For all the controversy it's generated, Congress took just two pages to write the Community Reinvestment Act of 1977.
How did such a short law spawn a 275-page regulation, hundreds of pages of examiner guidance, and an entire industry devoted to CRA compliance?
Those who helped draft the law and write the first CRA rules said they were interested only in forcing bankers and activists to meet regularly to discuss community credit needs. This communication was supposed to lead to increased lending, which examiners would reward with high CRA scores.
"CRA was written to nudge lenders," then-Sen. William Proxmire, the Wisconsin Democrat who chaired the Senate Banking Committee at the time, said in a March 1988 hearing reviewing the act's first decade. "Examination, evaluation, and enforcement procedures are meant to encourage lenders to make more loans in their own communities."
CRA's origins date back to the early 1970s.
Lawmakers were upset that banks were taking deposits from inner-city businesses and households but refusing to extend credit in these areas. Also several studies were released alleging extensive redlining of minority, inner-city neighborhoods, prompting activists primarily in Chicago and New York to demand a reinvestment requirement.
The bill that Sen. Proxmire wrote in 1977 required banks to lend everywhere they took deposits. Examiners were to evaluate compliance- although the grade would be confidential-and activists could protest merger applications if they believed a bank was not doing enough.
"It was very controversial because of the notion of credit allocation," said Jo Ann S. Barefoot, a partner at KPMG Barefoot Marrinan who worked for the lawmaker at the time. "Sen. Proxmire was watering down the bill as we went and creating legislative history about how this was not credit allocation and not intended to be burdensome."
Sen. Proxmire squeaked the legislation out of the Banking Committee only after an outspoken opponent, Sen. Bob Morgan, broke his leg hours before the vote. The act was tacked on to a housing bill, which President Carter signed into law on Oct. 12, 1977.
The House never held a hearing on CRA.
"The industry was not well aware of this," said Alan Herlands, director of licensing policy and systems at the Office of the Comptroller of the Currency and an author of the original CRA rules. "It had a very short legislative history."
Because the act is so short, regulators had little guidance when they wrote the rules. To get input, the agencies held hearings in six cities and received more than 500 comment letters. They devised 12 "assessment factors," which were designed to measure both lending and outreach.
The emphasis on lending, however, was quickly lost. Examiners, when they didn't see increased investment, began questioning bankers about their compliance efforts. Before long, rather than trying to make loans, banks were obsessed with documenting outreach efforts to ensure at least a satisfactory rating.
Still, regulators and bankers were relatively satisfied with the status quo during the early 1980s. "CRA had a pretty uneventful childhood," said Warren Traiger, a lawyer who advised the New York banking department on CRA issues. "There were a few protests but not much interest."
That started changing in the late 1980s and early 1990s. Activists, increasingly frustrated with the lack of fair-lending enforcement by the Justice Department and banking agencies under the Reagan and Bush administrations, began using CRA protests as a weapon to extract lending commitments from large banks.
"Protesting was the only real way of doing anything," said Richard T. Ritter, who served in Justice's civil rights division at the time. "If the Department of Justice had been more interested in working with community groups, then that might have limited the number of CRA challenges."
The surge didn't stop once President Clinton was elected.
Activists, after securing deals with Union Bank of California in 1988 and others, repeatedly protested megamergers. Protests rose from 41 in 1989, to 101 in 1994, according to data compiled by the General Accounting Office.
Ms. Barefoot blames the banks and regulators for the increase. Banks caved under community pressure and agreed to make below-market-rate loans, she said. This emboldened activists to protest even more banks, she said. Also, regulators never intervened, urging banks instead to settle disputes rather than force the agency to decide if the bank has done enough low- income lending, she said.
"This created a tool for the community groups and they used it a lot more skillfully than we intended," she said. "Having the protest become a central event was never intended."
Congress also gave activists extra ammunition. In 1989, lawmakers made CRA grades public and in 1991 they required the release of the data used to determine CRA grades.
At the same time, bankers began complaining about the costs of CRA compliance.
The Independent Bankers Association of America claims community banks spent more than $1 billion in 1992 complying with CRA. That computes to $63,448 per institution and represents a third of all compliance costs incurred by community banks, the IBAA said.
Activists also were unhappy that the law focused almost exclusively on mortgage lending and were upset that banks were not being judged harshly enough.
In stepped President Clinton, who in 1992 initiated a sweeping overhaul of the rules that eventually shifted the emphasis of CRA enforcement from paperwork to performance. In place of the 12 assessment factors is a three- prong test looking at lending, service, and investment. Big banks also must collect data on the location of their small-business loans.