Community Reinvestment Act: Regulation and Legislation

Community Reinvestment Act: Regulation and Legislation

Order Code RL34049
Community Reinvestment Act:
Regulation and Legislation
Updated July 17, 2008
Walter W. Eubanks
Specialist in Financial Economics
Government and Finance Division

Community Reinvestment Act: Regulation and
Legislation
Summary
The Community Reinvestment Act (CRA) addresses how banking institutions
meet credit needs in low- and moderate-income (LMI) neighborhoods and certain
other criteria. As implemented by the four federal banking regulatory agencies, CRA
requires paperwork and generates cost in reporting qualifying activities. Some regard
it as government-required credit allocation, while others view it as providing
justifiable community investments. The Gramm-Leach-Bliley Act (P.L. 106-102)
reemphasized CRA’s goals, yet relieved banks from part of the regulatory burden it
imposes on banking institutions. According to several studies, CRA is the most
burdensome federal regulation on banks. Others suggest that without CRA many
depository institutions would not invest in LMI communities.
The federal depository institutions’ regulatory agencies — the Board of
Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation, the Office of the Comptroller of the Currency, and the Office of Thrift
Supervision — have been implementing rules governing CRA compliance. In the
2005-2007 period, they have been issuing new rules for CRA compliance, including
levels of examination for different-asset-size institutions, and issuing guidance on
how institutions may acquire CRA credit by engaging in specific banking activities
(e.g., providing small-dollar consumer loans to LMI consumers in their
communities). Regulators are also implementing a provision of the Financial
Services Regulatory Relief Act of 2006, which qualifies more small depository
institutions for fewer CRA on-site examinations.
In the 110th Congress, the Community Reinvestment Modernization Act of 2007
(H.R. 1289) was introduced in the House of Representatives on March 1, 2007, and
was referred to the House Committee on Financial Services. It would repeal the
recent rules implemented by the regulatory agencies that some believe weakened the
enforcement of the 1977 CRA. H.R. 1289 would amend the Bank Holding Company
Act of 1956 (BHCA) to subject nonbank affiliates of bank holding companies to
CRA if they engage in lending or offer banking product services. Satisfactory CRA
ratings would be required of securities companies’, mortgage banks’, and insurance
companies’ affiliates of financial holding companies.
H.R. 1289 directs the Secretary of Housing and Urban Development to establish
requirements for insurers to submit information annually regarding noncommercial
insurance, rural insurance, and investments by insurers. Under this title, the
Financial Institutions Examination Council is directed to maintain a comprehensive
database containing the hierarchical structure of financial holding companies, bank
holding companies, depository institutions, and non-depository institutions. For
mergers and acquisitions, financial institutions would be required to have (1) a public
meeting and (2) a period for public comment regarding branch closures. It would
also amend the CRA to subject all regulated financial institutions, regardless of size
or aggregate assets, to a mandatory biennial examination.
This report will be updated as developments warrant.

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Statute . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Burden or Benefit? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Recent Congresses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Compliance Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
New Rules in 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Agency Guidance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
The Community Reinvestment Modernization Act of 2007 . . . . . . . . . . . . . . . . 10
Brief Summary of the Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
List of Tables
Table 1. Points Assigned for CRA Performance under Lending, Investment,
and Service Tests (Large Retail Institutions) . . . . . . . . . . . . . . . . . . . . . . . . . 4
Table 2. Number of CRA Examinations by Year, 1997-2006 . . . . . . . . . . . . . . . . 6

