The 1990s witnessed an upswing in the number of lower-income and minority homebuyers. Undoubtedly, the boom economy of the later 1990s played an important role. Another component was certainly the increased enforcement of anti-discrimination laws and, by extension, the willingness of banks to alter long-time underwriting practices and to service lower-income and minority neighborhoods. In this respect, the Community Reinvestment Act of 1977 (CRA) played a key role. The CRA requires the Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision to rate banks on their lending practices within low-to-moderate income (LMI) areas within their service area. Failure to make loans in such areas may bar bank expansion plans until the institution alters its lending practices. While government agencies have haltingly enforced the CRA over the years, community activists have used the act to pressure banks. Indeed, this political mechanism has been precisely the strength of the CRA. Compared to purely judicial remedies, such as the Fair Housing Act and the Equal Opportunity Credit Act, the CRA moves beyond individual grievances into the realm of broader, systematic relief.

Nevertheless, the CRA faces challenges from critics in the banking industry, in the George W. Bush Administration, and most importantly, from the federal regulators who police it. The regulators have recently instituted a number of changes that make it easier for financial institutions with less than $1 billion in assets to meet CRA requirements. Henceforth, small and medium-sized savings and loans may choose to have only their lending practices graded; whereas, they were previously required to undergo both service and investment tests. Small and medium-sized banks, by contrast, will still be required to pass a community development test that contains service and investment elements. Moreover, new guidelines intended to encourage more rural lending, because of poor or suspect drafting, may actually siphon off lending from LMI areas whether they are rural or metropolitan.

This article examines the impact of the CRA as an enforcement mechanism and its effect to date on the mortgage-lending market. Part I traces the drafting of the CRA and the current law as it relates to large institutions. Part II examines how government agencies and community-based organizations enforced the CRA up until 2000. Part III explores changes that the Republican-dominated Congress and the federal regulators have made in the last seven years to lessen the CRA regulatory burden on small and medium-sized institutions. Part IV concludes by discussing the politics that have driven the recent changes to the CRA and what this might hold for the future of the law.

I. The CRA as Law

The Community Reinvestment Act of 1977 requires federal financial regulatory agencies to ensure banks and savings and loans are advancing credit to LMI borrowers. Because the statutes are vague, the real content of the CRA lies in the assessment standards adopted by the four federal banking and thrift industry regulators. The Federal Reserve Board (FRB) regulates approximately 900 state-chartered banks that are members of the Federal Reserve System, as well as roughly 5,000 bank holding companies.[1] The Federal Deposit Insurance Commission (FDIC) oversees 4,809 banks outside the Federal Reserve System and 446 savings and loans, including the largest number of medium-sized institutions under any regulator.[2] The Office of the Comptroller of the Currency (OCC) regulates 1,933 national banks (chartered by the federal government).[3] The Office of Thrift Supervision supervises 896 savings and loans and their holding companies.[4]

Traditionally, the regulators have been required to administer three tests that cover lending, investment, and service within a metropolitan statistical area (MSA). If a bank or savings and loan fails to earn a satisfactory mark on any of these tests, it risks having any future expansion plans such as branch openings and mergers and acquisitions placed on indefinite hold.[5] Under the current guidelines, community groups and private individuals may comment on a bank's lending practices during the review process.

This section looks first at the background to the CRA's passage and its subsequent emendation. Second, it examines the regulatory regime as it stood prior to changes instituted in 2004-2005, which has affected small and medium-sized banks.

a.The Passage of the CRA

Congress passed the CRA as one of several remedies to encourage mortgage lending to LMI and minority borrowers in the aftermath of the Civil Rights Movement.[6] The Fair Housing Act of 1968 and the Equal Credit Opportunity Act of 1974 provided the legal architecture for this policy goal. These are remedial acts, which permit individuals (and sometimes classes) to sue for money damages and/or injunctive relief in specific cases of discrimination. By contrast, the drafters of the Community Reinvestment Act of 1977 employed regulatory mechanisms to encourage financial institutions to lend in underserved areas. Since the 1950s, many banks had engaged in "red-lining," by which they refused to approve loans in neighborhoods where housing values were unstable or declining. Most of these redlined tracts were located in urban areas and were LMI and/or minority in complexion.

The CRA combated redlining by requiring the FRB, OCC, FDIC, and OTS to rate financial institutions based on their lending within the whole of their service area. If the institution avoided lending or made few loans in LMI census tracts within their community, they ran the risk of receiving an unsatisfactory rating. While the ratings carried no direct monetary penalty, the regulators could require that a bank with a poor rating improve its lending practices in CRA tracts before being allowed to expand.[7] Significantly, the act only encompassed commercial banks and savings and loans. By contrast, mortgage banks and myriad sub-prime lenders, which today account for the fastest growing segments of mortgage lending, remain unregulated by the CRA. Two years earlier, Congress had passed the Home Mortgage Disclosure Act of 1975 (HMDA), which requires banks to publish lender reports disclosing the number and dollar amount of loans extended within a given census tract. The federal agencies rely in large part on HMDA data in determining institutional compliance with the CRA.

