ABSTRACT
The Community Reinvestment Act (CRA), passed in 1977 in response to a nationwide grass roots movement against bank redlining of low- and moderate-income neighborhoods, formally established banks’ “affirmative obligation to help meet the credit needs of the local communities in which they are chartered.” Twelve years later, reactivated by mounting evidence that neither banks nor their federal regulators were taking their obligations under the law seriously, a resurgent community reinvestment movement helped to obtain amendments to the CRA—and to its companion, the Home Mortgage Disclosure Act (HMDA)— that required increased public disclosure of information on bank performance.
This increased information has led to greater awareness of the inadequate performance of banks and their regulators. The industry has pursued an aggressive campaign to weaken the CRA and cut back on HMDA reporting requirements. Instead, the new Congress and new Administration should adopt revised policies that strengthen community reinvestment performance standards, enhance regulatory enforcement, and expand disclosure of lending data.
Both banks’ performance and public policy proposals should be evaluated in relationship to appropriate public policy goals: (1) ending racial discrimination by banks, (2) guaranteeing the availability of low-cost basic banking services for low-income individuals, (3) ensuring that the credit needs of low-income and minority communities and individuals are served as aggressively and creatively as those of other segments of society, and (4) providing public accountability for both banks and their regulators.
A mounting body of research documents the continuing failure of banks to adequately meet the credit and banking services needs of low-income and minority people and communities. There are disproportionately few mortgage loans for homes located in minority neighborhoods and disproportionately many denials of loan requests from minority applicants. Residents of low-income and minority communities find few banking offices in their own neighborhoods and too few 222banks anywhere offering affordable basic banking accounts. Small businesses, especially those in inner-city or rural areas and those owned by minorities, have difficulty obtaining adequate credit.
Why have banks done so poorly in this area? The primary reasons include failure to exploit profitable business opportunities in low-income and minority communities, racial discrimination in the provision of credit, ineffective performance by federal bank regulators; removal of legal barriers to geographic expansion and consolidation within the banking industry; and external factors that prevent socially desirable community reinvestment activities from being profitable for individual banks.
Public policy proposals to improve needed flows of credit and financial services to low-income and minority individuals and neighborhoods should include extending community reinvestment obligations to nonbank financial institutions, including government-sponsored enterprises such as Fannie Mae, and establishing community-oriented not-for-profit banks. Nevertheless, there is no substitute for substantially improved performance by banks themselves. At least five types of changes in federal policy toward the banks could help to bring this about:
enhanced enforcement of laws prohibiting racial discrimination;
mandated provision of affordable basic banking services;
improvements in the CRA examination and evaluation process;
material incentives for improved bank performance;
increased disclosure of information on CRA-related lending.