Community Reinvestment Act: Regulation
and Legislation
Introduction
The Community Reinvestment Act of 1977 (CRA, P.L. 95-128, 12 U.S.C. §§
2901-2908) and the Community Reinvestment Modernization Act of 2007 (H.R.
1289) address how banking institutions meet credit needs of their low- and moderate-
income (LMI) neighborhoods and certain other criteria. The law, P.L. 95-128, as
implemented by the four federal banking regulatory agencies,1 requires much
paperwork and expense. According to several studies, CRA is the most burdensome
banking law on the books. One study estimated that the ongoing operating cost of
complying with the CRA averaged $69,579 per financial institution.2 From the point
of view of consumer advocacy, CRA is regarded as economically justifiable credit
allocation that provides large community benefits. The Gramm-Leach-Bliley Act
(P.L. 106-102) reemphasized CRA, yet relieved banks from it in part as reflected in
the less stringent 2005 CRA rules.
The Community Reinvestment Modernization Act of 2007 (H.R. 1289) was
introduced in the House of Representatives on March 1, 2007, by Representative
Eddie Bernice Johnson of Texas and was referred to the House Committee on
Financial Services. The bill would repeal the 2005 compliance rules for depository
institutions issued by the federal regulatory agencies. Some financial analysts and
consumer advocacy groups believe that the 2005 rules dilute enforcement of the
Community Reinvestment Act of 1977. Among its provisions, H.R. 1289 would
extend CRA regulations to the nonbank financial services affiliates of bank holding
companies that engage in lending or offer banking products or services.
This report begins with a brief outline of the CRA statute and the regulations.
It also assesses the costs and the benefits of the 1977 act. The report then turns to
regulatory agencies’ recent CRA compliance rules. The two last sections of the
report briefly summarize the provisions of the Community Reinvestment
Modernization Act of 2007 and conclude with some implications.

1 The federal financial institutions regulatory agencies consist of the Board of Governors of
the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the
Comptroller of the Currency, and the Office of Thrift Supervision.
2 Marrinan Barefoot & Associates, Inc., Anjan V. Thakor, and Jess C. Beltz, Common
Ground: Increasing Consumer Benefits and Reducing Regulatory Costs in Banking,
Madison Wisc.: Herbert V. Prochnow Education Foundation, 1993; and Gant Thornton,
“Regulatory Burden: The Cost to Community Banks,” Study Prepared for the Independent
Bankers Association of America, January 1993, p. 15.

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Background
Statute
In reaction to perceptions that banks were not providing housing finance
resources to inner cities, preferring instead to make larger, more profitable
international loans, Congress enacted the Community Reinvestment Act of 1977
(CRA). It has evolved beyond housing markets, to consumer and business lending,
community investments, and low-cost services. To illustrate, in April 2007, the
agencies offered banks and thrifts favorable CRA considerations if they established
a low- and moderate-income (LMI) homeowner program that would transition
troubled borrowers from higher- to lower-cost loans to help mitigate the impact of
subprime mortgage lending on the housing market and the economy.3 Several states
also have separate community reinvestment laws applicable to banking institutions
under their supervision.
As an obligation associated with the safety net of federal deposit insurance, the
current CRA law does not cover credit unions or insurance and securities companies.
It imposes no statutorily set rules. CRA literally requires that a federal banking
regulatory agency evaluate how each of its regulated institutions affirmatively meets
“the credit needs of its entire community, including low- and moderate-income
neighborhoods, consistent with the safe and sound operation of such institution,” and
“take such record into account in its evaluation of an application for a deposit facility
by such institution.” It thus encourages socially responsible funding and deposit
services to areas and entities of low- and moderate-income. Its application often
involves sociological mandates going beyond income.4
Regulation
Four federal regulators administer CRA. They are the Office of the Comptroller
of the Currency (OCC), for national banks; the Federal Reserve System (Fed), for
state banks belonging to it and holding companies owning banks; the Federal Deposit
Insurance Corporation (FDIC), for state banks not belonging to the Federal Reserve;
and the Office of Thrift Supervision (OTS), for savings associations. Until 1989, this
act had little effect because of restrictions on mergers and acquisitions as well as the
Glass-Steagall Act of 1933, which restricted the mixing of banking and commerce,
as well as the banking industry’s preoccupation with the savings and loan debacle.
The agencies applied 12 criteria under CRA beginning in 1990, which required banks
and thrifts to complete much paperwork. Dissatisfaction among lenders and
community groups emerged.5 President Clinton called for reform in 1993. By 1997,
3 Federal Reserve Board, “Federal Regulators Encourage Institution to Work with Mortgage
Borrowers Who Are Unable to Make Their Payments,” Joint Press Release, April 17, 2007,
p. 1. [http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070417/default.html].
4 P.L. 102-233 as amended by P.L. 102-550 gives losses resulting from branches transferred
to minority- and female-owned institutions positive CRA credit. P.L. 102-550 allows
cooperation with minority- and female-owned institutions to receive such credit.
5 Michael S. Barr, “Credit Where It Counts: The Community Reinvestment Act and Its
(continued...)