The community groups that pressed for passage of the CRA argued that banks were profiting from the deposits of inner-city residents without extending a proportionate amount of credit in return. Since government regulation virtually assured them a given market share, activists argued that banks had a particular obligation to extend credit to these communities. [8] Such idealism permeates the language of the CRA: "Regulated financial institutions are required by law to demonstrate that their deposit facilities serve the convenience and needs of the communities in which they are chartered to do business."[9]

Since its passage in 1977, Congress has amended the CRA several times. In 1992, Congress delineated the factors that the regulators should take into account when grading institutional CRA performance.[10] In 1999, Congress placed the new financial services holding companies authorized by the Financial Modernization Act of 1999 (Gramm-Leach-Bliley Act) under CRA supervision.[11] At this time, CRA-opponents successfully inserted an amendment that forbade regulators from testing small banks more than once every four years.[12]

b. The Current CRA Regulations Applying to Large Banks and Thrifts

As the law currently stands, the regulators must evaluate banks and thrifts periodically on their CRA compliance.[13] In evaluating large institutions (and, until recently, medium-sized ones), the agencies employ three tests. The most important of these tests is the Lending Test.[14] The criteria are lending activity (in the assessment area), geographic distribution of loans, borrower characteristics (distribution of loans to low, middle and upper income borrowers), the number and amount of its community development loans, and innovative or flexible lending practices.[15] The Investment Test rates the dollar value, innovativeness, responsiveness, and investment performance rating of the bank's investments within a particular MSA, as well as the extent to which these investments are not provided by private investors.[16] Finally, the Service Test evaluates "a bank's record of helping to meet the credit needs of its assessment area(s) by analyzing both the availability and effectiveness of a bank's systems for delivering retail banking services and the extent and innovativeness of its community development services."[17] The criteria include distribution of the bank's branches among low, middle, and upper income neighborhoods, the bank's willingness to open branches in LMI neighborhoods, the range of services offered in these neighborhoods, and the presence of other banking facilities such as ATM machines and electronic banking. Small banks are evaluated under a separate set of criteria that largely replicates the criteria of the Lending Test.[18]

For each of the three tests, the regulators may assign one of four ratings: outstanding, satisfactory, needs to improve, and substantial non-compliance. The lending section is the most heavily weighted, meaning that it is impossible to get an overall rating of satisfactory or better without earning at least a satisfactory on this test. In order to score an outstanding on the Lending Test, a bank would need to demonstrate great responsiveness to credit needs in its area, make a majority of its loans in the assessment area, have a good spread of loans among different neighborhoods, distribute loans among different income groups and businesses, employ innovative or flexible lending practices, and be a leader in community development lending.[19] By contrast, an institution would be in substantial non-compliance if it were unresponsive to area credit needs, made few loans in the assessment area, concentrated its loans in specific neighborhoods and among higher income groups, had few innovative or flexible lending practices, and made few if any community development loans.[20]

Surprisingly, if a bank or savings and loan is found in statutory non-compliance, the regulators may not assess fines. While the regulators may refer institutions that violate the CRA to the Department of Justice (DOJ), this remedy has seldom been employed. It is only when banks and savings and loans wish to make some kind of structural change that the regulators have discretion to deny approval until the bank improves its CRA rating.[21] This typically arises when an institution wishes to open up new branches, merge with other banks, or merge with a savings and loans.[22] After the bank announces its plans, any member of the public may comment during a thirty-day review period.[23] Because the bank must post its CRA ratings on all three tests in the lobby of its main branch in a given MSA and in all branch offices, the public has the opportunity to survey the data.[24] (Currently, this information is often available on institutional websites as well). Those opposed to the bank's expansion may submit a formal "challenge" to the responsible regulator. The regulators have the discretion to order a public hearing on CRA-related issues, although the existing regulations do not specify when a hearing may be appropriate.[25] Following the hearing, the regulator's regional office, such as the regional Federal Reserve Bank for the FRB, investigates the charges and makes a recommendation to the regulator. The regulator then decides whether or not to approve or deny the institution's application.[26]

If the bank or savings and loan fails to receive a satisfactory rating from the regulator or wishes to increase its CRA-lending, it may negotiate a strategic plan of up to five years, which will serve as the benchmark for future evaluations.[27] The institution is encouraged to solicit public opinion while drawing up its plan.[28] After a draft is ready, the bank must publish notices and make available copies of the plan at all of its branches in the assessment area.[29] The bank must provide the regulator with a separate evaluation describing public comment that is submitted with the plan.[30] The Strategic Plan Review provides a second important means for community groups to pressure an institution to change its lending practices.

