage of the Community Reinvestment Act in 1977. The Community Reinvestment Act states "regulated financial institutions have continuing and affirmative obligation to help meet the credit needs of the local communities in which they are chartered." Under CRA, regulators can deny or delay a bank's application to merge with another bank or expand its services if the bank's CRA review is found inadequate. Community groups around the country have utilized this language to obtain loans and create programs to preserve and improve their neighborhoods.
Since the creation of the CRA in 1977, CRA has been credited by the National Community Reinvestment Coalition with leveraging $6 trillion in community reinvestment around the country. Millions of these dollars have come into neighborhoods of the Northwest Bronx. University Neighborhood Housing Program (UNHP), a non-profit organization formed by the Northwest Bronx Community and Clergy Coalition and Fordham University, has assisted in bringing many of those dollars into community controlled projects in the Northwest Bronx. Through its loan fund and technical assistance projects, UNHP has packaged loans which have assisted thousands of units utilizing bank and city programs rooted in the Community Reinvestment Act.
The Community Reinvestment Act in 2009What is the Community Reinvestment Act?
Congress enacted the Community Reinvestment Act (CRA) in 1977 in response to the unjustified “redlining” of lower income and minority neighborhoods by banks and thrift institutions during the 1960s and early 1970s (though the practice originated in the early 20th Century). The purpose was to ensure that for-profit financial institutions (including both federal and state-chartered commercial and savings banks) were adequately meeting the financial service needs of all parts of the communities from which they draw deposits. Periodic CRA examinations and ratings assess the extent to which banks and thrifts are meeting the credit needs of lower income and minority consumers, providing needed and affordable services to all customers and investing in local economic and community development projects. CRA ratings are taken into consideration by the banking regulatory agencies when banks or thrifts seek to open new branches, initiate mergers or acquire other financial institutions.
Why groups blame the Community Reinvestment Act as the cause for the present economic recession.
Since the economic downturn began in 2007, and especially in 2008, the Community Reinvestment Act (CRA) has been thrust onto the public consciousness due to the search for answers of how the United States fell into a recession. Several conservative groups have used this opportunity to put the blame of the financial crisis on government policy. These groups point to government polices such as a highly accommodative monetary policy by the Federal Reserve, federal policies designed to expand home ownership, and the congressionally-granted duopoly status of housing GSEs Fannie Mae and Freddie Mac. While these groups’ explanation of how the housing bubble was created has some credence, the addition of the CRA into the list of factors that caused the recession is incorrect and misguided.
The explanation by the conservative groups for how the CRA created the mortgage market crisis is based on two points. The first is that the CRA forced banks to extend credit to low to moderate income communities and thus creating a dramatic rise in sub-prime lending. The second argument follows that these communities defaulted on their sub-prime mortgages causing them to foreclose on their houses creating the mortgage market crisis. The arguments by these groups are best summarized by the words of Republican Congressman Jeb Hensarling:
“Thus, mandates like CRA ended up becoming a significant contributor to the number of foreclosures that are occurring because they required lending institutions to abandon their traditional underwriting standards in favor of more subjective models to meet their government mandated CRA objectives.”
Reasons for why the Community Reinvestment Act did not contribute to the present economic recession.The belief that the CRA played a role in the mortgage market crisis and therefore contributed to the present economic recession misconstrues the purpose of the CRA and the positive influence that it has had on low- and moderate-income communities throughout the nation and the mortgage market. CRA also provides a structure for banks that helps them become aware of business opportunities in low- and moderate-income communities without a requirement “to abandon traditional underwriting standards.”
The link between sub-prime loans and CRA loans can be dismissed through an analysis of HMDA data from 2006. A study by Compliance Tech found that 67% of sub-prime loans were made to upper or moderate income borrowers compared to the 28% received by low to moderate income borrowers. Also in 2004 and 2007 the smallest portion of sub-prime loans were received by low to moderate income borrowers. In another report released by the Federal Reserve Board in 2005 only 5.1% of the home purchase loans issued by institutions rated by CRA exams were high cost loans compared to the 34.3% issued by non-CRA covered institutions.
The influence of CRA on foreclosures is seen in a recent study of 2006 Home Mortgage Disclosure Act data showing that only 6% of higher-priced loans were originated by banks subject to the CRA. This fact thus disproves the notion that the CRA was to blame for the dramatic rise in foreclosures, and helps make the case that the non-regulated financial institutions and subsidiaries that made most of the high cost loans should come under the purview of CRA.
Successes of CRA include increased lending to minorities and low to moderate income borrowers by 20% and the signing of agreements between community organizations and lenders totaling in more than $6 trillion in reinvestment dollars since the Act’s passage in 1977, a sizeable chunk of which went to helping rebuild the Bronx. From the aforementioned facts it is clear that the CRA has only been beneficial and has not contributed to the many cause of the current economic recession.
