Statement by Lawrence B. Lindsey, Member, Board of Governors of the Federal Reserve System, before the Subcommittee on Consumer Credit and Insurance of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, February 8, 1994
Statement by Lawrence B. Lindsey, Member, Board of Governors of the Federal Reserve System, before the Subcommittee on Consumer Credit and Insurance of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, February 8, 1994.
I appreciate the opportunity to appear before this subcommittee to discuss Community Reinvestment Act (CRA) reform. The Community Reinvestment Act is intended to ensure that every community has access to adequate credit to help meet its needs. We at the Federal Reserve Board believe that the law has produced substantial benefits. However, the CRA has not--nor should it be expected to have--cured all the problems that plague our cities.
As you know, the federal financial institution regulatory agencies are actively engaged in an effort to reform the CRA by amending our regulations. This effort results from the President's request to make the CRA more objective, the ratings more uniform, and the paperwork less burdensome. This effort is a challenging one, which involves a substantial commitment by the agencies and encompasses many difficult issues. We are very conscious of the fact that what we do could significantly affect financial institutions and the public alike and that we must exercise care when we undertake such an important project. Because we are midway in the process and are still receiving comments from the public, our report to you will necessarily be somewhat preliminary.
HISTORY OF THE CRA AND THE CURRENT REFORM EFFORT
Before I discuss the proposal to reform the CRA, I would like to briefly review the law and a little of its history because that history is very relevant to the reform project. The Community Reinvestment Act calls for the financial regulatory agencies to use their examination authority to encourage institutions to help meet the credit needs of their communities, including low- and moderate-income areas, consistent with safe and sound business practices. The agencies are required to assess the community lending records of the institutions they supervise as pan of their examinations and to take into account those records in considering applications. The law, however, gives no other indication how the agencies are to accomplish these tasks and does not define key concepts, such as how an institution's community is defined or what constitutes satisfactory performance. A considerable responsibility, therefore, was placed on the agencies by the Congress.
The regulations that were adopted in 1978 by the financial regulatory agencies focused, at least in part, on factors related to the process used by institutions to determine the credit needs of their community and how they responded to those needs. To avoid credit allocation, and to allow for the maximum amount of creativity by institutions in meeting the varying credit needs of their localities, these regulations did not attempt to prescribe any particular level of lending. Instead, the evaluation of a financial institution's performance has been based on the application of twelve assessment factors, including how community credit needs are ascertained, the geographic distribution of loans, the record of opening and closing branches and providing services, participation in local community development projects, and the financial and legal capability of the institution. In determining how well an institution ascertains the credit needs of its community, examiners have taken into account such matters as the institution's community outreach and credit marketing.
In the course of our review of the CRA, we have heard from many consumer and community groups about how valuable the law has been in getting credit extended in low- and moderate-income areas. Some groups put the success of the CRA at $30 billion, which they estimate to be the level of the CRA commitments for new credit. I suspect the total impact of CRA considerably exceeds the $30 billion estimate. …