Thus, the CRA is primarily an administrative mechanism that may require financial institutions to make more systematic changes than other fair-lending laws allow. Nevertheless, the regulators have much discretion about how to achieve these ends. The regulators evaluate large institutions periodically using the three-prong test gauging lending, investment and services. If a bank or savings and loan is not in compliance with the CRA, then the regulators may prevent it from merging or opening new branches. Community groups may contribute to this review process through public comment. In part, it is this susceptibility to political pressure that has made the CRA an effective law over the years. By contrast, the other major component, the contribution of government regulators, has often been halting and sporadic. Only during the 1990s did the regulators and community organizations find some common ground on how the CRA was to function. In order to judge the effectiveness of the CRA, it is necessary to examine its enforcement in this period.

II. Enforcement of the CRA

The FRB's, OCC's, FDIC's, and OTS's enforcement of the CRA has varied considerably over the years, but it may be divided into three separate periods. During the first period, which extended from 1977 to 1990, federal regulators did little to enforce the CRA. In part, the agencies had little concrete data to work with because the HMDA required only that lending data be provided for each census tract in a CRA assessment area rather than broken down for minority groups as a whole. Thus, it was nearly impossible to examine the pervasive racial and ethnic discrimination that underlay many of these geographic disparities. In the second period, stretching from the late 1980s into the early 1990s, the political and legal environment shifted. The arrival of newly-detailed HMDA data in 1990 showing statistical proof of discrimination, the growing attention to the problem by economists, increased Congressional pressure on the regulators, and the arrival of the Clinton Administration in 1993 all combined to favor stricter CRA enforcement. During the 1990s, a combination of federal regulation, DOJ prosecution of noncompliant institutions, and community activism transformed the CRA into a reasonably important enforcement mechanism. The third period extends from 2000 to the present and will be discussed in the next section. This section will examine how the FRB and DOJ enforced the CRA on a national level in the 1990s.

For the first decade or so of its existence, regulatory agencies failed in large part to enforce the CRA. For example, the FRB is run primarily by economists who work closely with banks in setting interest rates and managing the nation's money supply. The CRA, by contrast, made the relationship between the FRB and the DOJ more adversarial. Moreover, the CRA exam contradicted the FRB's own Uniform Financial Institutions Rating System in that it rewarded aggressive lending to higher risk borrowers.[31] As such, the FRB was an awkward candidate to enforce a fair-lending law. Popular dissatisfaction with the regulators surfaced in 1978, when 11 civil rights organizations, led by the National Urban League, filed suit against the four regulators. The plaintiffs alleged that the regulators had failed to carry out their enforcement duties.[32] A judge granted a summary judgment motion for the agencies on the grounds that the plaintiffs lacked standing to sue under Title VIII of the Civil Rights Act.[33]

The arrival of the Reagan Administration in the 1980s, which favored decreased regulation and privatization of government housing programs, eroded CRA enforcement further.[34] Before 1992, the FRB, the OCC, the FDIC, and OTS did not refer a single lending institution to the DOJ for violation of fair-lending laws.[35] Viewing the HMDA data for 1989, Senator Alan Dixon of Illinois remarked that "it continues to be a miracle that the [fair lending] numbers are so bad and we never find anybody in this whole country that has done anything so gross that they ought not to be penalized…."[36] Despite such sentiments, the regulators felt little political pressure to enforce the CRA aggressively before the late 1980s.

Nevertheless, CRA enforcement became a higher political priority as LMI and minority lending data improved. In the late 1980s, Congress increased reporting requirements under HMDA, requiring banks to include racial and gender breakdowns of their loan applicants in addition to income. In October 1991, the FRB released the first data under the amended HMDA, empirically delineating the discrimination that politicians, academics, and community groups had long railed against.[37] In 1990, African-Americans were rejected in 34% of cases for non-government-backed loans.[38] Banks denied Hispanics in 21.4% of cases, while whites had a denial rate of 14.4%.[39] At the local level, the Boston Federal Reserve Bank found in 1992 that "a black or Hispanic applicant in the Boston area is roughly 60 percent more likely to be denied a mortgage than a similarly-situated white applicant," even after adjustments for income, assets and credit history.[40]

By the early 1990s, financial institutions that had defended their underwriting practices by arguing that there was little minority demand for home mortgages were now forced to confront undeniable proof of high minority rejection rates.[41] Prodded in part by these statistics, congressional committees held at least ten hearings that focused on fair-lending enforcement between 1990 and 1995, at which lenders often faced pointed questioning.