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the agencies’ 1995 Joint Final Rule fully reformed CRA.6 The agencies scheduled
joint redrafting of rulings five years later, in 2002. The effects of that effort on banks
and thrifts were not fully felt until recently.
Under CRA, agencies “uniformly” evaluate a financial institution given its
capacity, constraints and business strategies; demographic and economic data;
lending, investment, and service opportunities; and its competitors and peers.
Regulators generally apply three tests: lending, investment, and service. The lending
test evaluates the number, amount, and distribution across income and geographic
classifications of mortgage, small business, small farm, and consumer loans. It is
generally regarded as being the most important test. The investment test grades
community development investments. The service test examines retail service
delivery such as branches and low-cost checking. Application largely involves
activity in assessment areas (where institutions have deposit-taking operations).
“Out-of-area” activity receives less CRA scrutiny.
It remains unclear if innovative proposals, especially for investments and
services, will meet CRA acceptance. Bankers, on behalf of proposed recipients, may
need pre-clearance from their regulators, should any proposal be in doubt. Examiners
may credit a program for one institution/community yet disallow a like arrangement
elsewhere.
Table 1 shows how regulators use “points” to grade large retail institutions. In
reaction to criticisms that CRA ratings were vague if not subjective, this point-
scoring metric provided a significant degree of objective evaluation. Qualitative
benefits to communities may raise a grade above what points allow. Examiners
assign multi-state institutions ratings as a whole, and for each state of operation or
metropolitan area if in two or more states. Larger banks receive more CRA scrutiny
than smaller ones. Since large institutions generally operate in urban areas with
community-advocate networks, many believe that rural areas, which are generally
served by fewer and smaller banks and have relatively few community activist
groups, have benefitted less from CRA.
5 (...continued)
Critics,” New York University Law Review, May 2005, pp. 110-112.
6 12 C.F.R. Parts 25 (OCC), 228 (Federal Reserve), 345 (FDIC), and, 563e (OTS).

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Table 1. Points Assigned for CRA Performance under Lending,
Investment, and Service Tests (Large Retail Institutions)
Lending
Investment
Service
Outstanding
12
6
6
High Satisfactory
9
4
4
Low Satisfactory
6
3
3
Needs to Improve
3
1
1
Substantial Noncompliance
0
0
0
Total Points
Composite Rating Point Requirements
20 or over
Outstanding
11-19
Satisfactory
5-10
Needs to Improve
0-4
Substantial Noncompliance
Source: Federal Financial Institutions Examination Council, “Community Reinvestment Act;
Interagency Questions and Answers Regarding Community Reinvestments; Notice,” Federal Register,
vol. 66, no. 134, July 12, 2001, pp. 33639-33640. An institution may not be Satisfactory unless it
receives at least Low Satisfactory on the lending test. Examiners thus cap total points at three times
the lending test score.
Small institutions are relieved of certain requirements. Regulators have set the
standard at $1 billion in assets for “large” banks that must undergo the above
comprehensive three-part examination, and created a tier for compliance by
“intermediate small” banks between $250 million and $1 billion in assets. Ratings
for smaller institutions, those with less than $250 million in assets, look solely at the
following lending-related activities:
! loan-to-deposit ratios,
! percentage of loans in service territory,
! lending to borrowers of different income and in different amounts
! geographical distribution of loans, and
! actions on complaints about performance.

