From Wikipedia, the free encyclopedia
The Community Reinvestment Act (or CRA, Pub.L.
95-128, title VIII, 91 Stat. 1147,
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.
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. 
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,
Clinton Administration Changes of 1995
In 1995, as a result of interest from President
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. 
George W. Bush Administration Proposed Changes of
In 2003, the
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 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
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,
National Community Reinvestment Coalition, ACORN and other
groups) are cited as a primary reason to maintain or even increase the
scope of the CRA.
Critics claim that government policy encouraged risky lending
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."
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.
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.
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.