With the coming of the Clinton Administration in 1993, the CRA became for the first time a tool in a broader executive agenda. In 1993, President Clinton created the Interagency Task Force on Fair Lending in order to create unified guidelines for enforcing the Equal Credit Opportunity Act and the Fair Housing Act. In the following year, he issued Executive Order 12892, which required all federal agencies to develop clear and meaningful fair housing guidelines.

As a result of White House pressure, the regulators became more aggressive in enforcing the CRA and other fair-lending laws. In 1993 the FRB took its first punitive action against a large bank, preventing Continental Illinois from acquiring an Arizona bank until it had negotiated a CRA agreement. In 1995, the FRB referred five banks to the DOJ for prosecution, two more than in the previous seventeen years combined.[42] The FDIC was even more aggressive, for it referred three banks in 1992, seven in 1993, and a record twelve in 1994.[43] In 1993, the OCC announced it would use paired testing of white and minority mortgage candidates for the first time in order to gauge lending practices at particular branches. This was a step that community activists had long advocated.[44] The Department of Housing and Urban Development (HUD) also agreed to augment its enforcement efforts significantly. Finally, in 1995, the regulators collectively drew up the uniform CRA lending tests discussed above.

The increased willingness of regulators to refer cases to DOJ resulted in several landmark settlements that made banks more attentive to CRA testing than they had been in the past. In 1992, the DOJ filed suit against Decatur Federal Savings. For the first time, the federal government's was suing a bank for fair lending violations. Between 1985 and 1990, the government found that the bank made 97% of its loans in predominantly non-Hispanic white census tracts, lacked a single branch in a predominantly African-American neighborhood out of a 43 branch network, seldom marketed in minority areas, hired few minority employees, and rejected African-American applicants at a rate four times higher than whites for all loans. In the settlement, Decatur Federal agreed to loan $1 million to 48 minority and LMI applicants who had been denied loans, change its underwriting practices, increase its advertising in minority media and in minority communities, promote minority hiring, and increase compensation to loan-officers who approved LMI and minority lenders.[45]

In 1995, the DOJ filed another complaint against Northern Trust Co. of Chicago. The DOJ found great inconsistencies in the bank's application of underwriting requirements. Pairs testing revealed that loan officers allowed most white applicants to explain adverse items on their credit report, while African-Americans and Hispanics were not given this opportunity.[46] Loan officers went so far as to assist white applicants in finding positive factors in their credit history that might compensate for blemishes. This benefit was denied to most minorities. As a result of a settlement, the bank paid out $566,500 in damages to 60 minority borrowers to whom it had unfairly denied loans. Additionally it allocated another $133,500 to pay off future plaintiffs who could prove discrimination resulting from bank lending practices. In its new CRA agreement, Northern guaranteed that all loan applicants would have the opportunity to present their qualifications.

During the 1990s, the federal government entered into thirteen CRA agreements with lenders that provided $33 million in increased capital for loans to LMI borrowers.[47] Overall, the DOJ suits proved effective in fostering greater institutional compliance with the CRA. Banks, which needed to concern themselves with regulatory approval only when they merged or opened branches, were suddenly confronted with potential litigation. Significantly, none of the thirteen cases went to trial, which is an indication that the banks' legal position was weak. Moreover, the suits indicated to the banks that the Clinton Administration placed a lot of importance on fair and community lending. In the end, the suits, combined with White House pressure on federal regulatory agencies, helped to transform the way that banks viewed the CRA.

While opposition to the CRA did not disappear, many banks came to accept community lending as a standard business practice. As the regulators enforced the CRA more vigilantly, larger banks appointed CRA officers charged with overseeing compliance with the law. One bank vice president at a leading national bank noted that the examination lasted eight weeks and involved 40 examiners from the FRB sifting through bank files. She noted optimistically, "[w]e can get through the examination process, we will excel in the examination process."[48] As the banks accommodated themselves to the law, they were forced to develop a culture in which LMI and minority lending assumed greater political and economic importance. In 1992, John Hamill, President of Fleet Financial, testifying before the Senate Banking Committee, blamed the lack of minority demand for his bank's halting CRA compliance.[49] By 2002, Fleet was ranked by National Community Reinvestment Coalition as one of the most CRA-friendly lenders in the country.[50] Recently, Bank of America boasted on its website that it had earned an award from the National Coalition of Urban Bankers for its outstanding CRA scores.[51] Some banking leaders even argued that the community development banking was profitable.[52] While such statements were sometimes mere window-dressing for plodding CRA performance, they still reveal that many banks were taking CRA enforcement seriously. As one congressman put it not entirely sympathetically, "this sleepy little law that had been around for…13 years all of a sudden became a major liability for financial institutions."[53]

