"The Community Reinvestment Act"
The Community Reinvestment Act (or CRA, Pub.L. 95-128, title VIII, 91 Stat. 1147, 12 U.S.C. § 2901 et seq.) is a United States federal law that requires banks and savings and loan associations to offer credit throughout their entire market area and prohibits them from targeting only wealthier neighborhoods with their services, a practice known as "redlining." The purpose of the CRA is to provide credit, including home ownership opportunities to underserved populations and commercial loans to small businesses. It has been subjected to important regulatory revisions.
Contents Original Act 2 Clinton Administration Changes of 1995 3 George W. Bush Administration Proposed Changes of 2003 4 Changes of September 2005 5 Criticism 6 References 7 External links
Original Act The CRA was passed into law by the 95th United States Congress in 1977 as a result of national grassroots pressure for affordable housing, and despite considerable opposition from the mainstream banking community. Only one banker, Ron Grzywinski from ShoreBank in Chicago, testified in favor of the act. The CRA mandates that each banking institution be evaluated to determine if it has met the credit needs of its entire community. That record is taken into account when the federal government considers an institution's application for deposit facilities, including mergers and acquisitions. The CRA is enforced by the financial regulators (FDIC, OCC, OTS, and FRB).
The bill encouraged the Federal National Mortgage Association, commonly known as Fannie Mae, to enable mortgage companies, savings and loans, commercial banks, credit unions, and state and local housing finance agencies to lend to home buyers. It also encouraged the Federal Home Loan Mortgage Corporation, commonly known as Freddie Mac, to buy mortgages on the secondary market and sell them as mortgage-backed securities on the open market. Due to massive financial losses, on September 7, 2008 the Federal Housing Finance Agency (FHFA) put Fannie Mae and Freddie Mac under the conservatorship of the FHFA.
Clinton Administration Changes of 1995 In 1995, as a result of interest from President Bill Clinton's administration, the implementing regulations for the CRA were strengthened by focusing the financial regulators' attention on institutions' performance in helping to meet community credit needs.
These revisions with an effective starting date of January 31, 1995 were credited with substantially increasing the number and aggregate amount of loans to small businesses and to low- and moderate-income borrowers for home loans. These changes were very controversial and as a result, the regulators agreed to revisit the rule after it had been fully implemented for seven years. Thus in 2002, the regulators opened up the regulation for review and potential revision.
Part of the increase in home loans was due to increased efficiency and the genesis of lenders, like Countrywide, that do not mitigate loan risk with savings deposits as do traditional banks using the new subprime authorization. This is known as the secondary market for mortgage loans. The revisions allowed the securitization of CRA loans containing subprime mortgages. The first public securitization of CRA loans started in 1997 by Bear Stearns. The number of CRA mortgage loans increased by 39 percent between 1993 and 1998, while other loans increased by only 17 percent.
Other rule changes gave Fannie and Freddie extraordinary leverage, allowing them to hold just 2.5% of capital to back their investments, vs. 10% for banks. By 2007, Fannie and Freddie owned or guaranteed nearly half of the $12 trillion U.S. mortgage market.
George W. Bush Administration Proposed Changes of 2003 In 2003, the Bush Administration recommended what the NY Times called "the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago." This change was to move governmental supervision of two of the primary agents guaranteeing subprime loans, Fannie Mae and Freddie Mac under a new agency created within the Department of the Treasury. However, it did not alter the implicit guarantee that Washington will bail the companies out if they run into financial difficulty; that perception enabled them to issue debt at significantly lower rates than their competitors. The changes were generally opposed along Party lines and eventually failed to happen. Representative Barney Frank (D-MA) claimed of the thrifts "These two entities—Fannie Mae and Freddie Mac—are not facing any kind of financial crisis, the more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing." Representative Mel Watt (D-NC) added "I don't see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing."
