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COMMUNITY REINVESTMENT ACT OF 1977.
Term Paper ID:21623
Essay Subject:
Law keeping bank resources in community of origin. Background, enactment, purposes, amendments, provisions, implementation, problems, evaluation.... More...
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Paper Abstract:
Law keeping bank resources in community of origin. Background, enactment, purposes, amendments, provisions, implementation, problems, evaluation.
Paper Introduction:
The Community Reinvestment Act
This paper will discuss the Community Reinvestment Act of 1977 (CRA). The first part of the paper will provide some background to the CRA, including the reasons for its enactment. The second part of the paper will discuss the provisions of the Act itself and the regulations enacted to implement the Act. The third part of the paper will examine the effectiveness of the Act, including both positive and negative viewpoints.
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§ 29 1.[xxii]Dennis, supra note 2, at 13-17; see Report of the Senate FinanceCommittee on Banking, Housing and Urban Affairs on the Housing andCommunity Development Act of 1977, Report 95-175, at 33 (May 16, 1977); 123Cong. 2; Tomes, supra note 2, at 227;Comment, supra note 2, at 6 1-6 2.[v]Dennis, supra note 2, at 2-3.[vi]Pub. Even if the Act did not result in fatal creditpolicies, it has imposed onerous regulatory burdens upon these financialinstitutions and made them much less competitive in the internationalmarketplace. § 563e.3(b)(3).[xl]12 C.F.R. Second, federal funding for community and housingprograms fell of during the 198 s. The Federal ReserveBoard will usually defer approving a merger until after a CRA examinationis completed. Theregulations which effectively created a cartel in which banks and thriftsdid not compete with each other have broken down. L. 1991 Annual Review of Banking Law 225- 49.U.S. Hagler. Supreme Court sanctioned regional interstate banking in1985,[lxxvi] however, First Union took advantage of the ruling and began toengage in extensive interstate acquisition activity. The second category of opinions, on the other hand, adheres to theview that government intervention in the economic decisions of businessinstitutions represents a dangerous step towards overregulating theeconomy. 1529 (1974),amended, 15 U.S.C. As explained at the beginning of this paper,this view holds that since financial institutions take resources from thelocal communities, in the form of deposit accounts, they must also beresponsible for returning resources to the local communities, in the formof credit. The Community Reinvestment Act: Good Intentions Headed in the Wrong Direction. 1977).White, Lawrence J. 95-634. 66 Federal Reserve Bulletin 87-96 (198 ).Canner, Glenn. 475, 49 .[lxxxiii]Comment, supra note 2, at 623-24.[lxxxiv]Macey & Miller, The Community Reinvestment Act: An EconomicAnalysis, 79 Va. § 29 1(a)(1) and (3).[xciii]Macey & Miller, supra note 84, at 31 -12.[xciv]Id. L. Thus,their value as collateral was fairly poor and lending money to individualstrying to buy these buildings was not very prudent, regardless of theoutstanding personal characteristics of the individual loan applicants. Washington D.C.: Pottinger & Co., 1978.--------. The Act was intended to address the problems of theinner city and promote urban revitalization.[xx] Section 8 2 of the Actcontains Congressional findings which delineate the motivation behind, andthe purpose of, the Act. 79 Virginia Law Review 291-348 (1993).McCluskey, Orin L. Throughout this time,First Union's relationship with federal regulators was positive. It is notinconceivable that the losses from activity in this community may exceedthe profits. Finance Committee on Banking, Housing and Urban Affairs. 52,914(1989).[xxxi]See 12 U.S.C. It must then be prepared to pay off the groups which lodged theprotests and suffer the losses from the bad publicity. III, 89 Stat. 813, 814 (1981).[lxiv]Id. of Governors of Fed. In fact, much was left up to the regulatoryagencies charged with enforcing the Act.[lvi] Soon after the CRA wasenacted, the four federal agencies responsible for enforcement issued ajoint policy statement outlining the CRA examination procedures.[lvii]This statement not only forecast the regulations promulgated by theagencies but also provided some insight into how the agencies would enforcethe Act. 54 Federal Register 52,914 (1989).United States v. Revisiting the Community Reinvestment Act in an Era of Mergers and Acquisitions. 422 (1975).[xviii]12 C.F.R. There are no specific mandates on how the credit policies areto be satisfactorily accomplished, there are no rewards for complianceefforts, and there are no specific penalties for noncompliance. 2.[iv]7A Banking Law, supra note 2, at § 158. 2 (1994) [hereinafter Banking Law]; Tomes, The"Community" in the Community Reinvestment Act: A Term in Search of aDefinition, 1991 Annual Review of Banking Law 225, 226-27; Comment, TheCommunity Reinvestment Act - Asset or Liability?, 75 Marquette L. 1, 1977) (statement of Sen. CRA regulations encourage "highloan-to-value-ratio" mortgage loans in local communities, forcinginstitutions to incur greater risks. Localism in bankingtraces its roots back to the Progressive Movement at the beginning of theTwentieth Century. ComplianceHandbook, Pt. All of the protests were withdrawn afternegotiations and First Union was allowed to acquire local banks, eventhough its policies had drawn protests in the first place. The Community Reinvestment Act After Fifteen Years: It Works, But Strengthened Federal Enforcement Is Needed. Consolidation enables the assets ofweak or badly managed institutions to be transferred to efficientmanagement before these institutions became insolvent. It would require extensive, and expensive,research for banks to discover the potentially profitable loans to be madein these areas. 139, 141 (1975).[viii]Pub. Fire & Casualty Co., 472 F. During this time it received only moderateinput from regulators and few inquiries from the public.[lxxv] When the U.S. Res. 2 Fordham Urban Law Journal 281-92 (1993).-----------------------[i]12 U.S.C. The fact that it was notfinancially wise to lend money for the purpose of purchasing property whichwas in all likelihood going to lose its value in the future could notdiminish the shock value of banks taking the life savings of the residentsof poor communities and then refusing to lend money back to thecommunities.