Despite acquiescence by some larger institutions, many bankers, particularly at smaller institutions, continued to resent some aspects of the CRA. These critics argued that CRA lending requirements forced banks to make risky and unprofitable loans while imposing significant costs on the regulated institutions. Moreover, some bankers resented the power that community organizations had gained during the 1990s. As mergers increased in the late 1990s, banks were often anxious to avoid public hearings that might delay their multi-million dollar transactions.[54] As a result, institutions were often eager to negotiate with community groups, who could sometimes dictate the agenda for CRA agreements.[55]

To be sure, few outside of some conservative think tanks discussed scrapping the CRA altogether.[56] Rather, these disparate anti-CRA elements focused mainly on granting regulatory relief to small and medium-sized banks. During the later Clinton period, these banking interests found allies among the Republican House majority. Following the election of George W. Bush in 2000, the new administration gradually replaced Clinton Era regulatory officials with others more amenable to financial interests' demands. The changes they wrought in the CRA will be examined in the next section.

III. The Changes in the CRA

The regulatory agencies, all of whose current heads were appointed by George W. Bush, have enacted administrative changes that may allow many banks to reduce their CRA lending.[57] In the last two years, all four of the CRA regulators - the FRB, the OCC, the FDIC, and OTS - have adopted new administrative regulations loosening the requirements that financial institutions must fulfill to pass CRA exams. First, banks and savings and loans with less than $1 billion in assets may complete a simplified CRA exam. Second, financial institutions may fulfill their CRA obligations by lending in areas that are designated as distressed rural or federal disaster areas. Overall, the changes initiated by the four regulators decrease the requirements with which smaller banks must contend. On the other hand, the regulations could mark the beginning of a retreat from community-based lending by the federal government.

The current round of reforms began in 1999 with passage of the Gramm-Leach-Bliley Act. For the first time, Congress created separate tracks for smaller and larger banks. Under the new law, the CRA reporting cycle for banks with less than $250 million in assets was reduced to once every 4 to 5 years. Nevertheless, Gramm-Leach-Bliley left the threshold for a small bank at less than $250 million.[58]

The 1999 law also called for FRB to conduct a study of CRA lending that would determine the profitability and default and delinquency rates on CRA loans. The report, which was issued in July 2000, determined that "84 percent of CRA-related loans were originated by institutions that report that their CRA-related home purchase or refinance lending was profitable."[59] The report also found that "the majority of CRA special lending programs are either profitable or marginally profitable."[60]

While Graham-Leach-Bliley made relatively few changes in the CRA regime, it ushered in the two-tiered exam system for large and small banks on which recent reforms have built.

a. The Office of Thrift Supervision and Changes to the CRA

The shift towards greater hostility to the CRA has perhaps been greatest at the Office of Thrift Supervision (OTS). It can be traced in the changing rhetoric of Ellen Seidman and in the actions of James Gilleran, both former OTS directors. President Clinton appointed Seidman, a former White House economic adviser, to her four-year term on October 28, 1997. Already in 1997, Seidman worried that small lenders were overburdened by CRA requirements that could more easily be met by larger thrifts.[61] By 1999, Seidman continued to express her concern that smaller institutions were facing stiff competition from larger institutions.[62] By contrast, Seidman opined less on topics of interest to fair-lending organizations; only in passing did she suggest regulators would benefit from gathering more data on race, gender, and national origin.[63] OTS never implemented such a plan.

By 2001, Seidman concluded that the CRA's goals were too limited. The CRA was too focused on real estate loans, and did not deal with other issues such as checking accounts, ATMs, money orders, bill payment, and loan products aimed at businesses.[64] Additionally, Seidman argued that CRA overemphasized lending within census tracts, while neglecting LMI and racial groups as a whole.[65] Seidman's solutions to these issues were vague but leaned towards decreasing the CRA burden on financial institutions, while emphasizing partnerships between financial lenders, local governments, community activists, and businesses:

Let your creativity run wild. In the environmental movement, for example, over the last ten years, the most creative participants have moved away from prohibitions and regulations and towards ideas such as emissions trading, demand side management … and financing of energy-efficient building improvements based on the stream of expected savings. Learning to efficiently conceive, develop and finance mixed income and mixed use development, particularly in our cities, requires some of this type of creativity.[66]

