Revisiting the CRA: Perspectives on the Future of the Community Reinvestment Act

Volume 4, Issue 1 | February 1, 2009

February 2009


Eric Rosengren
President and CEO
Federal Reserve Bank of Boston

Janet Yellen
President and CEO
Federal Reserve Bank of San Francisco

The Community Reinvestment Act (CRA), enacted in 1977, has fostered access to financial services for low- and moderate-income communities across the country. Together with other antidiscrimination, consumer protection, and disclosure laws, the CRA remains today a key element of the regulatory framework, encouraging the provision of mortgage, small business, and other credit, investments, and financial services in low- and moderate-income neighborhoods.

Yet, since the passage of the act, the financial landscape has changed dramatically. How well has the CRA kept up over 30-plus years? Wherever one stands on the answer to this question, there is a general consensus on the need to reexamine this important regulation in the context of financial modernization.

To commemorate the 30th anniversary of the CRA, the Federal Reserve Bank of Boston hosted a special forum in October 2007. Researchers, regulators, bankers, nonprofit practitioners, and community advocates participated in the event. The discussion began with a speech on the legislative intent of the original act. Speakers addressed the changes and consolidation in the banking industry, the growth of non-bank providers of financial services, the major revisions to the CRA and to the examination process, innovations at the state level, and the demographic changes in low- and moderate-income communities. The event closed with a discussion of the future of the CRA, including proposed alternatives. Overall, this discussion underscored the need for an even deeper look at the CRA.

To tackle the many-sided issue of CRA reform, the Federal Reserve Bank of Boston partnered with the Federal Reserve Bank of San Francisco in assembling a team of experts to share their ideas, opinions, and research. The authors who contributed to this project include academic researchers, current and former regulators, community development practitioners, and financial service industry representatives. Of course, they have various, and sometimes divergent views, but they possess a common desire to improve the regulatory system to ensure access to financial services for all in a safe and sound way.

In this volume, we capture many different perspectives on the past and future of the CRA, provide facts, and highlight possible reforms—all in an effort to foster debate. Our efforts were helped considerably by the participation of Ellen Seidman of the New America Foundation, whose knowledge and expertise was invaluable in identifying topics and authors for this volume.

We also address the critics of the act who have pinned the blame for the subprime mortgage crisis on the CRA. There is no empirical evidence to support the claim that the CRA is responsible for the crisis, as several authors in the volume make clear. First, former Federal Reserve Governor Randall Kroszner argues in a speech included in this volume that the CRA did not contribute to any erosion in safe and sound lending practices. He specifically cites an analysis by the Federal Reserve Board that revealed that 60 percent of higher-priced loans went to middle- or higher-income borrowers or neighborhoods not covered by the CRA, and only six percent of all higher-priced loans were extended by CRA-covered lenders to lower-income borrowers or neighborhoods in their CRA assessment areas. Moreover, a research paper by the Federal Reserve Bank of San Francisco excerpted in this volume finds that loans originated by CRA-covered lenders were significantly less likely to be in foreclosure than those originated by independent mortgage companies not covered by the CRA.

The current financial crisis challenges us to reconsider the entire financial regulatory system, including updating the CRA. Proposals calling for reform have rightly been offered in this volume. We welcome a reasoned debate about solutions.

The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System. Material herein may be reprinted or abstracted as long as the Community Development Investment Review is credited.

Table of Contents

CRA Lending During the Subprime Meltdown

Elizabeth Laderman and Carolina Reid, Federal Reserve Bank of San Francisco

The current scale of mortgage delinquencies and foreclosures, particularly in the subprime market, has sparked a renewed debate over the Community Reinvestment Act (CRA) and the regulations governing home mortgage lending.

A Banker’s Quick Reference Guide to CRA

Federal Reserve Bank of Dallas

This publication is a guide to the CRA regulation and examination procedures. It is intended for bank CEOs, presidents, and CRA and compliance officers as a tool for accessing CRA information quickly.

The Community Reinvestment Act: Good Goals, Flawed Concept

Lawrence J. White, Stern School of Business, New York University

My views about the Community Reinvestment Act (CRA) surely differ from those of many of the other individuals who will contribute to this volume. I believe that, despite the good intentions and worthwhile goals of the CRA’s advocates, the CRA is an inappropriate instrument for achieving those goals.

A Principle-Based Redesign of HMDA and CRA Data

Adam Rust, Community Reinvestment Association of North Carolina

Community groups rely on the Home Mortgage Disclosure Act (HMDA) and the Community Reinvestment Act (CRA) databases to engage in advocacy. Those databases, however, have not kept up with recent financial innovations, particularly in subprime mortgage lending, and need to be reformed.

Community Reinvestment Emerging from the Housing Crisis

Michael S. Barr, University of Michigan Law School

We need to clean up the mortgage business, drive out abuses, and develop a system of consumer protection, prudential supervision, capital requirements, and transparency that restores trust and confidence in our financial system.

Putting Race Explicitly into the CRA

Stella J. Adams, S J Adams Consulting

The Community Reinvestment Act (CRA) was designed to correct market failures thirty years ago. The reimagining of CRA must address the remnants of twentieth-century market and government failures with twenty-first century solutions.