[v] Consequently, while the banks argued that they were bound to theirshareholders and depositors to employ "safe and sound" principles in theiroperations, more activists and legislators began to argue that thefinancial institutions also had an obligation to the public as a whole andto the communities from which drew their deposits. Senate. 1 1-73, 1 3 Stat. Louis Econ. 4[1].[xxxvii]12 C.F.R. Supp. CRA protestswill often be filed automatically when a bank seeks to acquire a communityinstitution; the protests are them withdrawn when the acquiring bank agreesto fund whatever the group wants money for. It was hoped thatthis data compilation would warn residents of redlining activities andcould be used to support claims of housing law violations.[ix] Thepreamble to this Act states that certain financial institutions have anobligation "to serve the housing needs of the communities and neighborhoodsin which they are located."[x] In the early 197 s, Congress outlawed discrimination on the basis ofsex, marital status, race, color, religion, national origin, or the receiptof public assistance benefits.[xi] The Fair Housing Act also prohibitsdiscrimination on the basis of race, sex, color, religion, or nationalorigin with regard to home loans.[xii] These provisions have also beeninterpreted as prohibiting discrimination with regard to mortgages,[xiii]homeowner insurance,[xiv] and appraisal techniques based on the racialcomposition of a neighborhood.[xv] Thus, a lender may not consider theracial or ethnic characteristics of the area where a mortgage is sought,even if statistical evidence supports the use of such criteria indetermining credit-worthiness.[xvi] More than just these provisions,however, prohibit such discrimination. 476 (1968).[vii]See Comment, Mortgage Discrimination: Eliminating RacialDiscrimination in Home Financing Through the Fair Housing Act of 1968, 2 St. Proxmire).[xxiii]Dennis, supra note 2, at 17-18.[xxiv]H.R. 22, 1978),cited in Cowell & Hagler, supra note 56, at 87.[lviii]Id.[lix]Id.[lx]Cowell & Hagler, supra note 56, at 87.[lxi]Joint Statement, supra note 57; see also Canner & Cleaver, TheCommunity Reinvestment Act: A Progress Report, 66 Fed. Oakley Bldg. Supp.11 6 (S.D. This undermines the proper goals of banking, which is tooffer credit through the use of safe and sound practices. Reserve Bank of Boston (1992), cited in Alvarado, Revisitingthe Community Reinvestment Act in an Era of Mergers and Acquisitions, 1993Ann. Bd. Little attention was given to theproblem of neighboring institutions in more affluent communities refusingto lend to the poor communities. 183 (codified as amended at 12 U.S.C. The second part of the paperwill discuss the provisions of the Act itself and the regulations enactedto implement the Act. § 2 2.6 n. The Three Year Experience with the Community Reinvestment Act. See Uniform Interagency RatingSystem, Community Reinvestment Act Guidelines for Disclosure of WrittenEvaluations and Revisions to Assessment Rating System, 54 Fed. As aresult of these developments, Congress enhanced the general enforcementauthority of the federal bank regulatory agencies in the FinancialInstitutions Reform, Recovery and Enforcement Act (FIRREA).[lxv] Althoughthe FIRREA was mainly intended as a response to the savings and loancrisis, it altered CRA compliance in two substantial ways. First, developments in banking law in 1985 allowed regionalinterstate banking. The Community Reinvestment Act of 1977. 1 72 (N.D. Although there might be a fewprofitable loans to be made in these communities, there are many more loanswhich will be unprofitable. Reg. § 29 6(b)(2). 67 Federal Reserve Bulletin 813-23 (1981).Comment, Mortgage Discrimination: Eliminating Racial Discrimination in Home Financing Through the Fair Housing Act of 1968. Allof these regulations are virtually identical.[xxxiv]12 C.F.R. Institutions which decide to consolidate musttake into account the CRA costs, including the likelihood of challenge andthe adverse publicity. The drafters argued that banking was alocal industry and that the banks had a responsibility towards thecommunities from which they drew their deposits. Res. at 815.[lxv]Pub. § 563e.7(d) and (f).[liv]12 C.F.R. Banking Law, Vol. 75 Marquette Law Review 599-27 (1992).Cowell, Jr., Marion A., and Monty D. It states that financial institutions arerequired to serve the needs of the communities in which they are charteredto do business and that these needs include the need for credit services,as well as deposit services. Ohio 1979).Fishbein, Allen J. Many have suggestedthat this indicates that the CRA examination process may beflawed.[lxxxiii] The Negative Aspects of the CRA The most vocal opponents of the CRA stress the inefficient economicpurpose of the Act: forcing banks to make loans to individuals who are badcredit risks. (June 6, 1977) at S.8958 (statement of Sen. Thus,ending discrimination by major financial institutions would constitute amajor step towards renewing the inner cities. L.J.293, 294-95 (1993).[lxxii]Id. Thus institutions covered by the CRA nolonger take assets from the local communities as they once did and theyhave been forced by competition to return benefits to the local communitiesin the form of services to depositors.[xciii] Finally, the CRA provides an opportunity for every community groupwith a political agenda or ax to grind to acquire concessions from businessentities. Finally, the costs imposed by the uneconomicloans which are forced upon the institution act as an implicit tax imposedby the CRA on consolidation. Rev. 291, 319-2 (1993).[lxxxv]Id. Mid-Am. L.J. It is much more economically viable for banks to seek outmost of their loans in higher-income areas, where the profitable loans willfar outnumber the unprofitable ones. Ironically, the early versions of the bill would probably havereinforced the trend of not lending to certain communities. The officers of these institutions were willing to take moneyfrom these communities but were unwilling to lend it back, especially inthe form of home mortgages. Redlining was seen as a drawing off ofresources from a community rather than as a larger problem of refusal tooffer resources to the community. § 563e.4(b)(1)-(3).[xlii]7A Banking Law § 158. Bd. When connected with the large amounts of resourcesdeposited by the residents of these redlined communities in theinstitutions in question, the refusal to lend money in these areas appearedas a perverse parody of Robin Hood: banks took money from the poorminorities to give to the rich whites. First, the five-point rating system was changed to a four-point scale;[lxvi] second, CRAevaluations were now to be publicly disclosed.