Following periodic examinations, the four agencies rate each institution in
descending order, as the equivalent of grades A to D:
! Outstanding
! Satisfactory
! Needs to Improve, or
! Substantial Noncompliance.
Grades of Outstanding and Satisfactory are acceptable. Covered institutions
must post a CRA notice in their offices and make a record of their overall CRA
performance publicly available. The overwhelming majority of institutions have
received at least the expected Satisfactory rating in recent years. According to the
Fed, about 12% of all banks and thrifts examined have an Outstanding rating, 87%

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have a Satisfactory rating, and less that 0.5% had a Needs to Improve or Substantial
Noncompliance rating.7
Regulators cannot sanction institutions that fall short of the agencies’ CRA
requirements. CRA comes into force when an institution applies for a “deposit
facility,” which generally occurs when moving offices and, especially, when buying
another institution. Denial of deposit facility applications (most importantly mergers
and acquisitions) is the main tool applied against banking organizations not in
compliance. Regulators generally rely on ratings when considering CRA-based
objections to banking fusions. However, denials of deals because of CRA have been
rare. Less than 0.5% (68) of 13,500 applicants were assigned either Needs
Improvement or Substantial Noncompliance. Of these 68 applicants, only 25 of the
more than 13,500 applications for the formation, acquisition, or merger of bank
holding companies or state-member banks have been denied by the Federal Reserve
Board since 1988.8 As a result, these numbers reveal very little about how CRA
ratings influence regulators’ denial of a bank and thrift expanded activities, since an
institution could receive a rating of Needs Improvement or Substantial
Noncompliance and still get approval. One reason is that applicants are able to
resubmit their applications later when they make the necessary CRA improvements.
Consequently, a rating below “Satisfactory” carries only a psychological penalty —
including potentially bad press.
Burden or Benefit? Some bankers have identified CRA as the most
burdensome regulation placed upon them and view it as an obligation similar to a
tax without offsetting return. They view CRA as forcing them to provide charity-
type loans for societal payoffs. To some it might appear to destroy value in the
banking industry as banks make fewer profitable community development loans that
lower safety and soundness. To others CRA and other banking regulations appear
as convenience-and-needs tradeoffs for banks receiving governmental support. In
return for benefits of federal deposit insurance, lender-of-last-resort availability,
payments systems, Federal Home Loan Bank membership, etc., the government
requires them to provide socially directed lending and other services.9 Other
businesses, notably the financial competitors of banks, are not subject to this
mandate. Complaints generally center on the time and costs associated with the
required paperwork. The American Bankers Association once estimated that CRA
cost the banking industry about $2 billion yearly. Others have estimated lesser but
still large “burdens.”10 Intensity of examination increases for larger banks, but less
than in proportion to size. Table 2 shows that the number of CRA compliance
7 Sandra Braunstein, Director, Division of Consumer and Community Affairs, Before the
Subcommittee on Domestic Policy, Committee on Oversight and Government Reform, Bank
mergers, Community Reinvestment ACT enforcement, subprime mortgage lending and
foreclosure, at the Carl B. Stokes U.S. Court House, Cleveland, Ohio,
[http://www.federalreserve.gov/BoardDocs/Testimony/2007/20070521/default.htm], p. 2,
May 21, 2007.
8 Ibid., p. 4.
9 Barr, pp.198-202.
10 Ibid., pp. 175-177.

