Community Reinvestment Act - Part Two

For me, unsophisticated and simplistic as I am, it's important to note that the only penalty for not complying with the CRA is being denied the ability to expand through merger, acquisition or branching. Even so, banks are pressured to "...help meet the credit needs of the communities in which they operate" whether they plan to expand or not.

From U.S.News & World Report blogger, James Pethokoukis (March 17, 2009): ... here comes this fantastic story, ...about East Bridgewater Savings in Boston:

Bad or delinquent loans? Zero. Foreclosures? None. Money set aside in 2008 for anticipated loan losses? Nothing. ... The bank even squeaked out a profit of $87,000. And its Tier 1 risk-based capital ratio was 31.6 percent, or more than three times higher than many community banks in Massachusetts. “We’re paranoid about credit quality,” Petrucelli said. The 62-year-old chief executive has run the bank since 1992.

Yet the FDIC has turned up the heat on Petrucelli's bank, giving it an apparently rare "needs to improve rating," for not making more risky loans under the Community Reinvestment Act. Here is how the FDIC puts it: “There are no apparent financial or legal impediments that would limit the bank’s ability to help meet the credit needs of its assessment area.

The FDIC examiners also faulted East Bridgewater "for not advertising and marketing its loan products enough. The bank, which does not have a Web site, offers fixed-rate mortgages."

How many East Bridgewaters are out there that knuckled under to the pressure and started handing out mortgages to whomever? I am not saying that CRA is the only factor here. There is plenty of blame to go around, regulators, Alan Greenspan, derivatives desks on Wall Street. But to let CRA and its enablers off the hook is ridiculous." (End James Pethokoukis article)

Speaking in 2007, the 30th anniversary of the CRA, Ben Bernanke, Chair of the Federal Reserve System since 2006, stated that the high costs of gathering information, "may have created a 'first-mover' problem, in which each financial institution has an incentive to let one of its competitors be the first to enter an underserved market.

Bernanke notes that at least in some instances, "the CRA has served as a catalyst, inducing banks to enter underserved markets that they might otherwise have ignored".

Underserved markets. At first glance I thought this said, "undeserved markets". It's amazing how similar those words look on paper.

In 1989, the first President Bush signed the Financial Institutions Reform Recovery and Enforcement Act (FIRREA) into law. FIRREA established a grading system for the CRA:

• Outstanding


• Satisfactory


• Needs to Improve


• Substantial Noncompliance

FIRREA also mandated that the 'grade' of each financial institution be make public - along with written evaluations using facts and data to support the CRA people's conclusions.

To make the CRA ratings public "... was a defining moment because it put the banks under the scrutiny of the media. It was the first time that any bank exam or rating was made public in the U.S." Source

Community Reinvestment Act - CRA

Referring to the The GLBA, enacted November 12, 1999, The Clinton Administration stressed that it "would veto any legislation that would scale back minority-lending requirements."

This meant that banks would be denied the ability to expand through merger, acquisition or branching unless each party received a good rating from the Community Reinvestment Act ... people.

The CRA 'people' are:
The Federal Reserve
The Federal Deposit Insurance Corporation (FDIC)
The Office of the Comptroller of the Currency (OCC)
The Office of Thrift Supervision (OTS)
and finally The Federal Financial Institutions Examination Council (FFIEC) coordinates the CRA efforts of these four. (The FFIEC's website hasn't been updated since 2007.)

The CRA was originally signed into law by President Jimmy Carter in 1977. It's purpose was to reduce discrimination in the credit and housing markets. You had:

• The Fair Housing Act of 1968 - to prohibit discrimination on the basis of race, sex, or other personal characteristics.


• The Equal Credit Opportunity Act of 1974 - same thing - to prohibit discrimination on the basis of race, sex, or other personal characteristics.


• The Home Mortgage Disclosure Act of 1975 - required that financial institutions publicly disclose mortgage lending and application data.


• The Community Reinvestment Act of 1977 - to ensure the provision of credit to all parts of a community, regardless of the relative wealth or poverty of a neighborhood.

In writing the CRA, Congress apparently didn't say how to ensure that banks and savings associations serve the credit needs of their local communities - the law just said to do it. And little by little, community groups organized to take advantage of their right under the Act to complain about law enforcement of the regulations.

To me, it's kind of like Congress told the banks to make their neighborhood people happy, and the people lined up at the banks, saying "Ok, it's a law now - make us happy." But how? The obvious answer was to make loans to people who otherwise wouldn't have qualified to borrow money - or buy a house. Because the "relative wealth or poverty of a neighborhood", in my opinion, can only be determined by the people who occupy it.

Mandatory Loans ....

A fellow named Barak posted an interesting article at 24hourcampfire.com called The Federal Reserve's Self-Imposed Dilemma - Gary North. (Barak listed the source.)

watch4bear, another member at 24hourcampfire made this comment about the article: "...Mandatory loans to unqualified borrowers, with zero collateral, and waived mortgage insurance, busted the bank. Ours, and other investing countries. Those responsible should be tried before the world court for collusion, and intent to defraud."

It was that phrase, "Mandatory loans" that started me off on this tangent - my quest for National Economic Understanding. Who was responsible for making bank loans mandatory? What an outrageous notion! Watch4bear pointed me in the right direction - the Gramm-Leach-Bliley Act.

The GLBA, enacted November 12, 1999, repealed part of an old law that prohibited a bank from offering investment,commercial banking, and insurance services all under one roof, so to speak. The GLBA made this legal again, and is how conglomerations like Citigroup (Citybank and Traveler's) are able to operate legally.

But the GLBA is beside the point when it comes to "mandatory loans", so I waded through the Wikipedia stuff and found exactly what I was looking for. I posted it on Barak's thread:

"Crucial to the passing of this Act was an amendment made to the GLBA, stating that no merger may go ahead if any of the financial holding institutions, or affiliates thereof, received a "less than satisfactory" rating at its most recent CRA [Community Reinvestment Act] exam", essentially meaning that any merger may only go ahead with the strict approval of the regulatory bodies responsible for the Community Reinvestment Act (CRA).

This was an issue of hot contention, and the Clinton Administration stressed that it "would veto any legislation that would scale back minority-lending requirements."

So this story really has nothing to do with the GLBA, and everything to do with the Community Reinvestment Act.