CRA getting good grades.

Author:Kane, Kevin T.
Position:Community Reinvestment Act

Several banks and thrifts have shown you can bring needed funds into credit-starved markets without risking the bottom line. Here's the low-down on winning top Community Reinvestment Act ratings.

In the wake of renewed consumer group pressure and new regulatory data suggesting ongoing problems with discrimination in lending, the Community Reinvestment Act (CRA) has re-emerged as an effective tool in monitoring the flow of private capital into needier communities.

As Congress debates both new regulation of Fannie Mae and Freddie Mac and wide-ranging banking reform in 1992 - a process that is likely to continue into 1993 - the issue of CRA compliance continues to gain increased attention. Along those lines, Congress is considering additional requirements for lenders under CRA tied to giving banks interstate branching authority. Coupled with shrinking public resources for housing and economic development, active participation by financial institutions in community investment is now more important than ever.

As a result, lenders are searching for ways to meet CRA requirements, while maintaining safe and sound banking practices. This article traces CRA's development and its impact on the banking community, focusing on the difficulties depository institutions have experienced complying with it, and spotlighting programs institutions have developed under the law in response to their community's credit needs.

How CRA evolved

When former Senator William Proxmire (D-WI) introduced the bill that became CRA in 1977, he said the measure merely restated lending institutions' responsibilities to help meet the credit needs of the local communities where they were chartered.

The law was enacted against a back-drop of concern over redlining. Before the passage of CRA, observers in the industry recalled earlier times when some institutions would literally draw red lines on maps depicting neighborhoods within their delineated community and refuse to lend in those areas. CRA helped to end many of the most blatant types of discriminatory lending practices by financial institutions.

In 1977, Congress conducted extensive hearings to address the redlining issue. The hearings generated testimony detailing how many institutions used the deposits of poor inner-city residents to make loans to middle- and upper-income residents, while denying loans to the poor urban residents.

Largely as a result of such testimony, Congress passed CRA to encourage more private-sector involvement in government efforts to rebuild deteriorating inner-city neighborhoods.

The act directs the four federal agencies with supervisory authority over depository lenders (Federal Reserve Board, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation and the Office of Thrift Supervision) to consider a lender's record of serving local credit needs in their decisions to grant or deny the expansion plans of depository institutions. Inadequate CRA performance evaluation is sufficient grounds to deny an expansion request.

For years, many banks behaved as though their existing lending programs satisfied the requirements of the act, and the federal regulators seemed to agree. During the mid- to late-1980s, however, community groups began to voice their collective concerns that CRA was not being enforced properly. They charged that federal regulatory agencies were lax in their CRA examinations of financial institutions, citing as evidence that as of 1988, only eight of 50,000 applications seeking regulatory approval to merge, acquire or expand were rejected on CRA grounds. (This statistic was cited in an article written by John D. Marsh for Southern Banker titled "Turning Up the Heat on CRA," November 1989.) Largely as a result of this statistic and others like it cited in testimony prior to enacting legislation to resolve the thrift crisis, Congress revised CRA when it enacted the Federal Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) to require public disclosure. The theory is that public disclosure of CRA ratings will help enforce the act, by opening the process to public scrutiny.

This article was developed as a result of an examination of hundreds of bank CRA statements in preparation for a book written on the CRA. A Banker's Guide To The Community Reinvestment Act provides a practical blueprint for creating a successful CRA plan by featuring how 33 financial institutions from all geographic regions have met the challenge of CRA compliance, turned it to their economic advantage and dramatically improved their standing and reputation in their communities.

In researching the book, what I quickly realized was that lenders with the most effective records for meeting their CRA responsibilities emphasized similar community investment policies. Additionally, the community investment policies commonly held by these...

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