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examinations had been trending down, both because of legislation analyzed below
and because the number of institutions subject to CRA has been reduced with
industry consolidations.
Table 2. Number of CRA Examinations by Year, 1997-2006
Year
Number
1997
1,896
1998
1,866
1999
1,911
2000
1,941
2001
1,912
2002
1,986
2003
2,103
2004
1,999
2005
1,103
2006
1,028
Source: Federal Financial Institutions Examination Council data, last revised July 25, 2007
[http://www.ffiec.gov/hmcrpr/cra06table1.pdf].
CRA proponents suggest that it may not be as burdensome as other regulatory
mandates. They note that bankers often lump CRA paperwork in with that for Home
Mortgage Disclosure, Equal Credit Opportunity, and Fair Housing Acts, and that
collecting and processing statistics constitute most of the burden. Proponents see
CRA as stimulating supply to low- and moderate-income credit. According to the
National Community Reinvestment Coalition, CRA was instrumental in generating
more than $1.5 trillion of home mortgage and small-business loans for central cities
since 1977.11 Analysts have never known CRA to cause a bank to fail or fall below
its capital requirements.
Because most CRA credits are used mostly by large banks when they are about
to merge, some analysts generally view CRA as promises to large banking
organizations when merging. Whether the mergers would have occurred without
CRA is unknown. Proponents may treat gross amounts as benefits without looking
at how they meet the needs of the under-served. Many pledges seem crafted to ward
off community protests. There is evidence, despite statistical difficulties, which
suggest that CRA benefits low-income communities and borrowers.12
Recent Congresses
The Riegle-Neal Amendments of 1997 (P.L. 105-24) reaffirmed that state
community reinvestment laws apply to out-of-state bankers. Two years later,
Congress passed the Gramm-Leach-Bliley Act (GLBA, P.L. 106-102). It requires the
depository parts of a financial holding company to maintain a CRA rating of at least
11 Samantha Friedman and Gregory D. Squires, “CRA Examiners Should Also Look at
Racial Statistics,” American Banker Online, August 29, 2003.
12 Barr, pp. 146-164.

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Satisfactory, and the same for national banks having financial subsidiaries. GLBA
requires disclosure and reporting of agreements made in connection with CRA
involving resources of insured depository institutions or affiliates: CRA Sunshine.
It provides a Small Bank Stretch-Out. Small banks face routine examination just
once every five years if Outstanding, and once every four years if Satisfactory. Such
institutions must have assets of $250 million or less. Its language provides that
nothing in GLBA will be construed to repeal any portion of CRA.

Compliance Results. Financial diversification regulations under GLBA
required CRA compliance in banking, and two studies of CRA’s efficiency, one by
the Treasury Department and another by the Fed. The Treasury Department’s study
claimed that CRA has been effective.13 The Fed’s study found that most CRA loans
for homes and small businesses were profitable, although many were unprofitable.14
Another study found that CRA Sunshine provision has been a lesser burden to
bankers than feared.15 A Harvard study suggested that CRA has played a large role
in increasing the number of depository institution LMI mortgages, but found that
non-covered entities have exceeded depositories in market shares, lowering CRA’s
effectiveness.16 Community activists remain unconvinced that banking companies
are compliant, since they may own sub-prime nondepository lending “affiliates.”17
The purpose of the Community Reinvestment Modernization Act of 2007, discussed
below, is to address this noncompliance issue.
New Rules in 2005
In 2005, following years of disagreements, banking regulators reached a
consensus on regulatory application of CRA. The Office of Thrift Supervision had
made its similar rule effective April 1, 2005, leading the way.18 Unlike the other
agencies, OTS moved the small thrifts’ assets threshold for CRA examination
purposes to $1 billion. However, in March 2007, OTS revised its CRA regulations
to align it with the other regulators. Consequently, the OTS CRA rules are the same
as the joint Fed, OCC, and FDIC rulemaking, effective September 1, 2005:
! Banks with assets between $250 million and $1 billion are exempt,
as “intermediate small banks,” from the previous reporting
obligations of banks with assets larger than $250 million.
13 Robert E. Litan et al., The Community Reinvestment Act after Financial Modernization:
A Baseline Report, at [http://www.ustreas.gov/press/releases/docs/crareport.pdf].
14 Board of Governors of the Federal Reserve System, The Performance and Profitability
of CRA-Related Lending, at [http://www.federalreserve.gov/boarddocs/surveys/
craloansurvey/cratext.pdf].
15 Duran, “CRA Sunshine Too Onerous?” American Banker, July 2, 2001, pp. 1, 4.
16 Joint Center for Housing Studies, The 25th Anniversary of the Community Reinvestment
Act: Access to Capital in an Evolving Financial Services System, March 20, 2002.
17 Rob Blackwell, “CRA Rules Need Tightening,” American Banker Online, March 4, 2003.
18 Office of Thrift Supervision, Press Release, February 28, 2005, at
[http://www.ots.treas.gov/docs/ 7/77507.html].