[lxvii] As a result of the changes to the Act, the federal agencies chargedwith enforcement issued a new joint statement in 1989, describing thepolicy changes they would institute. Supp. Ill. "Greenlining," as this tactic called, isintended to deter institutions from engaging in redlining. It does not apply tocredit unions or the branching decisions of state-chartered savings andloans. But itis wrong to say that without the CRA banks would not have made these loans,thus making the CRA consistent with safe and sound practices.[lxxxiv] The previous practices, which tended to ignore low-income areas,cannot be said to have economically unsound. at 322-23.[lxxxviii]Id. 281, 283 (1993).[xcv]Macey & Miller, supra note 84, at 34 -41. § 1691(a)(1)-1691(a)(2).[xii]42 U.S.C. Proxmire);see also Dennis, supra note 2, at 19-21.[xxvi]Dennis, supra note 2, at 22-26.[xxvii]12 U.S.C. Ohio1976).[xiv]Dunn v. Black and Hispanicloan applicants are two to three times more likely to be denied mortgageloans as are white applicants. The first category of opinions holds a positive view of the CRA andgovernment efforts to expand credit opportunities to disadvantagedcommunities. Thus, institutions would now have to maintain reasonabledocumentation of their activities which seek to implement CRA policies.Another policy change announced in the joint statement was the eliminationof the acceptance of commitments for future CRA compliance efforts duringthe application process. 1977).[xx]Dennis, supra note 2, at 6.[xxi]12 U.S.C. With itsemphasis on returning that taken from communities, the early version wouldhave allowed neighboring institutions to avoid lending in these areas sincethey did not receive deposits from residents in these communities.[xxiii] As a result of these criticisms and problems, the bill was amended toa milder form which placed less emphasis upon community reinvestment. American Institute of Real Estate Appraisers, 442 F.Supp. Ill. 228.3-7 (1992) for the Federal Reserve System, 12C.F.R. Second, it directsbanking and thrift regulators to evaluate the extent to which lenders aremeeting the local credit needs. Thepublic was given access to information on submitted applications, the timeperiod for public comment on applications was clarified, and requests forpublic hearings on protested applications were allowed.[lxiii] In thatsame year, the Federal Financial Institution Examination Council adopted anumerical rating system for CRA examinations, providing comprehensiverating guidelines for examiners.[lxiv] Congress amended the CRA in 1989, responding to four developments inthe industry. Supreme Court has ruledthat policies which have a disproportionate impact upon a legislativelyprotected class are suspect, even though the criteria may be neutral ontheir face.[xvii] This effects test has been assumed valid in regulationspromulgated under the ECOA[xviii] and has been applied in a Title VIII(FHA) case involving certain appraisal practices which, although based onnon-racial criteria, had the effect of prolonging racially discriminatorypatterns.[xix] It was this feeling that led to the conception of the CommunityReinvestment Act. Rev. 3, 9 (1982).[lxiii]Canner, The Community Reinvestment Act: A Second Progress Report, 67Fed. Note that each federal supervisoryagency has its own set of regulations; this paper will refer to theregulations promulgated by the Office of Thrift Supervision unlessotherwise noted. Mid-Am. Midwestern Indem. Requiring a high check-cashing fee or extensive documentationwould probably forfeit the CRA credit earned. §§29 2, 29 6 (1988 & Supp. Theoverall purpose became the changing of attitudes among the officers offinancial institutions and the government regulators who oversaw them. § 563e.3(b).[xxxv]12 C.F.R § 563e.3(a). Consequently,everyone living within this area became stigmatized as bad creditrisks.[iv] The debate over these practices was quickly imbued with the rhetoricof the civil rights movement, since the affected communities were largelypoor and minority. § 563e.3(a) (1992). 183 (1989), 12 U.S.C. This practice constituted racial and ethnicdiscrimination in effect because the low- and moderate-income areas werelargely inner cities disproportionately populated by racial and ethnicminorities. Financial institutions were usingthe funds from these deposits to extend credit to other communities, butwere not extending credit to the communities from which these deposits weredrawn.[ii] The fact that these communities were generally populated byminorities brought charges of institutional racism on the part of banks andthrifts. First Union was allowed to make commitments tobetter comply with CRA in exchange for granting its applications foracquiring local banks. § 563e.4(d).[xlv]12 C.F.R. Louis Law Journal 139-58 (1975).Comment, The Community Reinvestment Act - Asset or Liability? 1977).United States v. Supp. Althoughthis vision may have had some substance behind it in the early years of theTwentieth Century, before the advent of modern transportation andcommunication technology, it bears little resemblance to the modern realityof large-scale branch banking and electronic transfers of assets. Dennis, The Community Reinvestment Act of 1977 1-2 (1978); 7ABanking Law § 158. 1 Banking Law Journal 33-57 (1983).Northeast Bancorp v. It must be awarethat the financial condition of the local institutions which it may beseeking to acquire can deteriorate during the time it takes for the CRAprocess to run its course. It can expect that protests will be lodgedwhen it first applies for a permit to operate a depository operation in thecommunity. Supp. Localism is based on three propositions which may havehad some validity during the Progressive Era but are no longer viable.First, banking is a local industry; second, banks drain credit out of localcommunities; third, banks owe special duties to local communities.[lxxxix] As noted earlier, proponents and drafters of the CRA assumed thatbanking was a local industry. 489 (S.D. First Union's firstacquisition of a bank in Florida drew protests from local community groups. Most commentators during the debatesarticulated the view that the Act was intended to address home mortgageneeds.