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Has the Community Reinvestment Act outlived its usefulness in the 21st century

Has the more-than-40-year-old Community Reinvestment Act outlived its usefulness. Congress authorized the CRA in 1977, at a time when the banking landscape was far different than it is today.

An article in the December 3, 2018 American Banker by Diego Zuluage of the Cato Institute’s Center for Monetary and Financial Alternatives examines this question.

The Office of the Comptroller of the Currency has initiated a study of the CRA. One issue that bears review is the degree to which the CRA in the world of 21st century banking can accomplish the goal that Congress set for it in 1977 .

The CRA mandates that banks make credit available in the communities in which they take deposits. The laudable goal of the law is that banks serve historically underserved low and moderate-income communities.

The law fails to guide regulators on exactly how to to encourage such lending. It done not address, for example, sanctions, fines or threats of charter-revocation. It does allow regulators to block bank expansion including mergers, so much a part of the new banking landscape. One of those regulators, the Federal Deposit Insurance Corporation, back when the CRA made its way through Congress, oversaw 14,000 banks, but now supervises about 5,000. This attrition, to a great extent is due to bank mergers. 

For 4 decades the CRA has provided guidance for regulators on assessing how well banks have met their CRA obligations. However, although we live in a metrics-driven world now, 40 years ago Congress failed to provide guidance on how to measure CRA performance.

Another important issue raised by Zuluage is whether the CRA’s 40-year-old goal could have contributed to the 2008 financial crisis. He posits that the crisis illustrate that for many financial vulnerable households the problem was not so much a lack of mortgage credit as it was too much easy credit.