CRA Survives Its Toughest Challenge

There is nothing more exhilarating than to be shot at without result. –Winston Churchill

The Community Reinvestment Act (CRA) has survived the most serious attack in its 22-year history. The financial services modernization bill was “probably the most heavily lobbied, most expensive issue” before Congress in a generation, according to a leading banking lobbyist. The industry had campaigned for legislation to combine banking, insurance, and securities for over 20 years, but could not find internal consensus until last year.

Meanwhile, the new Senate Banking Committee Chairman had likened CRA to slavery, calling it a vehicle for fraud and extortion and “the greatest national scandal in the United States.” He had already stopped a previous financial services bill late last year because it protected CRA. This year, he vowed to use the momentum for a new bill and his leverage as Chairman to attack CRA. In this political climate, it is a remarkable achievement for CRA supporters that preservation of CRA was still essential to passage of such a powerful bill.

Although major expansions were not achieved and some provisions are problematic, it is clear that CRA has retained its integrity and vitality:

The Senate bill’s “safe harbor” provision was dropped. This had been a major threat to CRA, because it would have prohibited public comment on almost all bank mergers inthe only real moment of CRA enforcement.

The Senate bill’s proposal to repeal CRA for small rural banks was dropped. CRA will continue to apply to all federally insured depositories. However, most small banks (under $250 million, urban and rural) will go a year or two longer between CRA exams. Regulators can still conduct CRA exams whenever they feel it necessary.

Every bank must have a satisfactory CRA rating to enjoy the new privileges of starting insurance or securities activities. This provision is not as strong as the House bill’s “have and maintain” requirement, but it does establish the principle that CRA will matter when banks and other financial companies merge. Currently, a bank can buy a securities or insurance firm (though not vice versa) and CRA is not considered, so this provision modestly extends CRA into the new financial services world. The practical effect will be limited, however, since few banks with unsatisfactory CRA ratings are likely to seek expansion into insurance or securities activities.

In an important positive change, the final bill did not include a tentative agreement among conferees to exempt “wholesale financial institutions,” or so-called “Woofies,” from CRA.” Woofies would not accept small deposits or offer federal deposit insurance, but could have enjoyed other valuable federal benefits available to banks. Due to pressure from CRA supporters, woofies were deleted outright from the bill, maintaining the principle that CRA should apply to all banks.

The most troublesome CRA provisions in the bill are the “sunshine” requirements. Regulatory interpretations will be crucial here. At best, the regulators could narrow the range of funding agreements covered to the relatively few that would “materially impact” a bank’s CRA rating or a regulator’s approval of a bank’s merger application. At worst, virtually any grant over $10,000 or loan over $50,000 could be covered. The reporting detail required is also unknown. At best, a community partner could simply submit its federal tax return or audited financial statements once a year. At worst, regulators could demand a detailed accounting of how funds were used for travel, employee compensation, consultants, and administrative expenses.

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