[xxvi] The Provisions of the CRA The CRA requires depository institutions which are insured by theFederal Deposit Insurance Corporation (FDIC) or the Office of ThriftSupervision (OTS) to make efforts to meet the "credit needs of [their]entire communit[ies], including low- and middle-income neighborhoods,consistent with the safe and sound operation of such institution."[xxvii]The Comptroller of the Currency, the Board of Governors of the FederalReserve System, the Federal Deposit Insurance Corporation, and the FederalHome Loan Bank Board are required by the Act to assess how well theinstitutions involved are complying with this goal.[xxviii] Uponcompleting an examination of each institution, the appropriate regulatoryagency must prepare a written evaluation of the institution's record ofmeeting the credit needs of the community.[xxix] One of four ratings isassigned to each bank thus examined: (A) outstanding record of meetingcommunity credit needs; (B) Satisfactory record of meeting community creditneeds; (C) Needs to improve record of meeting community credit needs; and(D) Substantial noncompliance in meeting community credit needs.[xxx] One problem with the CRA is that it does not apply to many financialinstitutions which are in the business of lending. 422 (1975).Alvarado, Mario. Ifloans were offered to such individuals, the terms were likely to be sounfavorable that the loan applicant could not afford them or would refuseto accept them. Banks would now be evaluated in fiveareas[lxviii] and a significant emphasis would be placed on documentationof CRA efforts. When First Union applied to acquire another bank in Florida,it had a much more difficult time in satisfying the protesters and theregulators. The CRA forces themto return resources to the local communities in the form of credit. 2 St. Fourth, consumer debt dramatically increased during the 198 s. Reserve Bank of St. Supp. The uniform ratingsand public disclosure of these ratings aid local governments in discoveringwhich institutions are not substantially complying with the CRA and whichones have implemented lending policies most favorable to poorcommunities.[lxxxi] On the other hand, studies continue to show a disparity betweencredit availability for whites and that for minorities. § 563e.7(a); 7A Banking Law § 158. 4[2].[xliii]12 C.F.R. Miller. 93-495, 88 Stat. Extending creditto individuals in low-income areas as a whole is not a sound practice andthreatens the well-being of banks who engage in such a practice. II, § 1.45 (1979), cited in 7A Banking Law § 158. Report 95-175. at 323.[lxxxix]Id. Reserve Sys., 472 U.S.159 (1985).[lxxvii]Cowell & Hagler, supra note 56, at 95-97.[lxxviii]75 Fed. § 29 2(1).[xxix]12 U.S.C. Banksand regulators now have little leeway in CRA compliance andenforcement.[lxx] Evaluation of the CRA' Performance Opinions of the CRA generally fall under two opposing categories.First, the CRA is good legislation which, unfortunately, has not gone farenough in resolving the credit crisis of the inner cities. at 32 -21.[lxxxvii]Id. Government intervention has rarely made good economic sense andwhen the government forces financial institutions to extend credit toindividuals who are bad credit risks, it may eventually cause the death ofmany of these institutions. 7 (1981).[xix]United States v. See 12 C.F.R. 5,1989).[lxx]Cowell & Hagler, supra note 56, at 93-94.[lxxi]Fishbein, The Community Reinvestment Act After Fifteen Years: ItWorks, But Strengthened Federal Enforcement Is Needed, 2 Fordham Urb. The U.S. These are risky activities in low-income communities, where fraud rates run much higher than in othercommunities. The CRA was intended to force banks to meet the "credit needs"of local communities; in operation, however, community groups tend toforget the first word in that phrase and focus upon an elastic definitionof the second word. at 3 7-1 .[xcii]See 12 U.S.C. If there is any problem with the CRA it is that enforcementhas not kept pace with the intentions behind the law. § 29 1 (1992).[ii]W.L. L. §36 5.[xiii]Laufman v. Ohio 1976).Macey, Jonathan R., & Geoffrey P. The Community Reinvestment Act: An Economic Analysis. at 32 .[lxxxvi]Id. In addition, the localcommunity is benefited to the extent that local banks can pay higherinterest rates on deposits if they are allowed to lend the money outsidethe community. These groupsnow have a real chance of influencing the lending policies of financialinstitutions which operate in their communities. The third part of the paper will examine theeffectiveness of the Act, including both positive and negative viewpoints. As a result of these discriminatory practices,popularly known as "redlining," these neighborhoods deteriorated to thepoint that middle class families were unwilling to consider living in themand businesses were unwilling or even unable to continue operating inthem.[iii] The officers of the financial institutions, on the other hand, arguedthat they were not discriminating in the basis of race or ethnic origin butwere simply following traditional financial principles. Oakley Bldg. These groups argued that the regulators had gone easy on the institutionsand had not forced them to do much.[lxxii] Between 1977 and 1984, thirty-five Federal Reserve applications drew protests from community groups.None of these applications was denied and not one was withdrawn by theapplicant or returned by the Federal Reserve without beingapproved.[lxxiii] Between 1985 and 1988, only 2.4% of the 26, examinations conducted by federal regulators resulted in poor grades (lessthan satisfactory or below) being assigned.[lxxiv] The experience of one institution during this period provides andexample of how the CRA was being enforced. 13,742 (Apr. Moody, 422 U.S. v. The fact thatbusiness and residential buildings in these communities were deterioratingmeant that they were unlikely to retain their value in the future. No. of Real Estate Appraisers (AIREA), 442F. Midwestern Indem. The Community Reinvestment Act: A Progress Report. § 28 1 (1988).[xi]Equal Opportunity Credit Act, Pub. 9 -448, 82 Stat. The Community Reinvestment Act: Is It Doing the Job? & Loan Co., 4 8 F. Opponents of the Actargue that it forces banks and thrifts to act in an economicallyinefficient manner and had actually harmed the local communities bydiscouraging banks from opening deposit facilities in these communities. Some institutions will decide that the CRA costsoutweigh the overall benefit of consolidation and decide not toconsolidate.