In Focus: Federal Reserve Banks Examine Ways to Aid Compliance with CRA

Article excerpt

The Federal Reserve is pursuing novel measures to help banks comply with the Community Reinvestment Act.

Rules implementing the law require banks to meet three tests involving lending to, investing in, and serving local communities. The Fed -- working with local groups, governments, and developers -- is trying to help banks to find sound loans and investments.

For instance, the Federal Reserve Bank of San Francisco is working with California state officials, brokerages, insurance companies, and banks to create investment securities backed by small-business loans. Banks buying the securities could get CRA investment credit, and those selling the loans -- which would be guaranteed in part by the state -- would gain the liquidity to make more loans.

The new securities could be issued next year, said Joy Hoffmann Molloy, assistant vice president and community affairs officer of the San Francisco Fed. The investments could qualify under the CRA test, just as purchases of securities backed by mortgages for low- to moderate-income borrowers often do.

"For a long time when you said 'CRA,' you thought of affordable housing," Ms. Hoffmann Molloy said. "The industry has evolved. Small business has become more of a part of community and economic development."

The effort dovetails with small-business development initiatives under way in the Federal Reserve system.

To spur more CRA-related small-business lending, the Federal Reserve Bank of Cleveland held several meetings in the past eight months at which bankers, small-business owners, and credit counselors compiled a list of recommendations for the industry. …