The CRA as a Means to Provide Public Goods

Lawrence B. Lindsey, The Lindsey Group

The Community Reinvestment Act (CRA) has proved to be a unique experiment in banking regulation. As the Federal Reserve Governor with responsibility for consumer regulation and community affairs oversight during much of the 1990s, I look back fondly on my experience.

The Community Reinvestment Act: 30 Years of Wealth Building and What We Must Do to Finish the Job

John Taylor and Josh Silver, National Community Reinvestment Coalition

The Community Reinvestment Act (CRA) is a comprehensive law that has leveraged trillions of dollars in loans, investments, and bank services for minority and working-class neighborhoods. The CRA was passed in 1977 in response to the refusal of some banks to make loans available in minority and working-class communities. Since that time, the CRA has placed a continuing and affirmative obligation on banks to help meet the credit needs of the local communities in which they operate.

CRA 2.0: Communities 2.0

Mark Pinsky, Opportunity Finance Network

Congress predicated the Community Reinvestment Act (CRA) on one principle and two key facts when it passed the act in 1977. The principle is core and remains true.

What Lessons Does the CRA Offer the Insurance Industry?

Bridget Gainer, Aon Corporation

In light of the $150 billion bailout of AIG, there has been a renewed call for increased federal involvement in the insurance industry, including a proposal to extend something similar to the Community Reinvestment Act (CRA) to insurance providers.

Expanding the CRA to All Financial Institutions

Liz Cohen and Rosalia Agresti

The central premise of this article is that in return for access to the Federal Reserve’s Discount Window, investment banks, broker-dealers, and other financial institutions should be required to comply with an updated CRA. Fair access for all Americans to the full range of financial services is essential to restore our faith in the U.S. financial system and the health of our economy.

A Framework for Revisiting the CRA

John Olson, Prabal Chakrabarti, and Ren Essene, Federal Reserve Bank of San Francisco

The Community Reinvestment Act (CRA) of 1977 was enacted to address the concern that depository institutions had not met the credit needs of their entire communities. In many ways, the act can be credited with changing the way that banks do business in low- and moderate-income (LMI) communities.

A More Modern CRA for Consumers

Ellen Seidman, ShoreBank and New America Foundation

When the Community Reinvestment Act (CRA) was enacted in 1977, low-income American communities, especially in cities, were suffering from disinvestment and a lack of credit availability. The CRA requires banks and thrifts operating in and near those communities to lend in them, consistent with safe and sound operations. Since 1977, the financial services system and financial needs of low- and moderate-income consumers have changed dramatically.

The Community Reinvestment Act: Past Successes and Future Opportunities

Eugene A. Ludwig, Promontory Group of Companies; James Kamihachi, Promontory Financial Group; and Laura Toh, Promontory Financial Group

More than 30 years ago, before passage of the Community Reinvestment Act (CRA), relatively few banks made meaningful numbers of loans to people with low and moderate incomes.

A Tradable Obligation Approach to the Community Reinvestment Act

Michael Klausner, Stanford Law School

As in the environmental protection context, a tradable obligation approach to the CRA has the potential to enhance the provision of financial services to low and moderate-income communities at lower cost than does the current command-and-control approach.

The Community Reinvestment Act at 30 Years

The American Bankers Association

Banks are in the business of financial intermediation—of bringing together those with capital and those who need capital. We do not build communities on our own, but it is fair to say that few communities in America are built—and none prospers—without banks playing their important role of putting savings to work.

It’s the Rating, Stupid: A Banker’s Perspective on the CRA

Mark Willis, Ford Foundation Visiting Scholar

The Community Reinvestment Act (CRA) of 1977 has survived more than three decades of restructuring of the banking industry, of sporadic changes in the regulations, and of an evolution of best practices in community development. The CRA has seen many successes but is now in need of a major overhaul if it is to continue to play a meaningful role in strengthening low- and moderate-income (LMI) communities.

The Community Reinvestment Act: Outstanding, and Needs to Improve

Roberto Quercia, The UNC Center for Community Capital; Janneke Ratcliffe, The UNC Center for Community Capital; with Michael A. Stegman, The John D. and Catherine T. MacArthur Foundation

The Community Reinvestment Act (CRA) of 1977 responded to charges of redlining and discrimination by financial institutions.

The CRA within a Changing Financial Landscape

Robert B. Avery, Federal Reserve Board of Governors; Marsha J. Courchane, Charles River Associates, International; and Peter M. Zorn, Freddie Mac

The financial landscape has changed significantly since the passage of the Community Reinvestment Act (CRA) in 1977. In this paper we provide an overview of how these changes have affected the coverage of the CRA, the structure of CRA-regulated institutions, and their effectiveness in meeting the goals of the CRA.

The 30th Anniversary of the CRA: Restructuring the CRA to Address the Mortgage Finance Revolution

In deference to concerns about unsound and unprofitable loans, the CRA did not establish specific benchmarks or levels of credit, nor did it provide much guidance as to how regulators should evaluate bank performance. Instead, the CRA created an affirmative obligation for banks to reinvest in poor communities.

The Community Reinvestment Act and the Recent Mortgage Crisis

Randall Kroszner, Booth School of Business, University of Chicago

The Federal Reserve, together with the other federal financial regulatory agencies, has had some experience in addressing the credit needs of underserved communities, using the Community Reinvestment Act (CRA) as our guide.