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! Intermediate small banks are subject to a two-part test (retail lending
and community development) instead of the three-part ones of
lending, investment, and service. Satisfactory community
development, and also retail lending, ratings would be necessary for
an overall “Satisfactory.”
! The definition of “community development” is revised to credit
rural banks investing in general support for “underserved” rural
areas and for “designated disaster areas.”
! When illegal lending practices — for example, by a bank’s affiliate
— reduce the bank’s CRA rating is clarified.19
The intent of these changes was to make affected banks view CRA activities
with respect to results (effectiveness) and not just as arbitrary targets. To the extent
that the flexible community development test includes revitalizing “underserved and
distressed” rural areas20 and designated disaster areas, this change may increase the
number of CRA investment commitments. In particular, the disaster area provision
may allow banks anywhere in America to receive credit for aiding the regional
rebuilding from Hurricane Katrina, or the many counties elsewhere that have been
damaged by storms, flooding, tornados, etc.21
Agency Guidance
The banking agencies have issued somewhat conflicting guidance concerning
small-dollar loans and subprime lending for banks’ Community Reinvestment Act
requirements. In September 2006, the agencies issued guidance on subprime
lending.22 It was restrictive in tone. It warned banks of the risk posed by
nontraditional mortgage loans, including interest-only and payment-option
adjustable-rate mortgages. The agencies expressed concern about these loans
because of the lack of principal amortization and the potential for negative
amortization. After a rapid rise of foreclosures on subprime mortgages, in April
2007 the agencies indicated that, since a significant portion of the problem subprime
mortgages were made to low- and moderate-income households, those mortgages
will be given little positive weight under CRA. Banks would receive benefits for
helping delinquent borrowers who may be burdened with unaffordable mortgages.23
In sum, in 2006 the agencies discouraged subprime lending.
19 The text of this joint ruling is available at [http://www.federalreserve.gov/boarddocs/
press/ bcreg/2005/20050719/attachment.pdf].
20 These areas are available from the Federal Financial Institutions Examination Council at
[http://www.ffiec.gov/cra/pdf/distressedorunderservedtracts.pdf].
21 Federal disaster declarations listing affected counties are available from the Federal
Emergency Management Agency at [http://www.fema.gov/news/disasters.fema].
22 See the joint press release, Federal Reserve Board, Federal Financial Regulatory
Agencies Issue Final Guidance on Nontraditional Mortgage Product Risks, September 29,
2006. [http://www.federalreserve.gov/boarddocs/press/bcreg/2006/20060929/defaul.htm].
23 Richard Cowden, “Regulators Ease Banks’Fears About CRA During Era of Concern Over
Subprime Loans,” BNA Banking Report, April 30, 2007, p. 2; and see John Dugan’s remarks
at [http://www.occ.treas.gov/ftp/release/2007-44a.pdf].

