the Future of Change

Since its passage in 1977, the Community Reinvestment Act (“CRA”) has charged federal bank regulators with “encourag[ing]” certain financial institutions covered by the law to “to help meet the credit needs of the local communities in which they are chartered consistent with . . . safe and sound” banking practices.  What should stand out immediately are the CRA’s relatively “soft” provisions—can you think of another law that requires that regulators “help” those they regulate to do anything, where any such help must be undertaken in light of “safe and sound” practices?  Despite its relatively simple approach to bank oversight, the law has nevertheless brought about billions of dollars in investment in previously underserved communities throughout the United States.  At the same time, some tried to blame these relatively simple requirements for causing the subprime mortgage crisis because it somehow forced banks to make risky loans.  Nothing could be further from the truth.  In fact, some loopholes in the law mean that the law is not too strong, but too weak: it doesn’t really cover online banking and, what is worse, it does not cover financial institutions that do not take deposits, like so many of the subprime mortgage lenders that caused trillions of dollars in damages to the U.S economy.

Because of these weaknesses, the CRA and the rules that help agencies enforce it need to be updated.  Several of these agencies have proposed to do just that; The Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation have submitted proposed amendments to the CRA’s regulations.  At the same time, the Federal Reserve, the third federal entity that also regulates banks and enforces the CRA with those other two regulators, has yet to sign on to these proposed changes to the regulations.  The changes are complicated, and consumer groups and media outlets have come out against many of them.  If you’re looking for some background reading on the CRA itself, and some ideas for reforming it, check out some of the following articles which explain a range of CRA-related issues:

In The Community Reinvestment Act: Guilty, But Not as Charged, I argue that we need to reform the CRA in several ways, including expanding its scope to cover more financial institutions as well as creating a means through which consumers can sue both banks and the regulators for violations of the law’s provisions.

In Part of the Disease or Part of the Cure: The Financial Crisis and the Community Reinvestment Act, I describe the ways in which the many loopholes in the CRA helped open the door for rampant subprime lending to take place in the 2000s.

In A CRA for the 21^st Century: Congress Considers the Community Reinvestment Modernization Act of 2009, I analyze the efforts, initiated in Congress in the late 2000s, to update the CRA.  Today’s regulators could learn from this decade-old effort.

If you’re looking for such background reading on the CRA, I hope you find these helpful.