What Does the Community Reinvestment Act Regulate?
I do not feel U.S. Government should regulate, regulate, regulate, but the original intent of the Community Reinvestment Act (CRA) served a useful purpose. It was enacted to curtail industry-wide discriminatory lending practices.
CRA is an Act that requires periodic review of certain federally insured institutions to identify and help eliminate "redlining" practices in lending.
CRA was controversial in 1977 when it was enacted and is now being hotly debated today as Republicans attempt to blame Democrats for the Wall Street and mortgage meltdown based on this 30-year-old law.
Does CRA Require Lenders to Make Subprime and High-Risk Loans?
CRA was enacted to protect consumers in certain geographic areas that were being lumped together and denied access to credit, including business loans, based on their neighborhood, not their own credit. CRA does not require quotas to be met nor forces banks and thrifts to make high-risk loans. In fact, CRA wording specifically cautions against this practice.
Who Must Comply with CRA Regulations?
The CRA is not an industry-wide Act. It only affects federally insured lenders, and it is estimated that 75% of all the predatory subprime loans were offered by institutions not fully covered under CRA.
If the government is committing tax payer money to insure these institutions does it not also have the right to examine how these lenders are performing to serve the people? We are not just bailing out CRA-regulated lenders but greedy lenders without “excuse” of “the government made me do it.”
Does CRA Require Lenders to Meet Quotas on Minority and Low-Income Loans?
It is important to remember that CRA is not a “mortgage law.” It is an Act that was intended to address redlining (which still persists throughout the U.S. today) and discriminatory lending practices that also includes commercial business loans.
What Does CRA Require From Lenders?
The CRA requires periodic evaluation of each depository institution's record in helping meet the credit needs of its entire community, not just areas where depositors are affluent. That record is examined to see if redlining practices continue and is taken into account in considering an institution's application for deposit facilities.
In other words, lenders making money off a community are not allowed to discriminate against qualified applicants based on race or income in that same community. CRA does not require lenders to enter into communities, nor look at ways to invest in communities where they are not taking deposits.
Two important points about CRA regulations:
- CRA does not give specific criteria for rating the performance of depository institutions. It views the individual circumstances of institutions.
- CRA does not require institutions to make high-risk loans. In fact, the language of CRA specifically makes clear that an institution's CRA activities “should be undertaken in a safe and sound manner.”
CRA was designed to encourage equal lending opportunities and it is not the only law that has been required to address problems with discriminatory lending. In 1988 H.R. 5050 - What is H.R. 5050 - The Women's Business Ownership Act was passed. One of the things it made illegal was the requirement by lenders that women must have a male relative co-sign on all business loans for women.
Something to think about: CRA covers only federally insured institutions that the government knows that it must bail out if lenders fail. Why would Congress enact a law that purposely forces lenders to make bad loans to fill quotas that the government would then have to bail out?