The Community Reinvestment Act: The Community Reinvestment Act: Opportunities to improve the community Opportunities to improve the community

investment responsibility of the financial services investment responsibility of the financial services industryindustry

Tom FeltnerTom FeltnerVice PresidentVice President

Informing communities about the financial

services policy issues that impact them most

Documenting patterns in the financial services industry

and helping local organizations and media

understand problems

Giving communities the tools to make better, safer financial decisions

Woodstock Institute: Woodstock Institute: Applied research, policy development, and Applied research, policy development, and advocacyadvocacy

Woodstock Institute: Woodstock Institute: Applied research, policy development, and Applied research, policy development, and advocacyadvocacy

Woodstock Institute: Woodstock Institute: Informing the policy process with key, practical Informing the policy process with key, practical informationinformation

Woodstock Institute: Woodstock Institute: Informing the policy process with key, practical Informing the policy process with key, practical informationinformation

CRA Modernization: CRA Modernization: Overview of the Community Reinvestment ActOverview of the Community Reinvestment Act

1975

1977

1989

1992-96

1995

Home Mortgage Disclosure Act (HMDA)

1977-87

1990

Community Reinvestment Act (CRA)

Limited adherence to CRA requirements

“The Color of Money” story printed in Atlanta Journal Constitution

New data added to HMDA

Boston Fed analyses of CRA reports

lending, investments, services test added

1989 CRA Exams made public for the first time

2005 Regulators weaken exams

Source: Avery, et al. “The CRA within a Changing Financial Landscape“

CRA Modernization : CRA Modernization : Expanding the scope of CRAExpanding the scope of CRA

Recommendations

The CRA should apply to mortgage companies, mortgage brokers, mainstream credit unions, insurance companies, securities companies and others

Issues

Percent of household financial assets deposited in CRA-regulated financial institutions continues to decline

Increasing role and market share of non-CRA regulated mortgage lenders

Mainstream credit unions, which have a mission to serve people of “modest means,” in many cases do not do so.

Insurance companies, online bankers have few locations but sell financial products across the country

Figure 1. Shares of Households’ Financial Assets

Figure 2. Mortgages Originated by Institution Type

CRA Modernization: CRA Modernization: Improving CRA assessment areasImproving CRA assessment areas

Recommendation

Assessment areas should be defined as any state, metropolitan area or rural county where that institution maintains retail office or is represented by an agent, or has a significant market share

All exams should be full scope exams and include a comparative analysis, rather than a repetitive narrative

Assessment areas could be different depending on the test. For example, the lending test should include majority of mortgage loans, services test should be based on location of deposits

Issues

Assessment areas are defined by the location of bank branches, not where financial institutions actually lend

Mortgage lending is far more likely to occur through large mortgage banking affiliates or mortgage brokers.

Insurance companies selling financial products currently only have a community commitment where they are headquartered

Large online banks gather deposits and make mortgage loans across the country, but only have a physical presence where their headquarters are located.

Source: Avery, et al. “The CRA within a Changing Financial Landscape“

CRA Modernization: CRA Modernization: Expanding the relevance of CRA ratingsExpanding the relevance of CRA ratings

Recommendations

Regulators should develop an interagency performance context for metro areas or states to determine CRA-related needs and opportunities.

Performance contexts should be based on careful analysis of local employment, housing and other data and include a public comment process.

Performance context should be used to evaluate the performance of each institution in meeting local needs.

Issues

92 percent of all banks receive a satisfactory score

CRA Modernization: CRA Modernization: Expanding CRA complianceExpanding CRA compliance

Recommendations

If a bank receives a low satisfactory or lower, they should be required to submit a public improvement plan.

For financial institutions that still do not improve, we recommend that they be unable to sell mortgages to the GSEs, be ineligible to contract with federal agencies, and/or pay any applicable fines to a national reinvestment fund.

Issues

Fewer CRA exams conducted by regulators

The consolidation of the banking and thrift industry means fewer opportunities for actionable public scrutiny of a bank’s CRA performance.

Fewer mergers of healthy institutions. Many recent mergers happened on an emergency basis with no opportunity for public comment.

Figure 4. Number of CRA Exams conducted1990 to 2009

CRA Modernization: CRA Modernization: Summary of key reformsSummary of key reforms

Regulatory changes and legislation are necessary to modernize the Community Reinvestment Act

Regulatory changes are needed to improve assessment areas, performance ratings, and services test. Legislative changes are needed to expand CRA to all financial institutions

Expand the scope of the CRA to include financial institutions such as:

1.Mortgage companies and brokers2.Insurance companies3.Securities companies4.Mainstream credit unions

Modernize the CRA Services Test

Banks should disclose, and regulators should consider information on account holders, accounts, and transactions including such critical variables as census tract location, account holder, number of new accounts opened, age of account, and percent of bank income generated by fees.

Ensure investment obligations are applied consistently

Regulators should develop an interagency performance context for metro areas or states to determine CRA-related needs and opportunities. CRA ratings should be based on how well a financial institution meets local needs.

Financial institutions should invest where they do business:

Assessment areas should be defined as any state, metropolitan area or rural county where that institution maintains retail office or is represented by an agent, or has a significant market share

All exams should be full scope exams and include a comparative analysis, rather than a repetitive narrative

Assessment areas could be different depending on the test. For example, the lending test should include majority of mortgage loans, services test should be based on location of deposits

The Community Reinvestment Act: The Community Reinvestment Act: Opportunities to improve the community Opportunities to improve the community

investment responsibility of the financial services investment responsibility of the financial services industryindustry

Tom FeltnerTom FeltnerVice PresidentVice President