Time to overhaul the Community Reinvestment Act?
When banks take deposits from a community, but fail to lend back a similar amount of money, the resulting reduction of capital over time can have a detrimental impact on the community’s economic health.
The Worcester area’s economy may be suffering from such an exit of capital, in spite of regulations designed to ensure reinvestment.Many years ago, poor communities, and particularly those with large minority populations, were often "redlined" by banks, meaning many banks failed to lend sufficiently, if at all, to people living in certain neighborhoods.
To prevent redlining, Congress passed the Community Reinvestment Act (CRA) in 1977. The CRA requires the Federal Deposit Insurance Corporation (FDIC), or whatever federal agency supervises the institution, to assess how well the institution meets "the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with safe and sound operation of the institution."
The rating is based on a review of each bank’s lending practices, and its investment in and services to low- and moderate-income neighborhoods. It includes a review not only of mortgages, but of business loans and lending for community development projects. Also part of the review: the bank’s loan-to-deposit ratio, accessibility of its branches and services, and community involvement by bank officers and employees.
CRA may need fixing
The law has worked very well. More than $1 trillion in loans were made to low-income communities during the CRA’s first 25 years, according to the Joint Center for Housing Studies at Harvard University. Even so, despite updates to CRA over the years, changes in the banking industry may be hampering the effectiveness of the law.
• Fewer community banks. One reason there may be less community lending is that there are fewer community banks. As banking regulations prohibiting interstate banking were relaxed, large, statewide banks gave way to super-regional banks, which increasingly are giving way to national banks. Locally, for example, Conifer Bank was purchased by Bank of New England, which was purchased by Fleet Bank, which merged with BankBoston, which was acquired by Bank of America.
Large, merged banks are still subject to the CRA, but compliance is based on how they lend within an "assessment area," and as banks expand, so do their assessment areas. For a community bank, the assessment area is a fairly tight radius around the community. For a national bank, the assessment area is national.
A bank could receive deposits in Worcester and lend that money to low-income families in Boston and still comply with the CRA. That’s because loans to low-income customers are considered "in the aggregate," according to David Cotney, spokesperson for the Massachusetts Division of Banks.
While banks are evaluated primarily on their performance within their assessment area, they can also lend outside their assessment area. That became a growing trend in the 1990s and by 2001, according to the Joint Center For Housing Studies, more than half of all bank and thrift lending was outside their assessment area.
• Specialized financial institutions. Not only have banks changed since CRA became law, so have financial institutions in general. Since passage of the Gramm-Leach-Bliley Act in 1999, the lines have blurred between banks and other financial institutions. Gramm-Leach-Bliley repealed the Glass-Steagall Act and the Bank Holding Company Acts of 1956 and 1970, allowing affiliations between different types of financial service companies, including banks, insurance companies and investment companies. Not all of these entities are subject to CRA.
• Online banking. A growing number of online financial institutions from outside the Worcester area are doing nothing more than gathering Worcester deposits online, without lending in the community. Online banking has made it possible for many financial institutions to take deposits from throughout the country — without ever returning anything to the communities.
Given the rate at which online banking is growing, it could quickly handicap the effectiveness of the CRA. As of November 2004, 53 million Americans were using some form of online banking, making it the fastest growing Internet activity in the U.S., according to a survey by Pew Internet and American Life survey.
While Worcester-based banks also offer online banking, a growing portion of the money being deposited through online banking services is going to banks outside of the area and is being invested in places nowhere near Worcester.
• Growth of credit unions. Unlike banks, federally chartered credit unions are not subject to the CRA. That’s ironic, since credit unions initially were created to help low-income people and others whose needs were not being met by banks. Credit unions typically were formed by groups of blue-collar workers, unions or churches. Because they served a public need, credit unions were given tax-exempt status.
Today, credit unions are big businesses, but they are still exempt from the CRA. As with banks, there are fewer restraints than there used to be on the growth of credit unions. While Federal law restricts credit unions to serving anyone in a "well-defined, local community, neighborhood or rural district," the definition of "local community" has been stretched in many cases to include millions of people.
None of these trends bode well for the Worcester community — or for other metropolitan areas that are not major cities. It may be time to revisit CRA. If CRA were expanded to apply to all deposit-gathering institutions and more precisely define assessment areas to require lending in all local communities from which deposits are gathered, it would better protect the financial future of communities like Worcester.
Paul D. Gilbody is senior vice president & CRA Officer of Bay State Savings Bank, Worcester (www.baystatesavings.com).
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