This emphasis on "creativity" and market-oriented reform would become hallmarks of the new CRA reforms. In particular, this rhetoric provided cover for a more decentralized testing regime, in which smaller banks would henceforth be able to mold the test to meet their own complexions. Seidman concluded that community groups needed to abandon their aggressive regulatory posture towards financial institutions and find new ways to work with lenders.[67] Already in July 2001, the FRB, FDIC, OCC, and OTS issued advanced notices of proposed rules (ANPRs) that were intended to reduce the CRA-burden on smaller institutions.[68]

After Seidman's term expired in November 2001, President George W. Bush replaced her with James Gilleran. While Seidman was an economist, Gilleran had been the former chief executive of the Bank of San Francisco, a medium-sized bank that disappeared during the bank mergers of the late 1990s. As such, he proved especially amenable to the concerns of small and medium-sized financial institutions. As the OTS's chief counsel concluded, "OTS is committed to reducing regulatory burden wherever it has the ability to do so."[69] It is this philosophy that would drive OTS's (and the other regulators') CRA reforms.[70] In June 2003, Gilleran became chairman of the Federal Financial Institutions Examination Council (FFIEC), the body that coordinates all examinations among the four regulatory agencies. As such, he would occupy an influential position from which to affect CRA enforcement.

i. The Service and Lending Tests Become Voluntary for Thrifts with Less Than $1 Billion in Assets

OTS made several changes to its testing regime for small and medium-sized savings and loans. In August 2004, OTS issued final rules that changed the definition of "small savings association" from an institution with less than $250 million in assets to one that averaged less than $1 billion in assets over the previous two calendar years.[71] In March 2005, OTS loosened the criteria for the CRA examination of savings and loans. Previously, OTS, like the other federal regulators, judged savings and loans under the three-prong test that included lending activity, service, and investment in CRA-qualified areas. Under the new rules, a savings and loan could choose which prongs it wished the OTS to examine.[72] While at least 50% of the total CRA score must reflect the lending criteria, a savings and loan may dispense with the service and investment prongs altogether or allocate them as it wishes.

OTS argued that each savings and loan would best serve its community by choosing criteria that are most appropriate for its own market.[73] Some savings and loans noted during the comment period that small institutions and those in rural areas often had insufficient opportunities to satisfy the investment prong.[74] OTS's own policy justifications reflect the desire of medium-sized institutions to loosen the CRA standards:

We [OTS] have focused on the common-sense economic principle that allowing a savings association greater freedom to specialize in those things at which it is relatively more efficient should result in more, not less, real community development being delivered.[75]

Despite this rhetoric, the loosened exam requirements are unlikely to increase CRA lending, and it may even decrease it. Deemphasizing the investment test will enable thrifts to disregard community development in census tracts where investments are riskier and perhaps less profitable.[76] Moreover, permitting each institution to craft its own exam will necessarily lead to a decline in the uniformity of the testing.[77] This, in turn, will make it harder for financial industry analysts, CRA activists, and government regulators to compare the scores among different financial institutions.

Above all, when savings and loans may dispense with the service test, they will face less pressure to open branches in LMI areas.[78] As a whole, financial institutions, including savings and loans, have yet to make significant progress in building branch networks in underserved LMI and minority neighborhoods.[79] The presence of branches is crucial to instilling borrower trust and familiarity with a thrift's services, and one important factor in determining the availability of credit is convenient access to full service branches."[80] Access to prime lending through a branch network plays a disproportionate role in determining what kind of loan a borrower will ultimately choose.[81] Institutions have often disputed this claim. As one banker argued, "success depends not only on opening a branch but also involvement in the community."[82] But absent government scrutiny, what would compel a bank to open an office in an LMI census tract? Indeed, these are the same tracts that lenders left to decay during the 1950s and 1960s when redlining was prevalent. Loosening the service test risks isolating once again the very census tracts where CRA is supposed to spur lending.

Indeed, the lack of branches in LMI and minority-dominated census tracts has contributed to the explosive growth in sub-prime borrowing. In 2003, minority census tracts in New York accounted for 29.7% of prime loans, while the sub-prime percentage was 62.2%.[83] For San Francisco, minority tracts accounted for 31.9% of prime lending and 53.3% of the sub-prime market.[84] Even in Los Angeles, where minority tracts actually accounted for a majority of prime lending (50.1%), lending in minority tracts constituted 72.6% of the local sub-prime market.[85]

Rather than making the service test voluntary, some commentators actually favor strengthening this component. [86] At a time when there is little oversight of non-prime institutions and the legislative will to pass new predatory lending laws is lacking, enabling savings and loans to fulfill their CRA obligations without grading the number and effectiveness of their branches in LMI and minority census tracts threatens only to increase LMI and minority dependence on sub-prime lending.