[lxxxviii] The basis for the CRA's treatment of banks is a theory, outmodedaccording to opponents, which holds that banking is a local industry;consequently, banks owe special obligations to their local communities.This theory was briefly discussed above, when this paper recounted thebackground to the passage of the CRA. Whilethis is true, no convincing argument has ever been proposed as to why thisis such a bad thing. Moody, 422 U.S. Monitoring methods well documented.Satisfactory: A supportive, but less comprehensive, program of determiningthe demand for and extending loans to neighborhood borrowers.Need to Improve: Inadequate program of assessing loan demands and servicesoffered. § 29 3(1).[xxviii]12 U.S.C. The statement said that the CRA was not "intended to inject hardand fast rules or ratios into the examination or application process.Rather, the law contemplates a judgmental evaluation of a lender'srecord...."[lviii] Examiners should "adjust the CRA procedures on a case-by-case basis to accommodate institutions that vary in size, expertise, andlocale."[lix] Thus, examiners have interpreted this policy as holdinglarger institutions to stricter and more thorough standards for complianceand documentation than smaller ones.[lx] The guidelines issued in the Joint Statement made it clear that theagencies expected that protests against the applications of specificinstitutions would be handled in an informal fashion, with both sidesmeeting to discuss problems and iron out solutions and agreements.[lxi] Inmost such cases, agreements were reached between the institutions andcommunity groups. 693, 7 (1978);Tomes, supra note 2, at 23 -31.[xxxiii]12 C.F.R. In fact, the groupsare often not after improving the response to credit needs at all; instead,they seek to extract funding from the banks for pet projects. House. "Flexible" and therefore risky loansare encouraged by the CRA in order to increase the amount of creditextended to persons in these communities. As aresult, this practice also endangers deposit accounts held by these banks,accounts which came from these communities. Duke Power Co., 41 U.S. § 563e.4(a).[xli]12 C.F.R. First, the CRA affirms the obligation of thesefinancial institutions to help meet the credit needs of the entirecommunities in which they are chartered; they must serve the low- andmoderate-income areas, as well as the wealthier areas. Competition is nowfierce for deposits and depositors enjoy higher prices for their deposits.In addition, various types of firms are also competing for deposits, mostvisibly mutual funds and credit unions. No. The Community Reinvestment Act: A Second Progress Report. Their vision was of a traditional bank in asmall American town which supported its community in a manner similar tothat of George Bailey's bank in the film It's a Wonderful Life. Report No. § 563e.7(j).[li]12 C.F.R § 563e.7(e).[lii]12 C.F.R. The First Union Corporation wasa bank holding company headquartered in Charlotte, North Carolina, whichowned five national bank subsidiaries in various southern states.Beginning in 1985, it participated in the acquisition of fourteen bankholding companies and in fifty-five bank mergers. Atthe same time, the term "entire community, including low and moderateincome neighborhoods," was substituted for "primary savings service area."This change was intended to emphasize the "vital interconnection betweensuccessful community and housing development and local private investmentactivities."[xxiv] Thus, the provisions were to apply not only to theparticular institutions which received deposits from the residents of theaffected area, but also those institutions in adjacent areas which might beotherwise expected to lend money to individuals and businesses in theaffected area.[xxv] The final version of the bill, as a result of the changes interminology, came closer to the intent of urban revitalization then theearlier versions. In 1989,however, this relationship changed somewhat under the new enforcementguidelines. at 3 3-3 4.[lxxxii]Munnell, et al., Mortgage Lending in Boston: Interpreting HMDAData, Fed. Proponents of the CRA argue that the law is a good one because it hasforced banks to return resources back to the communities from which theywere drawn. Poor record of loan approval in low-income neighborhoods.Substantial Noncompliance: Community needs are rarely, if ever, consideredby management and board. The Housing and Urban Development Act of 1968[vi] was intended toencourage the rehabilitation of homes in marginal areas through the use ofFederal Housing Administration-insured loans. at 3 6.[lxxx]Fishbein, supra note 71, at 297-98.[lxxxi]Id. Bull. American Inst. 33, 51 (1983).[xvii]Griggs v. The Community Reinvestment Act of 1977: Defining "Convenience and Needs of the Community." 95 Banking Law Journal 693-717 (1978).Dunn v. Duke Power Co., 41 U.S. Banks should be allowed to lend money where they canget the most favorable terms, even if this location is outside thecommunity from which the deposits were received. Rather than just focusing upon the institutions actuallyserving the areas, the final version of the bill encouraged all financialinstitutions to invest in poor urban areas by lending money to residents ofthese areas. at 333-37; White, The Community Reinvestment Act: Good IntentionsHeaded in the Wrong Direction, 2 Fordham Urb. The agencies now require applicants to addresstheir CRA responsibilities and have the necessary policies in place andworking before they file an application.[lxix] These changes in the Actand the regulatory agencies' policies greatly strengthen the CRA. In the cases where agreements were not reached, thefederal agencies did not deny the application but attempted to securefuture commitments from the applicants for increased efforts to comply withthe CRA.[lxii] In 1981, the Federal Reserve Board refined the CRA guidelines. Thelanguage of the Act leaves several key terms (such as low- and moderate-income neighborhoods) undefined, forcing the regulatory agencies to come upwith their own definitions. Between 1977 and 1985,First Union developed its CRA compliance procedures and established apattern of annually renewing required documentation and market delineationsand obtaining board approvals. at 3 4-3 7.[xci]Id. These twelve factors can be arranged into five categories.The first category evaluates an institution's activities regarding effortsto ascertain the credit needs of its community. 1125 (1975), as amended, Pub.L. § 563e.7(k) and (l).