Community Reinvestment Act - Essay Example

 Community Reinvestment Act The Community Reinvestment Act (CRA) was enacted, or made into law, with the intention to “encourage depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound banking operations. It was enacted by the Congress in 1977 (12 U.S.C. 2901) and is implemented by Regulations 12 CFR parts 25, 228, 345, and 563e. (FFIEC’s Community Reinvestment Act). I believe that the CRA is still necessary as long as it is helping to revitalize and stabilize the low- or moderate-income geography. I do not believe that it imposes an unreasonable burden on the banking community (especially in the case of smaller institutions). My belief is that it can be a win-win situation for the banking institutions and the community if implemented properly. Banking institutions and the community (businesses wishing to assist the low- or moderate-income geography) should abide by the laws and regulations set and provide a system of accountability. Bylsma (1997) included comments from interagency letter that was forwarded to him this implication: “Examiners will presume that an activity revitalizes or stabilizes a low- or moderate-income geography if the activity has been approved by the governing board of an Enterprise Community or Empowerment Zone”. The interagency letter forwarded to Byslma also states: As you know, the CRA regulations establish the framework and criteria by which the regulatory agencies assess an institution’s record of helping to meet the credit needs of its community. The four bank and thrift regulatory agencies have promulgated substantively identical CRA regulations. Therefore, staff from all of the agencies have considered the issues you raised, and concur in the opinions expressed in this letter. The CRA regulations provide several different evaluation methods for examiners to use, depending on the business strategy and size of the institution under examination. Regardless of the performance test used to evaluate a regulated financial institution, an institution may receive positive consideration for making "qualified investments" that help meet the credit needs of the institution’s assessment area(s) or a broader statewide or regional area. Although the four financial regulatory agencies neither endorse nor certify particular lending or investment products, these implication keeps businesses that are applying for credit accountable to the banking institutions. Banking institutions carry a burden too and are held accountable to the community and said geography. Banks must help meet the credit needs of their communities. There are many federal regulations that the banking institutions must meet. These include, but are definitely not limited to, the Federal Reserve Systems’ standards for assessing performance and records, reporting, and disclosure requirements. Within these standards, some responsibilities include performance tests, standards, and ratings; lending tests; investment tests; strategic planning; data collection, reporting, and disclosure; content and availability for public file, etc. Having stated this, banking institutions are being held accountable to their communities. I do not think the Community Reinvestment Act is taken seriously because there was much planning and work involved. The designation and duties of Governors of the Federal Reserve System, the Officer of the Comptroller of Currency, Office of Thrift Supervisors, and Federal Deposit Insurance Corporation (just to name of few) comprise of so much detail and responsibilities. For example, the Federal Reserve Board alone has to implement the Federal Reserve Act. The Federal Reserve Board (2005) lists some duties: (Governing) borrowing by depository institutions and others at the Federal Reserve discount window (Prohibiting) lenders from discriminating against credit applicants, establishes guidelines for gathering and evaluating credit information, and requires written notification when credit is denied (Setting) uniform requirements for all depository institutions to maintain reserve balances either with their Federal Reserve Bank or as cash (Defining) the requirements for membership of state-chartered banks in the Federal Reserve System; sets limitations on certain investments and requirements for certain types of loans; describes rules pertaining to securities-related activities (Implementing) provisions of the Gramm-Leach-Bliley Act that require reporting and public disclosure of written agreements between (1) insured depository institutions or their affiliates and (2) nongovernmental entities or persons, made in connection with fulfillment of Community Reinvestment Act requirements This is just a fraction of the responsibilities of one organization formed in order to carry out the duties to protect and benefit the banking industries’ larger and smaller communities. There are many facets of performance evaluations that small, intermediate, large, wholesale, and institutions with strategic plans must perform. There is not enough time or space to even begin this discussion. Regardless, the Act has been well planned, developed, and implemented. However, I do not believe it is being well used and enforeced. I do not believe that neither the banking institutions nor the communities are taking full advantage of the Community Reinvestment Act. On the other hand, there are many regulations, guidelines, and responsibilities that the communities must, in turn, meet. Hence, the accountability of both side to each other provides the balance that is necessary. The communities desiring assistance from banking institutions must fall under certain categories. A small description of the the type of community that can apply for assistance from the banking community is extracted FFIEC’s home page regarding the Community Reinvestment Act: “Distressed nonmetropolitan middle-income” geographies are those located in counties that meet one or more triggers that generally reflect the “distress criteria” used by the Community Development Financial Institutions (CDFI) Fund, but which will utilize annual information where possible. The distress triggers are: (1) an unemployment rate of at least 1.5 times the national average; (2) a poverty rate of 20 percent or more; (3) a population loss of 10 percent or more between the previous and most recent decennial census, or a net migration loss of 5 percent or more over the five-year period preceding the most recent census. “Underserved nonmetropolitan middle-income geographies” must meet criteria for population size, density, and dispersion that indicate that an area’s population is sufficiently small, thin, and distant from a population center such that the geography is likely to have difficulty in financing the fixed costs of essential community needs. The agencies will use as the basis for these designations the “urban influence codes” numbered 7, 10, 11, and 12 that are maintained by the Economic Research Service of the United States Department of Agriculture. Communities, or geographies, must follow guidelines and responsibilities set forth. Just a few qualifications are listed in the interagency letters compiled by Bylsma (1997): To be considered as "community development," an activity that promotes economic development by financing businesses or farms that meet certain size eligibility standards must meet both a purpose test and a size test. To meet the purpose test, the activity must promote economic development. An activity is considered to promote economic development if it supports permanent job creation, retention, and/or improvement for persons who are currently low- or moderate- income or supports permanent job creation, retention, and/or improvement in low- or moderate-income geographies targeted for redevelopment by federal, state, local or tribal governments. An activity meets the size requirements if it relates to an entity that either meets the size eligibility standards of the Small Business Administration’s Development Company (SBDC) or Small Business Investment Company (SBIC) programs or if it has gross annual revenues of $1 million or less. The agencies will presume that any loan or investment in or to an SBDC or SBIC promotes economic development. However, any loan or investment in a business that merely meets the size standards applicable to the SBDC or SBIC programs, or has less than $1 million in gross annual revenues, must also promote economic development if it is to be considered to be community development.7 If the primary purpose of an investment is to revitalize or stabilize low- or moderate-income geographies, the intended benefits must be direct and longer-term to receive favorable consideration.8 The staff of the agencies have addressed the issue in the context of whether all loans in a low- or moderate-income geography must have a stabilizing effect to be considered to have a community development purpose, and although this discussion focuses on loans, it also applies to investments. Interagency questions and letters address revisions that may improve the Community Reinvestment. The agencies provide questions and answers that, if addressed and answered properly, can improve the current status for both banking institutions and their communities Therefore, I believe that with some revisions and lots of implementation, the Community Reinvestment can be a win-win situation for all. Works Cited Bylsma, Michael S. “Correspondence Date: September 3, 1997.” Community Reinvestment Act. Federal Financial Institutions Examination Council. 18 Dec. 2005, < http://www.ffiec.gov/cra/qnadoc.htm>. . Community Reinvestment Act. 2005. Federal Financial Institutions Examination Council. 18 Dec. 2005. . “Regulations.” 14 Dec. 2005 (last updated). The Federal Reserve Board. 18 Dec. 2005, . (2000). The American Heritage Dictionary of the English Language. Retrieved from . Read More