NCPA - National Center for Policy Analysis

Reforming The Community Reinvestment Act

May 7, 1999

Banks must get permission from federal regulators before they can merge with another bank -- or even open a new branch. The Community Reinvestment Act of 1977 (CRA) requires regulators to consider whether or not the lender has served the entire community, including low- and moderate-income neighborhoods.

The CRA is the center of a controversy over federal legislation to reform the financial services industry and lower barriers between banks and other financial institutions. Sen. Phil Gramm (R-Texas), chairman of the Senate Banking, Housing and Urban Affairs Committee, and Sen. Richard Shelby (R-Ala.) want to exempt small banks -- about 4,000 financial institutions with roughly 2.8 percent of all bank and savings and loan assets.

Gramm also proposes that a bank with a "satisfactory" or better rating for the past three years be presumed in compliance with the CRA unless there is substantial evidence otherwise. He says some organizations use the current CRA to extort money from banks by threatening to protest and intervene against bank mergers.

Actually, since home mortgage data were first made public in the late 1980s, conventional home mortgage lending has increased at a much faster rate for black families than for white families and for low-income families compared to those with higher incomes. For example, from 1993 to 1997:

  • Home loans to low-income borrowers rose 31 percent -- compared to the 18 percent increase in loans to the most qualified borrowers.
  • Home loans to minority borrowers increased 53 percent, to nonminorities 13 percent.

The CRA may have contributed to this trend, but mortgage interest rates fell during this period and the number of qualifying minority families rose. Today, even if a few lenders remain unresponsive, others are eager to do business, and financial services deregulation can stimulate more competition in making loans.

Source: William Murchison, "Why Not Abolish the Community Reinvestment Act?" Brief Analysis No. 290, May 7, 1999, National Center for Policy Analysis, 12770 Coit Rd., Suite 800, Dallas, Texas 75251, (972) 386-6272.


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