[lvi]Cowell & Hagler, The Community Reinvestment Act in the Decade of BankConsolidation, 27 Wake Forest L. These new institutions provideservices similar to those of banks and have forced banks to increase thebenefits provided to depositors. The whole process became an increasingly vicious circle:few loans were offered because of the perceived condition of the geographicarea and this condition worsened as no credit was extended. Critics feared that the bill would seriouslydisrupt the operation of the banking system, forcing financial institutionsto conduct business in an unprofitable manner, scaring off investors anddepositors. In addition, the normal costs of doing business in thiscommunity will be much higher simply because of the hurdles which must becleared by the institution. No viable neighborhood lending programs andlittle contact with community groups. Reserve Sys., 472 U.S. 159 (1985).Tomes, Jonathan P. 87, 9 (198 ).[lxii]Bowsher, The Three Year Experience with the Community ReinvestmentAct, 64 Fed. Low-cost checking serviceshave proven to be unprofitable in studies of such services.[lxxxvi] Besides encouraging unprofitable loans, the CRA also impedes theefficient evolution of the banking market structure by discouraging theconsolidation of banking institutions. Thus, if more profitable loan opportunities lie outside thelocal community, then the CRA is nothing more that a government-imposedcredit allocation which impairs the efficiency of the economy by directingcredit to lower-value uses.[xci] The final proposition, that banks owe special duties to their localcommunities, is stated explicitly in the text of the CRA.[xcii] Thisproposition, however, has little validity in an age where banks and savingsassociations no longer enjoy a monopoly on the deposit franchise. 489 (S.D. Second, the CRAwas enacted by generally good intentions but its drafters did notunderstand the operations of the banking industry; consequently, the Act isdangerous because it forces banks to adopt unsafe and unsound principleswhen extending credit. If a proposed merger precipitates a CRA protest, theagencies will often delay approval until after a CRA hearing can takeplace.[lxxxvii] Even when a delay does not preclude a merger, the CRA protests resultin increased costs. § 563e.3(b)(1).[xxxviii]12 C.F.R § 563e.3(b)(2).[xxxix]12 C.F.R. Delays imposed bythe CRA on mergers and acquisitions, however, often deny such actionsbefore the troubled institutions become insolvent. 1993 Annual Review of Banking Law 475-92.Bowsher, Norman N. The Act provides theseagencies with the power to promulgate regulations which will aid them indetermining whether financial institutions have demonstrated that theirdeposit facilities serve the convenience and needs of the community andwhether they are continuing to help meet the credit needs of the localcommunities.[xlvi] In addition, the regulations provide regulators with twelve factorsof consideration to be utilized in assessing an institution's CRAperformance. Consolidation allows bank assets tobe transferred to more efficient users, thus increasing efficiency andprofitability, as well as stability. 1977).[xvi]McCluskey, The Community Reinvestment Act: Is It Doing the Job?, 1 Banking L.J. 64 Federal Reserve Bank of St. § 563e.7(h).[lv]12 C.F.R. § 563e.4(1)-(2).[xlvi]12 U.S.C. 424 (1971); Albermarle Paper Co.v. 94-2 , tit. The first denial of anapplication occurred in 1989, when the Federal Reserve Board denied themerger application by the Continental Bank Corporation of Illinois toacquire an Arizona bank.[lxxviii] In this case, the regulators said thatwhile Continental had promised to make commitments to improve its CRAcompliance, it could not establish a record indicating "a basic level ofcompliance on which the commitments could be evaluated."[lxxix] Most ofthe leverage of the community groups, however, continues to exist with theability of the community leaders to force a negotiation, where theinstitutions must make commitments to improve their community reinvestmentrecords. 1993)); Cowell & Hagler, supra note 56, at 89-92.[lxvi]12 U.S.C. This angered community groups and leaders, who allegedthat redlining did not disappear after CRA was enacted and that banks andthrifts had done little to improve the servicing of community credit needs. Low- and moderate-income families and individuals have rarelybeen the recipients of credit from major financial institutions and thislack of credit has prevented them from advancing economically. Cleaver. at 296.[lxxiii]Cowell & Hagler, supra note 56, at 1 1.[lxxiv]Fishbein, supra note 71, at 296.[lxxv]Cowell & Hagler, supra note 56, at 94-95.[lxxvi]Northeast Bancorp v. Federal Reserve Sys. Low and moderate income areas are defined ascensus tracts where the median family income is less than eighty percent ofthe median family income for the SMSA. Ill. § 29 2(3) for a definition of "application for adeposit facility."[xxxii]Dennis, The Community Reinvestment Act of 1977: Defining"Convenience and Needs of the Community," 95 Banking L.J. Report of the Senate Finance Committee on Banking, Housing and Urban Affairs on the Housing and Community Development Act of 1977. S.16114 (Oct. And high-income minorities are more likelyto be turned down than low-income white applicants.[lxxxii] But governmentstatistics also show a high rate of CRA compliance. The regulators encouraged First Union to meet with the protesters and aresolution was reached which committed First Union to augmenting its CRAcompliance in Florida markets. Congress. Bull. This legislation was notvery successful, however, because few financial institutions were willingto take the risks of lending in these areas.[vii] In 1975, the HomeMortgage Disclosure Act[viii] was enacted, requiring financial institutionsto compile data on residential mortgage loan activity. Fire & Casualty Co., 472 F. of Real Estate Appraisers (AIREA), 442 F. Bull. 1 72 (N.D. Basically, it was being argued that residents ofthese communities were placing their money in these institutions, in theform of deposit accounts, but were not receiving anything in return fromthe institutions, in the form of credit. 4[1].[xxxvi]7A Banking Law § 158. The CRA established a system in which certain institutions applyingfor federal permits to operate depository facilities in certain areas hadto be rated according to their activities in extending credit to the localcommunity involved. Applications subject to CRA assessment do not include those seekingentry into the Federal Reserve System; they only include "applications fora deposit facility."