A New Direction for CRA: Revisions Look Likely. Here Are Clues to the Outcome
Rowe, Robert G.,, III, ABA Banking Journal
A new turning in the road is coming for the Community Reinvestment Act. Whether the federal regulatory agencies take the input they received at four hearings held this summer or whether Congress takes action on CRA, bankers can expect steps will be taken to update CRA.
When Congress adopted CRA in 1977, it was one in a series of statutes Congress adopted to help meet national credit needs. First came the Fair Housing Act of 1968 and the Equal Credit Opportunity Act of 1974, statutes designed to ensure fair treatment for individuals. Congress found that some lenders were making credit decisions based solely on geography, however, which was contributing to the decline of local neighborhoods.
The first step to address that problem came in the form of the Home Mortgage Disclosure Act (HMDA) in 1975. Taking things one step further, in 1977 Congress adopted CRA, which goes beyond housing, to all credit. Unlike the laws that ensure fair access to credit, the basic premise of CRA--which hasn't changed in nearly 35 years--is to be sure that depository institutions affirmatively meet credit needs of local communities.
Since 1977, the world has changed. Banking holds a much smaller share of financial markets. The number of banks has decreased substantially. Banks can now operate across state lines. Credit unions have evolved, and can now operate with a community-based charter. Insurance companies now own banks and securities firms offer far more than investments. Technology has changed how we live and bank.
A much-amended rulebook
Let's consider several significant changes along the way to today--each of which could be significant for where CRA goes.
Our first stop: 1993. Nobody was very happy with CRA. The general consensus: There was way too much emphasis on process and not enough on performance. As a result, in 1995, after an intense review the four federal banking agencies overhauled CRA regulations. They created a two-tier examination process intended to alleviate some of the burdens on smaller institutions, especially since community banks are integrally tied to their local communities. What's most important about this step--and still relevant--is that the rule-writers recognized that not all banks are the same. Under the 1995 revisions, small banks would be tested on their lending performance.
Larger banks, more complex, would be evaluated on additional factors using a three-part test. Since CRA focuses on credit, the primary assessment would still be lending, but the agencies also decided that larger institutions should be rated on their investments in the local community and the services that they provide those communities. These grafts onto the original CRA are focal points for much discussion about CRA, especially the service element.
The service test was designed to assess bank outreach when providing credit. The question is, as we move forward, is it morphing into something that really is not CRA?
Two other significant elements were added in 1995.
The first was "performance context." This important factor ensures that because CRA evaluations are qualitative, examiners should consider local conditions and market needs when evaluating whether a depository institution meets local needs.
The second was the concept of the strategic plan, which would let individual institutions--at their option--create their own performance criteria. The strategic plan option has not been widely used. Agencies are considering ways to breathe new life into it today.
Separately, in the late 1990s, the National Credit Union Administration (NCUA) took a brief step into the CRA realm with what many called "CRA-lite." However, with a change at the helm of NCUA, the requirement was repealed before it took effect. This raises another question: If a credit union is community-based, should it not be subject to CRA elements as other community-based depositories? …