Statement of Sandra L. Thompson, Director,
Division of Supervision and Consumer Protection,
Federal Deposit Insurance Corporation
on
The Community Reinvestment Act: Thirty Years of Accomplishments, But
Challenges Remain;
before the
Financial Services Committee, U.S. House of Representatives; 2128 Rayburn
House Office Building
February 13, 2008
Chairman Frank, Ranking Member Bachus and members of the Committee, thank you
for the opportunity to testify today on behalf of the Federal Deposit Insurance
Corporation (FDIC) regarding the Community Reinvestment Act (CRA)1 on the occasion
of the thirtieth anniversary of the Act. CRA was landmark legislation and its effect has
been significant in enhancing credit opportunities nationwide.
In my testimony, I will provide some brief background on the statute and regulation,
discuss how the FDIC evaluates and monitors CRA performance, explain the effect of
CRA on the financial institution application process and describe CRA's positive impact.
I also will focus on how the FDIC is using CRA to address current challenges, such as
mortgage foreclosures, the need for affordable small-dollar loans, the exceptionally high
cost of credit and the need for basic banking services in many underserved
communities.
Background
Before CRA was enacted in 1977, there were severe shortages of credit available to
low- and moderate-income neighborhoods, as well as concerns about redlining2 and
discrimination. CRA was intended to expand access to credit and reduce discriminatory
credit practices. The statute built on earlier legislation such as the Home Mortgage
Disclosure Act of 1975 (HMDA), the Equal Credit Opportunity Act in 1974 and the Fair
Housing Act in 1968. Consistent with safe and sound operations, CRA assigns federally
insured financial institutions a "continuing and affirmative" obligation to help meet the
credit needs of their entire communities, including low- and moderate-income
neighborhoods.3
Evolution of CRA Regulations
In the thirty years since CRA's passage, there have been significant changes in the
financial services sector in terms of both industry characteristics and available products.
The agencies have revised the CRA regulations over time to keep pace with financial
sector developments.
The original implementing regulations for CRA, issued by the agencies in October 1978,
established criteria for evaluating bank and thrift CRA performance.4 Public evaluations
provided narrative descriptions of financial institutions' efforts, but with few hard
Division of Supervision and Consumer Protection,
Federal Deposit Insurance Corporation
on
The Community Reinvestment Act: Thirty Years of Accomplishments, But
Challenges Remain;
before the
Financial Services Committee, U.S. House of Representatives; 2128 Rayburn
House Office Building
February 13, 2008
Chairman Frank, Ranking Member Bachus and members of the Committee, thank you
for the opportunity to testify today on behalf of the Federal Deposit Insurance
Corporation (FDIC) regarding the Community Reinvestment Act (CRA)1 on the occasion
of the thirtieth anniversary of the Act. CRA was landmark legislation and its effect has
been significant in enhancing credit opportunities nationwide.
In my testimony, I will provide some brief background on the statute and regulation,
discuss how the FDIC evaluates and monitors CRA performance, explain the effect of
CRA on the financial institution application process and describe CRA's positive impact.
I also will focus on how the FDIC is using CRA to address current challenges, such as
mortgage foreclosures, the need for affordable small-dollar loans, the exceptionally high
cost of credit and the need for basic banking services in many underserved
communities.
Background
Before CRA was enacted in 1977, there were severe shortages of credit available to
low- and moderate-income neighborhoods, as well as concerns about redlining2 and
discrimination. CRA was intended to expand access to credit and reduce discriminatory
credit practices. The statute built on earlier legislation such as the Home Mortgage
Disclosure Act of 1975 (HMDA), the Equal Credit Opportunity Act in 1974 and the Fair
Housing Act in 1968. Consistent with safe and sound operations, CRA assigns federally
insured financial institutions a "continuing and affirmative" obligation to help meet the
credit needs of their entire communities, including low- and moderate-income
neighborhoods.3
Evolution of CRA Regulations
In the thirty years since CRA's passage, there have been significant changes in the
financial services sector in terms of both industry characteristics and available products.
The agencies have revised the CRA regulations over time to keep pace with financial
sector developments.
The original implementing regulations for CRA, issued by the agencies in October 1978,
established criteria for evaluating bank and thrift CRA performance.4 Public evaluations
provided narrative descriptions of financial institutions' efforts, but with few hard
numbers to support the examiners' conclusions. The emphasis in the original
regulations was on process, and the same performance criteria were used to evaluate
all banks and thrifts regardless of size or business focus.