[xxxi] As a result, the CRA applies to only one-halfof the savings and loan organizations in the United States.[xxxii] An important part of complying with CRA is delineating the communitywhich an institution serves. of Governors of Fed. 11 6 (S.D. Beginning in 199 , those rankings wereclarified:Outstanding: a record of meeting community credit needs. The Community Reinvestment Act in the Decade of Bank Consolidation. Rec. New York: Matthew Bender, 1994.Laufman v. § 563e.7(b).[xlix]12 C.F.R. § 563e.4(c)(1)-(3).[xliv]12 C.F.R. Similarly, its subsequent acquisitions drewprotests from community groups in the areas where it acquired institutionsand resolutions were reached in similar fashions. 95th Cong., 1st Sess., 1977.U.S. Supp. Reg. Rev. of Banking L. This view reflects the reasons why the CRA was passed in thefirst place. L. Conf. 4[4].[xlviii]12 C.F.R. Explicit lendingguidelines are actively promoted and overseen by senior management andboard members. These activities mayinclude communications with community members, participation in publicprograms, relationships with nonprofit developers, and collection of localdemographic data reflecting loan activity.[xlvii] The second categoryassesses marketing programs and the types of credit extended. Third, the Act permits regulators toimpose sanctions on lenders with weak compliance records by denyingapplications for deposit facilities.[lxxi] In spite of the intent behind the CRA and the language which requireslending institutions to serve their community credit needs, many havecomplained that the CRA's provisions are vague and have not been properlyenforced by the federal regulatory agencies. This is done by referring to a map:[xxxiii]the local community consists of the contiguous areas surrounding each ofthe financial institution's offices.[xxxiv] The delineated area may notexclude low or moderate income neighborhoods.[xxxv] Regulators will besuspicious of unusually shaped communities and regulatory agencies havebroad discretion in determining the reasonableness of delineatedcommunities.[xxxvi] Regulations specify the methods by which an institution may delineatea CRA community. Attracting deposits in this community means that theinstitution must also make extensive loans to the low-income areas of thecommunity, loans which will generally be unprofitable. The CRA officially establishes and clarifies the publicresponsibilities of federally insured financial institutions to their localcommunities in three ways. Conference Report to Accompany HR 6655. No. Ohio 1979).[xv]United States v. Institutions covered by the CRA are reluctant to enterthe market of low-income communities because of all the problems inherentin this market. Rec. § 563e.7(i).[l]12 C.F.R. Report No. § 29 6(a)(1) (1992).[lxviii]See supra text accompanying notes 47-55.[lxix]Federal Bank Regulatory Agencies' Joint Statement on InformationRequirement of the Community Reinvestment Act, 54 Fed. And the credit needs most at issue in enacting the provisionswere those associated with housing. Congress. 1 1-73, § 1211, 1 3 Stat. The basic aim of the Actwas to eliminate the long-standing practice of redlining, whereby banksrefused to extend credit to certain areas based upon the incomecharacteristics of that area. 424 (1971).Lapine, Kenneth M. The adverse publicity also damages the institution'sreputation and customer base. Thus, groups try to get whatever they can out ofbanks, regardless of the cost to the institutions or the long-term effectson the provision of deposit services to the community. § 28 1 et seq(1988).[ix]7A Banking Law § 158. This drawing off of resources was saidto cause the decline of communities; the issue of whether the community hasenough resources in the first place to sustain its own demand was notinitially considered.[xxii] The criticisms of the early versions of the bill figure prominentlyin the hearings and debates. Notes BibliographyAlbermarle Paper Co. 3 4 (1989).[lxxix]Id. § 563e.7(g).[liii]12 C.F.R. If entitieswith large amounts of assets refuse to deposit these assets in banks whichengage in redlining practices, it is likely that the banks will changetheir practices in order to attract these depositors. L. The specific types of credit availablemust be described in the statement.[xlii] The regulations also encouragethe inclusion of: (1) a description of how the institution's currentprograms are helping to meet community credit needs, (2) a current reportof the institution's record in helping meet such needs, and (3) adescription of the institution's efforts to determine the credit needs ofthe community, including communications with members of the community withrespect to credit services.[xliii] The statement reviewed annually andamended as needed[xliv] and must be available for public inspection at themain office of the institution and each branch office in the delineatedcommunity.[xlv] Using these formal requirements, the federal regulatory agenciesassess the CRA compliance of an institution. Ill. While agreements were finally reached, regulators were notentirely satisfied with First Union's CRA compliance under the 1989standards.[lxxvii] The experience of First Union illustrates some of the problems of theCRA prior to the FIRREA. 26, 1977).[xxv]123 Cong. 1 72 (N.D. Background The Community Reinvestment Act originated out of complaints thatbanks and thrifts were taking resources out of poor communities withoutputting anything back. Community groups were given the opportunity to lodgeprotests against the institutions and both sides were encouraged to reach anegotiated settlement. Louis L.J. Bankdepositors make fewer physical trips to their banks, relying instead uponautomatic deposits of their paychecks and credit card transactions.Efficiency has effectively weakened the ties between banks and their localcommunities.[xc] The second assumption, that banks drain credit out of localcommunities, is based upon the fact that banks attract deposits from localcommunities then lend this money to borrowers in different locales. at 3 3-3 4.[xc]Id. § 29 6(a)(1).[xxx]12 U.S.C. 2 Fordham Urban Law Journal 293-31 (1993).Griggs v. 7A. The Positive Aspects of the CRA According to proponents of the CRA, it represents an importantmilestone on the road to making financial institutions more responsible tothe communities they serve. Prior to the passage of theFIRREA in 1989, community groups complained that federal regulators wenttoo easy on financial institutions when examining them for CRA compliance.It was easy for critics to point to the guidelines established by theagencies which promoted informal meetings between institution officers andcommunity leaders in order to come to some sort of understanding regardingthe serving of community credit needs. Although the CRA provided community groups with a voice when it wasfirst enacted in 1977, it was not until the 1989 amendments that thesegroups obtained real leverage over financial institutions. § 29 1(a)(1) and(3).