Academic journal article Federal Reserve Bulletin

The Community Reinvestment Act: Evolution and Current Issues

Academic journal article Federal Reserve Bulletin

The Community Reinvestment Act: Evolution and Current Issues

Article excerpt

The Community Reinvestment Act took effect in November 1978. How well is it working? The answer is, probably a lot better than is often recognized. The legislation has had a major influence on reinvestment activity throughout the country and has brought greater attention to local needs, especially in low-income and minority areas. It has also engendered creative strategies and techniques to stimulate lending for community development. In many parts of the country, community groups and financial institutions have moved from adversarial relations to cooperation in pursuit of mutual goals.

Yet many financial institutions complain that complying with the Community Reinvestment Act (CRA) is costly and burdensome. Some criticize the law's requirements as too vague: others say that its implementation amounts, de facto, to credit allocation. Some also are adversely affected by the law's existence when they seek to expand operations, particularly if a public protest is filed. Many community and consumer groups, on the other hand, believe that financial institutions are not doing enough to help meet the credit needs of residents and businesses in low- and moderate-income areas. In part, they blame the supervisory agencies for being too lenient in assessing CRA performance and too generous in assigning grades. Caught in the middle, the agencies over the years have addressed the divergent views and expanded the guidance they offer while seeking to maintain the flexibility called for by the law.

Today the act remains a source of concerns common to regulators, bankers, and community activists - the paperwork burden the disproportionate effect on small institutions, and a lack of certainly in the law's application. But it also continues to offer each depository institution wide opportunities for meeting its CRA responsibilities creatively, in a manner that best accommodates the institution and the community it serves.


In the mid-1970s, a prevalent view among some members of the Congress was that many financial institutions accepted deposits from households and small businesses in inner cities while lending and investing those deposits primarily elsewhere. They believed that, given this disinvestment, or "redlining," credit needs for urban areas in decline were not being met by the private sector; moreover, the problem was worsening because public resources were becoming increasingly scarce.

In January 1977, the original Senate bill on community reinvestment was introduced. In the hearings that followed, opponents of the legislation voiced serious concerns that the bill threatened to allocate credit to geographic areas, according to the volume of deposits coming from those areas, or to specific types of loans, without regard for credit demand or the merits of loan applications. The law would therefore disrupt the normal flow of capital from areas of excess supply to areas of strong demand and undermine the safety and soundness of depository institutions. Proponents of the bill stated that it was meant to ensure only that lenders did not ignore good borrowing prospects in their communities and that they treated creditworthy borrowers evenhandedly. Senator William A. Proxmire, the bill's sponsor, stressed that it would neither force high-risk lending nor substitute the views of regulators for those of banks. He said that safety and soundness should remain the overriding factor when agencies evaluate applications for corporate expansion; meeting the credit needs of the community was only one of the criteria to consider.

Believing that systematic, affirmative programs would encourage lenders to give priority to credit needs in their home areas, the Congress passed the Community Reinvestment Act, and the President signed it into law on October 12, 1977.(1) The CRA reaffirmed the principle that financial institutions must serve "the convenience and needs" of the communities in which they are chartered to do business by extending credit in these communities. …

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