Over time, these regulations were criticized by both industry and community groups for
an over-reliance on process to the detriment of actual performance. In response, the
agencies amended the CRA regulations in May 1995 to require that an institution's CRA
activities be evaluated against the institution's performance context, taking into account
both economic and demographic information about the institution's assessment area
and the available lending, investment, and service opportunities. In response to growing
specialization within the banking industry, the revised regulations provided separate
tests for large retail, small retail, and wholesale/limited purpose institutions,5 and
incorporated an option for banks and thrifts to include the activities of their affiliated
companies in their CRA exams.
When the agencies issued the revised regulations in May 1995, they committed to
review the regulations again within 10 years. With the considerable changes in the
financial services sector over that time, a number of potential revisions were
considered. After an advanced notice of proposed rulemaking and several subsequent
notices of proposed rulemaking, the agencies issued final rules in 2005.6 These rules
included a number of revisions, including clearer consideration of discriminatory or other
illegal credit practices, which I will address in more detail later in my testimony when I
discuss how illegal lending is incorporated in the CRA review.
Over the years since promulgation of the original CRA implementing regulations, the
agencies have periodically issued a series of interagency CRA questions and answers
(CRA Q&As) designed to give further guidance to examiners and bankers.7 Most
recently, in July 2007, the agencies issued for public comment proposed revisions of the
existing CRA Q&As and addressed a number of emerging issues.8 For example, the
proposed revisions highlight that establishing loan programs to provide relief for low-
and moderate-income homeowners facing foreclosures will warrant favorable
consideration as being responsive to the needs of the institution's assessment area.
Other proposed changes encourage institutions to support national foreclosure relief
programs and counseling. The agencies expect to issue the final revised CRA Q&As in
the upcoming weeks.
FDIC's CRA Review and Evaluation Process
Consistent with statutory requirements, FDIC examiners evaluate the CRA performance
of the approximately 5,200 institutions under the Corporation's supervision.9 As I noted
above, for most institutions, this performance is evaluated under tests that draw
distinctions among institutions based on their size and business strategies.10 When
conducting CRA evaluations, examiners consider factors such as the business
opportunities available, as well as the size and financial condition of institutions.11
Lending institutions with assets greater than $1.061 billion (adjusted annually for
inflation) are subjected to a three-part lending, services and investment test that
regulations was on process, and the same performance criteria were used to evaluate
all banks and thrifts regardless of size or business focus.
Over time, these regulations were criticized by both industry and community groups for
an over-reliance on process to the detriment of actual performance. In response, the
agencies amended the CRA regulations in May 1995 to require that an institution's CRA
activities be evaluated against the institution's performance context, taking into account
both economic and demographic information about the institution's assessment area
and the available lending, investment, and service opportunities. In response to growing
specialization within the banking industry, the revised regulations provided separate
tests for large retail, small retail, and wholesale/limited purpose institutions,5 and
incorporated an option for banks and thrifts to include the activities of their affiliated
companies in their CRA exams.
When the agencies issued the revised regulations in May 1995, they committed to
review the regulations again within 10 years. With the considerable changes in the
financial services sector over that time, a number of potential revisions were
considered. After an advanced notice of proposed rulemaking and several subsequent
notices of proposed rulemaking, the agencies issued final rules in 2005.6 These rules
included a number of revisions, including clearer consideration of discriminatory or other
illegal credit practices, which I will address in more detail later in my testimony when I
discuss how illegal lending is incorporated in the CRA review.
Over the years since promulgation of the original CRA implementing regulations, the
agencies have periodically issued a series of interagency CRA questions and answers
(CRA Q&As) designed to give further guidance to examiners and bankers.7 Most
recently, in July 2007, the agencies issued for public comment proposed revisions of the
existing CRA Q&As and addressed a number of emerging issues.8 For example, the
proposed revisions highlight that establishing loan programs to provide relief for low-
and moderate-income homeowners facing foreclosures will warrant favorable
consideration as being responsive to the needs of the institution's assessment area.
Other proposed changes encourage institutions to support national foreclosure relief
programs and counseling. The agencies expect to issue the final revised CRA Q&As in
the upcoming weeks.
FDIC's CRA Review and Evaluation Process
Consistent with statutory requirements, FDIC examiners evaluate the CRA performance
of the approximately 5,200 institutions under the Corporation's supervision.9 As I noted
above, for most institutions, this performance is evaluated under tests that draw
distinctions among institutions based on their size and business strategies.10 When
conducting CRA evaluations, examiners consider factors such as the business
opportunities available, as well as the size and financial condition of institutions.11
Lending institutions with assets greater than $1.061 billion (adjusted annually for
inflation) are subjected to a three-part lending, services and investment test that