In Focus: Federal Reserve Banks Examine Ways to Aid Compliance with CRA

The Federal Reserve is pursuing novel measures to help banks comply with the Community Reinvestment Act.

Rules implementing the law require banks to meet three tests involving lending to, investing in, and serving local communities. The Fed -- working with local groups, governments, and developers -- is trying to help banks to find sound loans and investments.

For instance, the Federal Reserve Bank of San Francisco is working with California state officials, brokerages, insurance companies, and banks to create investment securities backed by small-business loans. Banks buying the securities could get CRA investment credit, and those selling the loans -- which would be guaranteed in part by the state -- would gain the liquidity to make more loans.

The new securities could be issued next year, said Joy Hoffmann Molloy, assistant vice president and community affairs officer of the San Francisco Fed. The investments could qualify under the CRA test, just as purchases of securities backed by mortgages for low- to moderate-income borrowers often do.

"For a long time when you said 'CRA,' you thought of affordable housing," Ms. Hoffmann Molloy said. "The industry has evolved. Small business has become more of a part of community and economic development."

The effort dovetails with small-business development initiatives under way in the Federal Reserve system.

To spur more CRA-related small-business lending, the Federal Reserve Bank of Cleveland held several meetings in the past eight months at which bankers, small-business owners, and credit counselors compiled a list of recommendations for the industry.

The real-life advice is more valuable to bankers than a "dry report" from a single source, said Ruth Clevenger, assistant vice president and community affairs officer at the Cleveland Fed.

The task force recommended banks set up divisions that exclusively market small-business loans. It also suggested that banks use more flexible criteria and standards for so-called micro loans, which are in the $300 to $100,000 range. Banks that do not want to assume all the risk, especially from larger loans, should set up a lending entity with government agencies and charitable foundations. The task force also recommended that another joint arrangement be set up to invest in small companies.

The recommendations reflect how the Fed is encouraging banks to go deeper into underserved communities by coordinating more with consumer advocates, developers, charities, and government.

"There is still a gap. Banks are risk-averse," Ms. Clevenger said. However, "there are a lot more players now. People have seen the positive results of partnerships."

To foster networking, the Fed sponsored 282 conferences last year, up from 233 and 206 in each of the two previous years, and had 1,600 "outreach" meetings last year, up from about 1,400 in each of the last two years.

"This is a forum that helps," said Robert G. Rowe, regulatory counsel of the Independent Community Bankers of America. Without the Fed's help, he added, "there'd be a lot more fumbling. Each bank would have to be reinventing the wheel all over again."

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