Community Banks and Rural Development: Research Relating to Proposals to Revise the Regulations That Implement the Community Reinvestment Act
Avery, Robert B., Canner, Glenn B., Mok, Shannon C., Sokolov, Dan S., Tenkean, Onka L., Federal Reserve Bulletin
Since 1977, the Community Reinvestment Act (CRA) has required that federally insured banking institutions--commercial banks and savings associations--be evaluated on their records of helping to meet the credit needs of their local communities, including low- and moderate-income (hereafter, lower-income) neighborhoods. In 1995, the four federal agencies responsible for bank supervision substantially revised the regulations that implement the CRA. (1) The revisions were intended to emphasize performance rather than process, to reduce unnecessary regulatory burden, and to increase consistency in CRA evaluations.
Under the 1995 regulations, "large" institutions, generally those with assets of $250 million or more, have been evaluated under a three-part test, whereas "small"' institutions, generally those with assets of less than $250 million, have been subject to comparatively streamlined evaluations. Large institutions have been required to report data annually on certain types of CRA-related loans (small-business, smallfarm, and community development loans) and on the geographic areas (for example, census tracts) that constitute their local communities, whereas small institutions have been exempt from such reporting.
In 2001, the agencies began reviewing the CRA regulations to determine whether they were successful in meeting the objectives that the agencies set forth in 1995. The review focused in part on the possibility of extending the eligibility for streamlined examinations and the exemption from data reporting to more institutions. In 2004 and 2005, the agencies put forth several proposals to implement these changes by raising the asset-size threshold from $250 million to $500 million or $1 billion. The proposals, and the public's comments on them, paid particular attention to how and when to evaluate the community development performance of banking institutions with assets of less than $1 billion, especially in rural areas, where such institutions have a proportionately larger presence than in urban areas. A related but separate issue that the agencies presented for public comment was how to define which bank activities in rural areas should be considered community development in CRA evaluations.
We have evaluated a large amount of data to gain insight into the potential effects of these proposals, and in this article we report the key findings of our research. Our intent is to inform deliberation over the recent proposals, not to advocate any particular view.
BRIEF DESCRIPTION OF THE CRA
The CRA encourages federally insured banking institutions to help meet the credit needs of their communities, including lower-income neighborhoods, in a way that is consistent with the safe and sound operation of those institutions. (2) In particular, the CRA directs the federal agencies responsible for bank supervision (1) to assess through examinations every institution's record of meeting such community credit needs and (2) to consider the institution's CRA record when evaluating its application for deposit insurance or for a charter, branch or other deposit facility, office relocation, or merger or acquisition.
The CRA gives the agencies broad discretion to implement the law. For example, the act does not define "low- or moderate-income neighborhood" or a banking institution's "community"; rather, the act leaves those definitions to the agencies. The act also leaves to the agencies the establishment of criteria for rating an institution's record of meeting its community's credit needs. Each agency has separate rulewriting authority for the institutions it supervises; but with one recent exception, the four agencies have adopted identical regulations. (3)
The 1995 regulations establish objective standards for measuring performance. Rather than providing specific lending thresholds for particular CRA ratings, however, the standards are flexible and are applied in the context of information about an institution, its community, and its competitors (broadly referred to as the institution's "performance context"). …