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