Changes of September 2005 This section may contain original research or unverified claims. Please help Wikipedia by adding references. See the talk page for details.(September 2008)
Among banks and the regulatory agencies, there was a consensus that data collection, recordkeeping, and reporting requirements imposed a heavy burden on small community institutions. As a result of a 2002 review of the CRA regulations, and revision of an initial Federal Deposit Insurance Corporation (FDIC) proposal following a public commenting period that was largely negative, the FDIC, Office of the Comptroller of the Currency (OCC) and the Federal Reserve Board (FRB), made substantive changes to the implementation of regulations for the CRA for banks (not thrifts).
Previously, all institutions over $250 million in assets were subject to a three-part penis CRA test that covered lending (including community development loans), qualified investments, and services (including community development services) to their assessment areas. Institutions less than $250 million were subject only to a lending test.
However, as of September 1, 2005, only those institutions with more than $1 billion in assets were subject to the three-part test. Institutions below $250 million remain subject to only a lending test, and a new CRA test was created for institutions with assets between $250 million and $1 billion. This latter category, referred to as Intermediate Small Banks, is subject to the same lending test to which institutions under $250 million were subject, along with a new combined community development test that covers community development loans, qualified investments, and community development services. The $250 million and $1 billion asset thresholds also were indexed to the consumer price index and could change annually. Thus, all institutions remain subject to the CRA test. These substantive changes were intended to be a compromise between changes advocated by banks and community groups.
However, the changes were not received positively by all community groups. Changes to tests conducted on the Intermediate Small category were viewed by some as decreasing the institutions' obligations to meet lending requirements of low- and moderate-income households. Racial inequities in mortgage acceptance rates (as reported by Inner City Press, the National Community Reinvestment Coalition, ACORN and other groups) are cited as a primary reason to maintain or even increase the scope of the CRA.
Criticism Some economists have claimed that the CRA encouraged risky lending and contributed to the development of the subprime mortgage crisis. According to the Wall Street Journal, the law forced banks to make loans to borrowers who often could not repay them. Federal Reserve chairman Ben Bernanke admitted that an underlying assumption of the CRA – that more lending is always better for local communities – is questionable. However, this is disputed by Robert Gordon who has pointed out that approximately half of the loans were made by independent mortgage companies that were not regulated by the CRA, and thus had no government obligation to offer credit to minorities. In the later part of the crisis, these mortgage companies made subprime loans at twice the rate of CRA banks. Another third of the major subprime lenders were regulated, but had very little CRA involvement. Gordon also makes the argument that the weakening of the CRA in 2004 was followed by intensified subprime lending. Austrian economist Thomas DiLorenzo counters Gordon's statistic by arguing that even if half of the subprime loans were made by non-CRA companies, the CRA had still caused tens of billions in defaults on mortgages by unqualified borrowers. He also argues against Gordon's three main propositions stating that Gordon's first two propositions flatly contradict each other, whereas the third is unequivocally false.
Congressman and 2008 Republican presidential candidate Ron Paul has partially attributed the ongoing subprime mortgage crisis to legislation such as the CRA. Economist Stan Liebowitz has also expressed his opinion that banks were forced to loan to un-credit worthy consumers with "no verification of income or assets; little consideration of the applicant's ability to make payments; no down payment." However, the chief executive of Countrywide Financial, the nation's largest mortgage lender, is said to have "bragged" that to approve minority applications "lenders have had to stretch the rules a bit", suggesting that Countrywide was responsible for relaxing its standards rather than the other way around.
Ellen Seidman, the former director of the US Office of Thrift Supervision, has stated her belief that the CRA did not have an effect on the United States housing bubble. She observes that CRA banks were particularly warned to make responsible investments, citing a speech by herself as an example. She notes that if unregulated independent mortgage companies do make subprime loans, affiliated CRA banks should not be able to count them for CRA purposes, although she does not indicate whether this practice currently occurs. An analysis by attorneys Traiger and Hinckley concluded that CRA banks were less likely to sell risky mortgages onto the secondary market, and likely mitigated the effect of the subprime crisis.
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