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In 2007, federal regulators offered CRA credit to banks for helping to mitigate
the effects of subprime lending turmoil. At the same time, a set of questions and
answers (Q and A) was designed to assist financial institutions in complying with
Community Reinvestment Act rules, including provisions to encourage lenders to
work with homeowners facing foreclosures.24 The Q and A were also used to
explain the methods the regulators used to allocate CRA credits for banking
institutions investments in programs such as low income housing tax credit (LIHTC)
funds. These LIHTC funds provide banking institutions a tax credit which lowers the
investing institutions’ tax liabilities and earns them CRA credits for complying with
the Community Reinvestment Act of 1977. Unfortunately, the description of the
methods gave the impression that the regulators had made changes to the methods
they are using to allocate CRA credits. The result was that institutions and their
representatives began to contact Members of Congress and regulators urging them
to change it back.
Specifically, the complaints were that the regulators were prorating the CRA
credit given to institutions for their investments in low income area community
developments, according to the investments’ proximity to the geographic area in
which the banks operate. This is likely to reduce the incentive for these institutions
to make such investments. The regulators began doing this to make sure that the
CRA-credited investments were being made in the communities from which the
institutions garnered their deposits. In fact, the regulators did not change their
methods of allocating CRA credits. The proration was only applicable to
investments in national funds whose numbers have grown dramatically in recent
years. For these funds, the regulators have always prorated the CRA credits because
nation funds are likely to be invested in low income areas outside the bank’s
geographic area. Therefore, the regulators prorate the CRA credits according to the
amount an institution invests in the national fund in relationship to the total
investment of the fund, and where the fund makes its investments. If the national
fund makes no investments in low income communities in the bank’s geographic
area, the bank would get no CRA credit for its investment in that fund. On the other
hand, statewide and regional investments continue to get 100% CRA credits.
Favorable CRA considerations were offered by the FDIC in its guideline to
encourage banks to offer affordable small-dollar loans. While the guideline does not
prescribe the specific nature of the small-dollar loans, the FDIC intends these
banking products to compete with less-affordable, predatory payday small-dollar
loans and to continue to comply with the regulators’ safety and soundness
requirements. Under these guidelines all fees and interest associated with these loans
must be less than 36% per year.25 The banking industry’s reaction to the guidelines
24 See Rechard Cowdens, “New Q&A on Community Reinvestment Act Focuses on
Activities to Mitigate Foreclosures,” BNA Banking Report, July 16, 2007, p. 108, and
Traiger & Hinckley LLP, The Community Reinvestment Act: A Welcome Anomaly in the
Foreclosure Crisis, January 7, 2008, 3p.
25 See FDIC Press Release, “Affordable Small Dollar Loan Guidelines,” December 4, 2006,
pp. 4, [http://www.fdic.gov/news/press/2006/pr06107a.html]; and Karen Werner, “FDIC
Small-Dollar Loan Guidelines at Odds with Broad Reading of New Law, Groups Say,”
(continued...)

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initially has not been enthusiastic, because these types of loans are generally
considered to be risky, with limited prospects of profitability.
The Community Reinvestment
Modernization Act of 2007
Brief Summary of the Provisions
The stated purpose of H.R. 1289 is to enhance the availability of capital and
credit for all citizens and communities; to ensure that community reinvestment keeps
pace as banks, securities firms, and other financial services providers become
affiliates as a result of the enactment of the Gramm-Leach-Bliley Act; and for other
purposes. The bill has three titles and 32 sections. The first provision would repeal
the regulatory agencies’ 2005 rules (discussed above) applicable to the Community
Reinvestment Act of 1977 and reinstate the banking agencies’ regulations in effect
before the publication of the revisions. H.R. 1289 would amend the Bank Holding
Company Act of 1956 (BHCA) to make nonbank affiliates of bank holding
companies subject to CRA if they engage in lending or offering of banking-product
services. At a minimum, a satisfactory CRA rating would be required for securities
firms, mortgage banks, or insurance company affiliates of financial holding
companies to be CRA compliant if H.R. 1289 becomes law.
Title II (Data Disclosure Requirements) directs the Secretary of Housing and
Urban Development to establish requirements for insurers to submit information
annually regarding noncommercial insurance, rural insurance, and investments by
insurers. It requires the Secretary to make such information public. Under this title,
the Financial Institutions Examination Council is directed to maintain a
comprehensive database containing the hierarchical structure of financial holding
companies, bank holding companies, depository institutions, and non-depository
institutions. Title III (Regulatory and Structural Reforms) would amend the BHCA
to allow certain expanded financial activities by a bank holding company only if it
or its affiliate has neither (1) been adjudicated in federal court nor (2) entered into a
consent decree or settlement agreement, premised on a violation of the Fair Housing
Act (antiredlining requirements). Under this title, for mergers and acquisitions the
financial institutions would be required to have (1) a public meeting and (2) a period
for public comment regarding branch closures. It would also amend the CRA to
subject all regulated financial institutions, regardless of size or aggregate assets, to
mandatory biennial examination.
25 (...continued)
BNA’s Banking Report, February 12, 2007, p. 1.

