Long Overdue: Updating the Community Reinvestment Act

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November 2010; Source: US Banker | There is something missing in the Dodd-Frank Act’s comprehensive financial services regulation bill—in addition to not dealing with the looming problem of Fannie Mae and Freddie Mac. That something missing is the long-overdue review and overhaul of the Community Reinvestment Act. What’s more, with a potential change in the composition of Congress after November 2, it might be that a deadlock between the two houses of Congress, or between Congress and the White House, stymies the “modernization” of CRA.

Banks would certainly like to see CRA relegated to the dustbin of governmental regulation, though many believe that CRA is not going to go away. Community advocates would like to see CRA toughened beyond current rules that they deem to have become ineffective in meeting community needs. What are some of the potential issues that Congress might have to deal with? Here are a few:

  • Should all financial services companies, such as insurance companies, meet the same CRA standards that apply to banks?
  • If CRA is extended beyond banks, which financial services companies would be covered? A bill introduced in the House would extend CRA to hedge funds, mortgage companies, and investment banks, but not credit unions. The banks ask why not credit unions too?
  • Why should CRA only apply to the banking part of banks and not extend to bank holding company affiliates such as their subsidiary mortgage lenders and investment firms?
  • Shouldn’t banks get CRA credit for reinvestment loans they make anyplace in the nation, as opposed to only where they have branches?
  • Rather than looking only at housing-focused lending, shouldn’t CRA be improved to give increased attention and credit to bank lending for small businesses or innovative support services such as financial literacy initiatives or savings programs geared to low- and moderate-income customers?
  • Should banks get extra credit for “high-impact” projects such as donating or selling at deep discount properties to nonprofit community organizations?
  • Should there be a stronger CRA emphasis on services to customers such as credit or homebuyer counseling or for providing technical and financial assistance to community nonprofits?
  • Should banks be given credit for making grants to community groups, so long as they meet community needs, as opposed to emphasizing originating loans when the loans might not be what are needed?

The nonprofit sector’s stake in CRA modernization is obvious. It’s not just for community development groups.—Rick Cohen

  • Kate Barr

    Rick,
    The present version of CRA does include all of your last four bullet points. The exam format for large banks includes three combonents: lending, investment and services. the lending test places high priority on small business loans, the investment test includes grants and donated goods and services, and the services test includes low cost accounts, counseling services, and financial assistance to community groups.

    CRA has been an essential tool in developing communities and transforming neighborhoods. It absolutely should be strengthened.
    Kate

  • rick cohen

    Agreed! But those elements are under attack or should be strengthened. I’ve been a CRA advocate before the days when there was a CRA. But I’ve been stunned at times to hear progressives argue, amazingly, that banks have been overregulated, that their overregulation helped cause the financial sector collapse, that CRA is no longer needed because it is an accepted part of good bank practice. We need to protect and strengthen CRA and the items I bulleted.