Therefore, the changes at OTS will permit savings and loans with less than $1 billion in assets to fulfill their CRA obligations without passing either service or investment tests. Similar changes will affect the banks subject to the FRB, FDIC and OCC supervision.

b. CRA Changes at the FRB, FDIC and OCC

Like OTS, the FRB, FDIC, and OCC have altered their regulations to create a new category of banks with assets between $250 million and $1 billion that will be subject to less onerous review of their service and investment practices. Additionally, the FRB, FDIC, and OCC have expanded CRA-lending to include many middle-income census tracts in rural areas. Like the changes at OTS, these reforms threaten to diminish the resources that medium-sized institutions devote to CRA lending.

i. New Testing Regime for Intermediate Small Banks

FRB, FDIC, and OCC have joined OTS in changing the testing regime for intermediate small banks. Henceforth, any banks with less than $1 billion in assets will now be part of a new class of intermediate small banks.[87] Moreover, regulators will no longer require these banks to collect and report CRA loan data dealing with loans to small businesses and farms.[88] Therefore, the public will no longer be able to determine whether intermediate small banks are complying with their CRA obligations to provide small business and farm loans.[89] Rather, they will need to rely entirely on the CRA ratings assigned by the regulators. The regulators have concluded "the costs of the mandatory data collection and reporting by intermediate small banks, including the fixed costs that weigh more heavily on smaller banks, outweigh the benefits."[90]

Most significantly, the FRB, FDIC, and OCC have also altered the testing regime for intermediate small banks. Henceforth, these banks will be evaluated under two separate tests: the small bank lending test and a flexible new community development test that replaces the former investment and service tests.[91] The lending test focuses on (1) a bank's loan to deposit ratio, (2) the percentage of loans located in the bank's assessment area, (3) the bank's record of lending to borrowers of different income levels and businesses and farms of different sizes, (4) the geographic distribution of the bank's loans, and (5) the bank's record in responding to written complaints about its CRA performance.[92] The community development test rates (1) the number and amount of community development loans, (2) the number and amount of qualified investments, (3) the extent to which a bank provides community development services, and (4) the bank's responsiveness through its activities to community development, lending, investment and service needs.[93] A bank must earn satisfactory ratings on both tests to obtain an overall satisfactory CRA rating.

Altogether, the FRB, FDIC, and OCC reforms are not as dramatic as OTS's. The new Community Development Test contains elements of the former service and investment tests. The new intermediate small bank label, combined with the existing exemption for small banks with assets less than $250 million, has the effect of removing 8,667 banks from the more the more onerous testing regime of large banks.[94] This means that approximately 93% of the banks in the United States will be subject to the new exam.[95] The percentage is similar for regional markets. In California, one community group estimates 89% of state-chartered financial institutions will be eligible for the new testing regime.[96]

The banking community has generally praised these reforms. As Karen M. Thomas, Executive Vice President of the Independent Community Bankers Association, concluded, "[s]ince the success and survival of many community banks is intertwined with the success and viability of their communities, the proposal will merely eliminate some of the most burdensome requirements, such as data-collection requirements, imposed on larger banks and thrifts."[97] Thomas also argued that banks should earn CRA credit for charitable giving and loans to local charities, which currently do not satisfy any of the CRA tests.[98]

Some community-based organizations, while displeased by the changes, were nevertheless relieved that banks would continue to be examined under many of the same criteria as under the previous exams.[99] Nevertheless, the reforms go further toward transforming the CRA into a program for large banks, focusing on high-profile markets such as New York and Chicago at the expense of smaller metropolitan areas or even the rural areas in which the regulators claim they wish to encourage more CRA oversight. As the Congressional Black Caucus concluded recently in a joint-statement, "CRA was never intended to be the responsibility solely of very large thrifts and banks."[100] While the changes are fairly limited for now, they could presage further deregulation along the lines of OTS's new regulations.

Therefore, the new regulations on intermediate small bank lending will simplify the service and investment tests under a new community development test. While banks will still be subject to most of the factors utilized under the old tests, it is still possible that important issues such as loans to community groups and the health of branch networks will receive less oversight.

ii. New Guidelines on Rural Lending

The FRB, FDIC, and OCC have issued new guidelines that are intended to encourage more rural lending and development.[101] The definition of community development now encompasses "activities that revitalize or stabilize low-or moderate-income geographies" or "distressed or underserved non-metropolitan middle-income geographies … based on rates of poverty, unemployment and population loss or population size, density and dispersion."[102] Non-regulatory guidelines have filled in these vague regulatory criteria. Specifically, these new CRA-covered areas must experience either (1) an unemployment rate of at least 1.5 times the national average, (2) a poverty rate of 20% or more, (3) a population loss of 10% or more between the previous and most recent decennial census, or (4) a net migration loss of 5% or more over the five-year period preceding the most recent census.[103]