[xlvii]12 C.F.R. 1 72 (N.D. Therefore, Federal financial supervisoryagencies have the responsibility of encouraging financial institutions tomeet the needs of local communities.[xxi] On the other hand, debates and hearings on the bill focused uponredlining as a problem of local banks not returning resources to thecommunities from which they were drawn. The CRA thus becomes aneffective tool for extortion.[xciv] Given all of these problems, it is not surprising that opponents ofthe CRA argue that the Act actually harms the very communities it isdesigned to serve. Legislation was enactedduring the late 196 s and early 197 s with the aims of prohibitingredlining and preventing financial institutions from taking money fromcommunities in the form of deposits without returning it in the form ofloans. 95-634, Conference Report to Accompany HR 6655,95th Cong., 1st Sess., at 76 (Sept. Certainly there are some loansin low-income areas which can be profitable and are not bad risks. Rev. 83, 86-87 (1992).[lvii]Community Reinvestment Act Examination Procedures (Nov. Depository institutions areencouraged by the CRA to earn credits by cashing government checks oroffering low-cost checking accounts. Res. Otherwise, they are essentially taking resources from thesecommunities to lend to other, wealthier, communities. American Inst. The Community Reinvestment Act This paper will discuss the Community Reinvestment Act of 1977(CRA).[i] The first part of the paper will provide some background to theCRA, including the reasons for its enactment. 27 Wake Forest Law Review 83- 1 1 (1992).Dennis, Warren L. Louis Economic Review 3 (1982).Canner, Glenn, and Joe M. Those institutions whichrefuse to change their policies may have their applications to operatedeposit facilities in these communities denied. Third, community groups began renewingcharges of discriminatory lending practices against financial institutions. Yet negotiations still led tothe withdrawal of the protests and the granting of the application, eventhough the regulators still had serious doubts about First Union's CRAcompliance policies. It is little wonder then that many institutionswill likely decide that operations in the particular community in questionmay not be worth all of the trouble of complying with the CRA process.[xcv] Conclusion The Community Reinvestment Act was enacted in 1977 in an effort tomake banks and thrifts more responsive to local community credit need inlow- and moderate-income areas. § 29 6(b)(2) (1992).[lxvii]12 U.S.C. Rev. 599,6 1 (1992).[iii]Dennis, supra note 2, at 2; Tomes, supra note 2, at 227; 7A BankingLaw, supra note 2, at § 158. It was notuntil the more stringent guidelines came out in 1989 that First Unionexperienced serious opposition and problems. § 345.3-7 (1992) for the Federal Deposit Insurance Corporation. § 25.3-7 (1992) for the Comptroller of theCurrency, 12 C.F.R. No. 2.[x]12 U.S.C. It will be presented in more detailhere, as the opposition to this theory is considered. Searching for the few profitableloans in a low-income area will waste the banks' resources and destroyshareholder confidence.[lxxxv] By requiring that banks make loans in these areas, the CRA reducesthe safety and soundness of banks. Thus, protests still are made with the intention of extractingcommitments, rather than simply blocking the acquisition of localfacilities.[lxxx] The public disclosure of ratings, enacted in 199 , allows communitiesto evaluate individual institutions and develop strategies for influencingcredit extension policies outside of formal protests. 95th Cong., 1st Sess., 1977.Uniform Interagency Rating System, Community Reinvestment Act Gudelines for Disclosure of Written Evaluations and Revisions to Assessment Rating System. In addition, regulators wereencouraged to allow institutions to present plans for future complianceactivities when it was discovered that little had been done to serve thelocal communities. The "Community" in the Community Reinvestment Act: A Term in Search of a Definition. American Institute of Real Estate Appraisers, 442 F. For instance,several large cities have tied the placement of public funds to specificlending activity requirements. Thisincludes an evaluation of the extent of service marketing and theavailability of special programs to low and moderate incomeindividuals,[xlviii] the origination and purchase of community loans,[xlix]and the level of participation in government insured, guaranteed, orsubsidized loan programs.[l] The third category of factors is used toevaluate the institution's geographic distribution of loans[li] and itsrecord of opening and closing offices.[lii] The fourth category of factorslooks at discrimination and illegal credit practices.[liii] The fifthcategory concerns community development, such as participation in localinvestment and development projects,[liv] and the ability of an institutionto meet local community credit needs based upon its financial condition andsize.[lv] The most common criticism of the language of the Act is that it istoo vague. First, it may use existing political or governmentalboundaries, such as the Standard Metropolitan Statistical area (SMSA), toidentify the community being served.[xxxvii] Second, it may use its owneffective lending territory, which is defined as the local area around eachoffice in which the institution makes a substantial portion of its loansand all areas equally distant from each of its offices.[xxxviii] Third, itmay use any other reasonably delineated area that meets the CRA's purposeand does not exclude the low and moderate income areas.[xxxix] Each institution must adopt a CRA statement, similar to a generalprospectus regarding community lending commitments.[xl] This statementmust contain the delineation of the local community, a list of specifictypes of credit available to the local community, and a copy of the CRAnotice.[xli] The statement must also contain a map of the local communityto which the statement pertains. & Loan Co., 4 8 F.
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