CRS-11
Conclusion
The CRA is now being examined from a number of different perspectives,
including its role in regulatory relief, subprime lending relief, and small-dollar loans,
as well as expanding CRA to other nonbanking financial services. From the
perspective of regulatory relief, CRA has been described by some bankers as
burdensome, both in terms of paperwork and the opportunity costs of alternative
investments. Consequently, to relieve smaller banks of this regulatory burden, the
agencies’ 2005 rules changes simplified the compliance requirements for smaller
institutions. In addition, Congress passed the Financial Services Regulatory Relief
Act of 2006 that reduced the frequency of on-site examinations of smaller banking
institutions. Consumer advocates argue that regulatory relief has weakened CRA
enforcement.
The Community Reinvestment Modernization Act of 2007 would repeal the
2005 rules and require the nonbanking affiliates of bank holding companies to
comply with CRA. It would also extend CRA to other the banking activities of
nonbanking affiliates. If bank holding companies are conducting more banking
activities through their insurance, securities, and mortgage banking affiliates and
away from the holding companies’ bank(s), the act could increase low- and
moderate-income community lending. This implies that the CRA requirements in
H.R. 1289 may directly counter the promised benefits of the Gramm-Leach-Bliley
Act of 1999, which regulates the commingling of financial services. The reason is
that H.R. 1289 would require CRA compliance of the services provided by the
holding companies; for example, securities and insurance activities will now have to
comply with the CRA. Under current law, these affiliates are not required to comply
with the CRA.
The regulatory agencies’ use of CRA credits in their guidance lacks consistency.
Consumer advocates supported regulators’ efforts to use CRA credits to encourage
banking institutions to offer programs that extend small-dollar loans to LMI
individuals and families to reduce their dependence on more-expensive payday
lenders and auto-title loan providers. The regulators also have consumer groups’
support for their efforts to provide financial assistance to subprime borrowers.
According to the FDIC general council, Sara Kelsey, “We encourage bankers to play
this role and will be supportive of such restructuring efforts, as we were in similar
efforts by banks following Hurricane Katrina. Such efforts will be considered as
meeting the goals of the Community Reinvestment Act.”26 But, the guidance is in
conflict with the September 2005 guidance on subprime lending, which warns of the
risk in making these types of CRA-credited loans. This apparent inconsistency
suggests that more concrete guidance that balances safety and soundness
requirements with lenders’ ability to offer credit to LMI individuals and families is
necessary to be able to hold banks and their regulators accountable in their role in
eliminating the subprime lending and predatory lending concerns.
26 Christian Bruce, “FDIC’s Legal Counsel Raises Possibility Of Capital Charges Against
Securitized Loans,” BNA Banking Report, March 29, 2007, p. 3-4.
[http://pubs.bna.com/ip/bna/bbd.nsf/eh/A0B4E9G9]