Since the Community Reinvestment Act's inception in 1977, trillions of dollars have been pumped into low- and moderate-income communities, but in the last 10 years, CRA has become less effective. So Congress aims to modernize the legislation.
A couple of reasons explain CRA's gradual loss of effectiveness, and consolidation within the banking industry is a significant driver. As smaller institutions have been bought by larger regional, national or global banks, the local banking presence in many communities has been diminished, along with the requirement to fairly serve those areas as required by CRA.
Technology and the advent of the Internet have also profoundly affected CRA. Much of today's banking is done online, deemphasizing retail branches. Loan applications are taken and approved online, diminishing the importance of an institution's physical presence. As a result, fewer communities are being served.
Historically, CRA has been driven by what are known as "assessment areas." An institution would report data based on where its branches were sited, and loans originated in the immediately surrounding areas would be evaluated to ensure that community members were being equally served.
Today, some large institutions have one central office but that serve communities hundreds of miles away through the Internet. In that situation, how is an assessment area defined?
Public groups advocate greater emphasis on community development, more stringent CRA standards and evaluations, more locally driven CRA ratings, more incentives to achieve an "outstanding" rating for true industry leaders and greater scrutiny of affiliate activities.
These public groups are also looking for more data to better assess how lenders are complying with CRA and to determine whether they are serving their communities equally. Their goal is to increase lending in underserved communities.
Currently, CRA data is not submitted in Loan Application Register format as Home Mortgage Disclosure Act data is. For HMDA, individual loan data is available to the public, enabling easier evaluation and assessment. CRA data is submitted in aggregate form, meaning information cannot be individually assessed. With more data available, these groups strive to pump more money into underserved areas.
Significant changes lie ahead for the industry. Because of the decreasing number of banks, CRA will possibly be expanded to include nonbank institutions such as independent mortgage companies, investment banks, hedge funds, credit unions, insurance companies and bank affiliates and subsidiaries. Including institutions not previously covered by CRA should mean more communities served.
Dodd-Frank requires race, sex and possibly ethnicity to be added to the data fields tracked for CRA compliance if extensions of credit to minority-owned or female-owned businesses are being monitored. The deadline for these fields to be added, is January 1, 2012.
CRA modernization also seeks to have data submitted individually rather than in aggregated form in order to supply information at a micro level.
This level of information would help the public more easily verify whether institutions are complying with the requirements and ensure that communities are being equally served.
Furthermore, a Consumer Financial Protection Bureau has been authorized and, as part of its responsibilities, is to oversee HMDA, CRA and Fair Lending compliance. This added oversight is intended to help ensure that lending institutions are equally serving communities and maintaining compliance.
Institutions should evaluate their current software now. Legacy systems lack the functionality required to support lending institutions' compliance needs. To maintain compliance, institutions must employ more modern technology to ensure that data is collected quickly, efficiently and without error.
Also, institutions that are outsourcing must verify that their vendor is knowledgeable about current regulations and the new requirements imposed by Congress. For example, as data fields are added, the vendor must update the system accordingly. Blame for failure to do so would ultimately fall on the institution, incurring severe penalties and fines.
Though many pundits have blamed the housing bubble and its implosion on the Community Reinvestment Act, it should be noted that just 6% of toxic loans were made by CRA-reporting institutions. Most of these loans were originated by non-CRA-reporting institutions. The reality is that, if more institutions had been required to comply with CRA, those bad loans probably would not have been made because CRA-reporting institutions are highly regulated.
CRA modernization may take significant strides, such as the possible expansion of coverage to nonbank institutions, to improve the industry. But institutions are still not required to equally serve communities where they have no physical presence but still extend credit online. As ever more loans are originated over the Internet, the industry will be forced to change how assessment areas are defined. No longer will an area be defined based on where branches are but rather on where loans are made.
As a result, large banks with limited local presence would be required to take on the responsibility of learning the needs of those individual communities, assessing their demographics and making sure those areas are equally served.
According to the National Community Reinvestment Coalition, CRA "has had a broader impact on the overall economy by creating jobs, expanding affordable-housing opportunities and promoting small-business development." Time will tell whether CRA modernization moves the economy to a better place.
