National economic development groups are up in arms over proposed changes to the Community Reinvestment Act (CRA), the landmark 1970s legislation enacted to stop redlining. The most significant reform would expand the definition of a “small” bank, which opponents fear would let powerful financial institutions wriggle out of their responsibility to serve low-income communities.
Right now, institutions with assets below $250 million are categorized as “small” under the CRA guidelines; federal regulators have suggested raising the limit to $500 million. This would affect the status of 46 lenders in New York State, and nearly 1,100 banks nationwide.
Many community development organizations criticize the plan. Small banks are evaluated less frequently than large banks (once every four to five years instead of every third year). More importantly, say advocates, small banks are only judged on their record of lending whereas large banks are required to meet targets in lending, investment and services to low-income communities.
“We are in total opposition to the proposed changes,” said Chandra Western, executive director of the National Community Development Association. “The whole thing is designed to reduce the number of banks that have to comply with the CRA.”
But banking representatives say that the entire industry has changed since the CRA was last updated in 1995—and the law should keep pace. “The industry is now much more consolidated, and large banks are just getting larger,” said Karen Thomas, vice president of the Independent Community Bankers of America. “A $255-million bank should not be examined using the same procedures as an $800-billion bank.”
By allowing more banks to be evaluated under the simpler, small-bank guidelines, argues Thomas, they will be freed from the administrative hassles that detract from their ability to serve low-to-moderate income communities. “We’re talking staff time, software expenses, detailed data collection and reporting. The regulatory burden for local banks actually takes away from their ability to fulfill CRA,” she said.
Community groups and low-income advocates are unconvinced. “When you make a loan, you have to do record-keeping and engage in extensive documentation,” said Joshua Silver, vice president of the National Community Reinvestment Coalition. “The additional paperwork the CRA asks for is minimal, and the benefits to communities far outweigh those costs.”
Independent data regarding the impact of the CRA on lending and community investment is limited, but a recent study by the Joint Center for Housing Studies at Harvard University concluded that access to credit in low-income areas has expanded since the law was passed.
Both sides’ arguments have been filed with the four CRA overseers (the FDIC, Federal Reserve, Office of Thrift Supervision and Office of the Comptroller of the Currency). A final determination is anticipated by the end of the summer.