Community Reinvestment Act Weakened by New Rule Changes

Three of the four federal banking regulators recently voted for rule changes that will weaken the Community Reinvestment Act (CRA). Over 12,000 submitted comments opposed them. The rule changes passed by the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the Federal Reserve Board affect banks with $250 million to $1 billion in assets, or what are now considered “intermediate small banks.” Another rule passed by the fourth regulator, the Office of Thrift Supervision (OTS), raises the asset limit for small banks to $1 billion without requiring any kind of community development test.

Intermediate small banks will no longer be evaluated under the more stringent large-bank lending, investment, and service tests, but neither will they be graded entirely under the simpler small-bank evaluation. The small-bank lending test as well as a new, flexible community development test will evaluate intermediate small banks. The community development test will examine community development loans, qualified investments, and community development services.

Intermediate small banks will not be collecting data or reporting to the public on the distribution of small-business and small-farm loans. While banks generally agree that this will reduce the reporting burden placed on them, community organizations are concerned about the lack of access to the lending information of these banks. Studies show that in the past intermediate small banks generally made more loans in these categories than large banks.

Because mainstream financial institutions traditionally underserve low-income communities, these population groups may have no option but to use alternatives such as check cashers. Such alternatives are extremely costly and offers customers no opportunities to save money and accumulate assets. This is where the CRA comes in. The CRA tests evaluate and grade banks on lending and community development services in low-income communities. The CRA encourages financial institutions to help low-income individuals and communities achieve their financial goals.

Financial Links for Low-Income People (FLLIP), which is coordinated by the Sargent Shriver National Center on Poverty Law, has used the CRA to create many partnerships between community organizations and financial institutions to deliver financial education classes. These banks will still receive credit for these partnerships under the new community development test.

For more information, visit: http://www.federalreserve.gov/boarddocs/press/bcreg/2005/20050719/attachment.pdf