The Twenty-Fifth Anniversary of the Community Reinvestment Act: Past Accomplishments and Future Regulatory Challenges. (Session 4: Housing Subsidies and Finances)

I. INTRODUCTION AND SUMMARY (1) The U.S. Congress passed the Community Reinvestment Act (CRA) in 1977 to encourage depository institutions to meet the credit needs of lower income neighborhoods. The CRA was built on the simple proposition that deposit-taking banking organizations have a special obligation to serve the credit needs of the communities in which they maintain branches. At the time of the CRA's passage, banks and thrifts originated the vast majority of home purchase loans. The CRA's initial focus on areas where CRA-regulated institutions maintained branches made sense because restrictions on interstate banking and branching activities were limiting the geographic scope of mortgage lending operations. Today, the CRA continues to provide significant incentives for CRA-regulated institutions to expand the provision of credit to lower income and/or to minority communities where those institutions maintain deposit-taking operations. Yet in the quarter century since the act's passage, dramatic changes have transformed the financial services landscape, especially in home mortgage lending. These changes have combined to weaken the link between mortgage lending and the branch based deposit gathering on which the CRA was based. Today, less than 30 percent of all home purchase loans are subject to intensive review under the CRA. In some metropolitan areas, this share is less than 10 percent. With a substantial portion of home purchase lending no longer subject to detailed scrutiny under the CRA, the issue of how best to modernize the CRA has emerged as an important public policy challenge. Some argue that the CRA's costs exceed its benefits. Others advocate expanding regulatory oversight. Congress considered changes to the CRA in the debate leading up to the passage of the 1999 Gramm-Leach-Bliley Financial Modernization Act (GLBA), but in the end it did little to make the CRA conform to the realities of the financial services marketplace. Although the CRA continues to provide significant benefits to lower income households and communities, reform is needed for the act to encourage financial services providers to meet the continuing needs of the communities they serve. 1.1 Summary of Key Findings This paper draws on a more extensive Joint Center for Housing Studies assessment of the CRA, funded by the Ford Foundation. The larger study not only assesses the impact of the CRA on home purchase and home refinance lending, it also presents commentary on the CRA's impact on small-business and multifamily lending, as well as on the provision of financial services more generally. In addition, the Ford Foundation study presents qualitative findings concerning the CRA's impact on the operation of banks and mortgage lenders as well as the impact on the relationship between mortgage lenders and community-based advocacy organizations. Our paper focuses on the regulatory and legislative challenges that confront the act at age twenty-five. In addition to providing a brief review of the evolution of CRA regulations, we document the impact that the CRA has had on home mortgage lending to lower income people and communities and assess changes in industry structure. We conclude with a discussion of current legislative and regulatory challenges. The CRA Has Expanded Access to Mortgage Capital Working in combination with the Home Mortgage Disclosure Act (HMDA) and the closely related Fair Housing and Fair Lending Legislation, the CRA continues to expand access to capital for CRA-eligible borrowers. Here, CRA-eligible borrowers include those with an income of less than 80 percent of the area median income and/or those living in census tracts with a median income of less than 80 percent of the area median. CRA-regulated lenders refer to federally regulated banks and thrifts as well as their mortgage company and finance company affiliates. * In both 1993 and 2000, CRA-regulated lenders operating in their assessment areas (areas where they maintain deposit-taking operations) had shares of conventional, conforming prime home purchase loans to CRA-eligible borrowers that exceeded the equivalent shares for out-of-area lenders or noncovered organizations. …