Congressional concerns that banks and thrifts (institutions) were not adequately responsive to credit needs of the communities they served, including low- and moderate-income areas, prompted the passage of the Community Reinvestment Act (CRA) in 1977. The act requires each federal bank and thrift regulator—the Federal Reserve Board (FRB), the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) for banks, and the Office of Thrift Supervision (OTS) for thrifts—(regulators) to encourage institutions under its jurisdiction to help meet the credit needs in all areas of the community the institution is chartered to serve, consistent with safe and sound operations. The act also requires the regulators to periodically assess institutions’ community lending performance during examinations and to consider that performance in their evaluations of institutions’ applications for expansion or relocation of their operations. Growing concern about the effectiveness of CRA’s implementation and its regulatory burden on institutions led to the regulators’ major reform effort, which resulted in two major proposed CRA revisions, issued in December 1993 and October 1994, and a final revised CRA regulation in May 1995. This report responds to a request from the former Chairmen, House Committee on Banking, Finance and Urban Affairs and the Subcommittee on Consumer Credit and Insurance asking us to evaluate whether the regulators’ reform efforts would improve compliance with the CRA, encourage institutions’ lending to their entire communities, and reduce unnecessary burden. The former Chairmen also asked us to evaluate the regulators’ implementation of the fair lending laws—the Fair Housing Act (FHA), the Equal Credit Opportunity Act (ECOA), and the Home Mortgage Disclosure Act (HMDA). The result of our work on fair lending will be discussed in a separate report. The debate preceding enactment of CRA was similar to the current debate. Community groups urged its passage to curb what they believed to be a lack of adequate lending in low- and moderate-income areas. Bank and thrift officials (bankers) generally opposed CRA as an unnecessary measure that could, among other things, unduly affect business decisions by mandating credit allocation and cause safety and soundness problems by forcing institutions to make excessively risky loans. Since the passage of CRA, the regulatory, economic, and legislative environments have changed. It is therefore useful to review the history of, and substantive amendments to, CRA to understand its origins and where emphasis has shifted. Table 1.1 briefly illustrates the major amendments to CRA since its passage. CRA was passed as title VIII of the Housing and Community Development Act of 1977 (12 U.S.C. 2901 et seq.). CRA requires each federal banking regulator to use its authority, when examining institutions, to encourage such institutions to help meet the credit needs of the local communities in which they are chartered, consistent with the institution’s safe and sound operation. In connection with these examinations, the regulators are required to assess an institution’s record of lending in its community and take it into account when evaluating any type of application by an institution for a deposit facility. CRA was amended by FIRREA to require that the regulator’s examination rating and a written evaluation of each assessment factor be made publicly available. FIRREA also established a four-part qualitative rating scale so that the publicly available CRA ratings would not be confused with the five-part numerical ratings given to institutions by the regulators on the basis of the safety and soundness of their operations. These safety and soundness ratings are confidential. In 1991, FDICIA further amended CRA to require public discussion of data underlying the regulators’ assessment of an institution’s CRA performance in the public CRA evaluation. The Housing and Community Development Act of 1992 amended CRA to require that the regulators consider activities and investment involving minority- and women-owned financial institutions and low-income credit unions in assessing the CRA performance of institutions cooperating in these efforts. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 amended CRA to require that institutions with interstate branching structures receive a separate rating and written evaluation for each state in which they have branches and a separate written evaluation of their performance within a multistate metropolitan area where they have branches in two or more states within the area. The principle contained in CRA, that institutions must serve the “convenience and needs” of the communities in which they are chartered to do business consistent with safe and sound operations, is one that federal law governing deposit insurance, bank charters, and bank mergers had embodied before CRA was enacted. The Banking Act of 1935 declared that banks should serve the convenience and needs of their communities. The Bank Holding Company Act, initially passed in 1956, requires FRB, in acting on acquisitions by banks and bank holding companies, to evaluate how well a bank meets the convenience and needs of its communities within the limits of safety and soundness. Under CRA, the concept of “convenience and needs” was refined to explicitly include extensions of credit. CRA and the fair lending laws, while separate, have related objectives. The primary purpose of