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Community Reinvestment Act

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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 thrifts 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.



[edit] Original Act

The CRA was passed into law by the U.S. 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. [1]

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).

[edit] 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[1] 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.[citation needed]

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. [2] The number of CRA mortgage loans increased by 39 percent between 1993 and 1998, while other loans increased by only 17 percent. [3] [4]

[edit] 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." [5] 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 her e, 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."[6]

[edit] Changes of September 2005

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 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.

[edit] Criticism

Critics claim that government policy encouraged risky lending[7] and the development of the subprime debacle through legislation like the CRA. Economics professor Stan Liebowitz writes 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." 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."[8] Robert Gordon of the Center for American Progress disagrees, and quotes statistics that he claims show "independent mortgage companies, which are not covered by CRA, made high-priced loans at more than twice the rate of the banks and thrifts." He faults then-Federal Reserve chair Alan Greenspan for "cheering the subprime boom" in the banking industry.[9] Economics professor Thomas DiLorenzo counters Gordon, stating that independent mortgage compa nies are "middlemen" between banks, including those regulated by the CRA, and consumers and that in any case the CRA had caused tens of billions in defaults on mortgages by unqualified borrowers.[10] Economist Yaron Brook concluded succinctly, "The Government Did It:" through the stick of the CRA [and] the carrot of Fannie Mae and Freddie Mac, the fed created the mortgage market debacle. [11]

People did try to correct this train wreck waiting to happen.
Remember no one can ruin your day until you give him or her permission.

Creation date: Sep 24, 2008 8:11 am     Last modified date: Sep 27, 2008 9:54 am   Last visit date: Oct 14, 2016 10:59 am     link & embed ?...
2 / 1000 comments
Sep 24, 2008  ( 1 comment )  
4:16 pm
Marie Carr (nanarie)
Thanks for putting this valuable information up, Julie.
Dec 30, 2012  ( 1 comment )  
9:44 pm
Hi Julie,
You cut off the Wiki entry after the one lone "expert" who blamed the CRA for the subprime mess..
About 10 experts after him refuted the claim:
However, other analysts hold that the CRA did not make a significant contribution of the subprime crisis. Nobel laureate Paul Krugman[112] noted in November 2009 that 55% of commercial real estate loans were currently underwater, despite being completely unaffected by the CRA.[113] According to Federal Reserve Governor Randall Kroszner, the claim that "the law pushed banking institutions to undertake high-risk mortgage lending" was contrary to their experience, and that no empirical evidence had been presented to support the claim
Luci Ellis concluded that "there is no evidence that the Community Reinvestment Act was responsible for encouraging the subprime lending boom and subsequent housing bust", relying partly on evidence that the housing bust has been a largely exurban event.[115] Others have also concluded that the CRA did not contribute to the financial crisis, notably, FDIC Chairman Sheila Bair,[116] Comptroller of the Currency John C. Dugan,[117] Tim Westrich of the Center for American Progress,[118] Robert Gordon of the American Prospect,[119] Ellen Seidman of the New America Foundation,[120] Daniel Gross of Slate,[121] and Aaron Pressman from BusinessWeek.[122]
According to Janet L. Yellen, President of the Federal Reserve Bank of San Francisco, independent mortgage companies made risky "high-priced loans" at more than twice the rate of the banks and thrifts; most CRA loans were responsibly made, and were not the higher-priced loans that have contributed to the current crisis.
 A 2008 study by Traiger & Hinckley LLP, a law firm that counsels financial institutions on CRA compliance, found that CRA regulated institutions were less likely to make subprime loans, and when they did the interest rates were lower. CRA banks were also half as likely to resell the loans.
Raines also cited information that only a small percentage of risky loans originated as a result of the CRA.
Here is something about Countrywide Financial, A group of lenders not subject to CRA:
As others have pointed out, Fannie and Freddie actually accounted for a sharply reduced share of the home lending market as a whole during the peak years of the bubble. To the extent that they did purchase dubious home loans, they were in pursuit of profit, not social objectives—in effect, they were trying to catch up with private lenders. Meanwhile, few of the institutions engaged in subprime lending—such as Countrywide Financial—were commercial banks subject to the Community Reinvestment Act.
The bad players were making BIG bucks writing bad loans and making a ton of points on these shaky loans.. CRA BAnks and Fannie and Freddie would not touch these loans!
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