Future Proposals for changing the Community Reinvestment Act
In the spring of 2009, the Obama Administration released a document, A New Foundation: Rebuilding Financial Supervision and Regulation, proposing a reform of the financial regulatory system. In the report, the White House proposes to create a new regulatory agency called the Consumer Financial Protection Agency (CFPA). With the creation of CFPA, existing consumer financial services and fair lending statues including the CRA will fall under the sole authority of the new agency.
According to the document, the Whitehouse agrees that CRA is not to blame for the sub-prime meltdown and that the appropriate response to the crisis is to promote the robust application of the CRA. The document goes on to explain how “the CFPA’s mission should be to promote access to financial services, especially for households and communities that traditionally have had limited access.” The Whitehouse proposes that the CFPA should have sole authority to evaluate institutions under the CRA. While the prudential regulators should have the authority to decide applications for institutions to merge, the CFPA should be responsible for determining the institution’s record of meeting the lending, investment, and services needs of its community under CRA, which would be part of the merger application.
On March 12, 2009 Rep. Eddie Bernice Johnson (D-Texas) proposed the “Community Reinvestment Modernization Act of 2009” to update and augment the CRA due to the changes in the financial industry. The bill is currently being deliberated in congress. To update and enhance CRA, the Community Reinvestment Modernization Act of 2009 proposes the following:
1. To repeal recent regulatory changes to the application of the CRA of 1977 implemented in 2004, 2005, and 2007.
2. To extend the community reinvestment obligations to financial holding companies.
3. To encourage securities, investment, mortgage, mortgage related, insurance services to be provided in low to moderate income communities by securities companies, mortgage banks, insurance companies, and credit unions.
4. To reduce a CRA rating due to predatory lending
5. To change the data disclosure requirements by establishing general requirements, updating the definitions, regulations, and reporting of different forms of information.The Beneficiaries of CRA
In addition to the people living in neighborhoods around the country, there are a number of other beneficiaries of the Community Reinvestment Act. A number of banks and bankers speak openly about the value of the Community Reinvestment Act and the benefits of CRA to their institutions; for example, Chase Manhattan Bank and the Bank of America have publicly supported the Community Reinvestment Act in the debate. The money coming into the neighborhoods is coming in the form of loans, and the banks are making money on these loans. These loans can support and develop deposit and other banking relationships with many people living in those communities.Multi-family property owners have been great beneficiaries of CRA work. In the mid 70's many Bronx owners were forced to sell at discounted prices since they were unable to obtain traditional financing. In fact, some experts anticipated the abandonment of most older multi-family housing in the Bronx. The financing doors that CRA opened allowed those owners to maintain existing properties and look into additional investment opportunities. That financing for acquisition, refinancing and rehabilitation have preserved numerous management and superintendent jobs in many Bronx neighborhoods. The renovation work has created a market for contractors. The millions of dollars that were invested to substantially renovate the thousands of abandoned apartment building units in the Bronx created many financial and job opportunities for contractors in the metropolitan region.
Examples of CRA Successes
The testimony of the value of CRA can be seen in buildings, blocks and neighborhoods around the Bronx. The most recent example, the Tremont-Anthony project utilized bank funds at market rate from Chase Manhattan Bank combined with City funds at 1% interest to allow 31 units of housing to be purchased and renovated by a community organization in the Bronx. Many Bronx apartment buildings have been similarly renovated through the City's Participation Loan Program. A number of banks participate in the program. The bank's initial involvement in the program can be traced directly to the requirements of the Community Reinvestment Act. Many years later, some banks have institutionalized these lending programs. However, either an elimination or weakening of CRA may make it difficult for these banks to maintain these programs and commitments. If competitors can operate with limited or no regulatory pressure requirements, institutions currently sympathetic to CRA may change their views quickly as they review profit margins.Unfortunately, community reinvestment projects rarely raise the same level of excitement that other types of financing can generate. A boiler loan in the Bronx may not look as exciting as a multi-million dollar commercial loan in mid-town. However, the risk of the boiler loan is much more limited and the benefits of the boiler loan are much more tangible. CRA has helped make the "boiler" type of loan a priority with financial institutions. A reduction in the scope of CRA will make this type of lending less appealing once again.
Links for Additonal Information on CRA
A blog entry from 2007 on the DMIblog.com that discusses the relevance, importance, and future of CRA in the Bronx. Click here to read.
An article published in the American Banker on December 18th, 2002, CRA at 25: Reforming an Almost Perfect Law, discusses the benefits of CRA over the last 25 years for the banking industry and the need to streamline some of the processes. Click here to read.
For Additional Information on CRA, visit the National Community Reinvestment Coalition's Web Site