CRA was to prohibit redlining—arbitrarily failing to provide credit to low- and moderate-income neighborhoods. FHA and ECOA prohibit lending discrimination based on certain characteristics of potential and actual borrowers. The FHA, passed by Congress in 1968 as title VIII of the Civil Rights Act of 1968, among other things prohibits discrimination in residential real estate-related transactions on the basis of an applicant’s race, color, religion, gender, handicap, familial status, or national origin. Such prohibited activities include denying or fixing the terms and conditions of a loan based on discriminatory criteria. The ECOA, passed in 1974, prohibits discrimination with respect to any aspect of a credit transaction based on race, color, religion, national origin, gender, marital status, age, receipt of public assistance, or the exercise, in good faith, of rights granted by the Consumer Credit Protection Act. HMDA was enacted by Congress in 1975 to provide regulators and the public with information so that both could determine whether depository institutions were serving the credit needs of their communities but was expanded over time to detect evidence of possible discrimination based on the individual characteristics of applicants. HMDA established a reporting obligation for depository institutions. Initially, HMDA required depository institutions with total assets of more than $10 million to compile data on the number and total dollar amount of mortgage loans originated or for which the institution received completed applications or purchased during each fiscal year by geographic area and make that data available for public inspection. In 1989, HMDA was amended to require collection and reporting of data on race, gender, and income characteristics of mortgage applicants to provide data to assist in identifying discriminatory lending practices and enforcing fair lending statutes. Amendments to HMDA in 1988 and 1991 expanded the reporting requirements to most mortgage banking subsidiaries of bank and thrift holding companies and independent mortgage companies not affiliated with depository institutions. In 1992, HMDA was amended to require affected financial institutions to make available to the public, upon request, their loan application registers, which maintain data for loans covered by HMDA. Both HMDA and CRA were originally enacted to remedy a perceived lack of lending by institutions to the communities in which they were chartered to do business by the regulators. HMDA was amended in 1989 to include the collection of data on race, sex, and income of applicants for credit to provide indications of possible lending discrimination. In addition, 2 of the 12 assessment factors, factors D and F, in the current CRA regulation address the issue of discrimination to be considered in determining an institution’s CRA rating. Where available, HMDA data are to be used by examiners when assessing compliance with CRA, FHA, and ECOA. The federal banking regulators have primary responsibility for the examination of CRA performance and enforcement of the act. In addition to their responsibilities for examining institutions for financial condition and safe and sound operations, the regulators have been, since the late 1960s, responsible for examining and enforcing laws and regulations primarily related to matters other than safety and soundness. These include various consumer protection or civil rights laws and regulations intended to ensure that the provision of banking services is consistent with legal and ethical standards of fairness, corporate citizenship, and the public interest. These laws include CRA, and the regulators monitor compliance with them through compliance examinations. Since the late 1960s, the number of laws and regulations covered by compliance examinations has increased to over 20. Believing that bank operations had become too complex to be adequately covered by a single group of examiners, the FRB established a special compliance examiner program in 1977, which is responsible for performing compliance examinations separately from safety and soundness examinations. The FRB made the compliance examiner program permanent in 1979. A distinct group of compliance examiners, initially established by this program, has remained in place since 1979 and has grown relative to the number of Federal Reserve member banks. FDIC initiated a compliance examiner program in the late 1970s that established a compliance specialty but did not represent a separate career path and did not preclude examiners from also conducting safety and soundness examinations. FDIC did not establish an entirely separate compliance examiner force exclusively responsible for compliance examinations until 1990. FDIC’s compliance examiner program was not fully staffed, however, until the end of 1993. The compliance examiners remained part of FDIC’s Division of Supervision until an August 1994 reorganization that consolidated activities formerly divided between the Division of Supervision and the Office of Consumer Affairs into a single Division of Compliance and Consumer Affairs. Similar to FDIC, OCC established a compliance examination specialty in the late 1970s. The specialty did not represent a separate career path for examiners and often resulted in examiners spending only a portion of their time doing compliance examinations. Junior examiners were usually responsible for doing compliance examinations.