While there are persuasive public policy reasons for encouraging CRA lending in many rural areas, the new rule will permit some banks to fulfill their CRA obligations by lending to higher-income borrowers. The problem lies in the language of the regulation. As OTS admitted in its own proposal for a parallel scheme that it ultimately did not adopt, the agency chose not to provide a definition of the word "rural" in the revised rules.[104] The FRB, OCC, and FDIC similarly left themselves considerable discretion to create informal guidelines, which are not subject to public comment and review periods as are proposed regulations. The current guidelines are relatively focused on LMI tracts, but even they would permit CRA credit for a bank lending in more affluent areas. For example, some communities in the Northeast and Midwest have lost more than 5% of their population over the last five years, yet they still contain substantial middle and upper class communities.[105]

As a result of these vague regulations, banks may satisfy CRA requirements even if few loans are made to LMI and minority borrowers.[106] As critics have noted, intermediate small banks could receive CRA credit for financing private golf courses.[107] The new rules appear to follow the logic of some conservative economists and politicians: lending to higher income borrowers will spur economic activity, and as a result, cause benefits to "trickle down" to LMI individuals:

A bank activity that provides affordable housing, but not necessarily for low- or moderate-income individuals, may qualify as an activity that provides housing for middle- or upper-income individuals in an eligible rural area qualifies as 'community development' when part of a bona fide plan to revitalize or stabilize the community by attracting a major new employer that will offer significant long-term employment opportunities to low- and moderate-income members of the community.[108]

While the regulators' new definition of community development lending will result in some increases in rural lending under the CRA, there are few regulations (as opposed to voluntary guidelines) to ensure that significant lending occurs in LMI census tracts.

Altogether, the new rules enable banks to focus less on the CRA's main goal: ensuring LMI tracts receive their fair share of mortgage, equity, and small business lending. Some banks may now satisfy their CRA obligations by lending to clients whose business they would probably seek anyhow. On the other hand, these banks will provide the public with less data to determine whether LMI and minority borrowers are benefiting from small business lending.

IV. Conclusion: Politics

Finally, it is necessary to examine the CRA in terms of pure partisan politics. Unlike most laws, in which courts or administrative boards act as enforcers, the CRA is administered through regulatory examination. Punishment is exacted not through judgments, but rather through informal sanctions that deny violators regulatory permission to merge or open up new branches. While the FRB, FDIC, OCC, and OTS are independent agencies free of executive oversight, their heads and other senior personnel are presidential appointees. As a result, the executive branch exercises tremendous influence over CRA enforcement. Just as under the Clinton Administration, the CRA came into its own as a regulatory mechanism, so under the George W. Bush Administration, these Republican appointees (as well as a few Democrats) have largely weakened the CRA.

This is an unfortunate result. In truth, there could be few civil rights programs whose goals are more "conservative" than CRA. The CRA has long attempted to break down the barriers of geography, race, and income that often separate LMI and minority Americans from the lending institutions who can assist in their economic advancement. The CRA has played a significant role in ending redlining and precipitating significant prime lending in neighborhoods previously bereft of investment. While statistical evaluations are difficult, researchers have concluded that home-ownership rates are higher in CRA-covered census tracts than in non-covered areas.[109] Overall, CRA-regulated institutions lead the prime market in providing mortgage loans to LMI and minority tracts.[110]

It is probably true that smaller banks and savings and loans suffer greater inconvenience from CRA-lending than their larger counterparts, which can afford to hire CRA compliance officers and support staff. But placing most institutions under $1 billion outside the purview of the service and investment tests exempts the vast majority of American lending institutions from deeper scrutiny. As community organizers have shown, the service test is particularly important in determining how many branches and ATMs cater to LMI and minority populations. Local branches serve as gateways for LMI and minority borrowers, who will more likely apply for prime loans as they become more comfortable with other services these institutions have to offer.

This is not to say that the CRA is sacrosanct and should not be subject to thoughtful reform. Commentators from all political perspectives have pointed out that CRA should be modernized. Even critics such as Seidman have noted that the CRA is under broad in that it does not encompass sub-prime lenders, which furnish a disproportionate number of loans to LMI and minority borrowers.[111] Moreover, while CRA-covered institutions continue to be closely monitored, large non-banking industry mortgage lenders such as Countrywide Home Loans and Cendant (respectively the third and sixth largest mortgage lenders in terms of loans originated in 2005) are not subject to CRA examinations.[112] Some commentators have suggested that the CRA should be expanded to cover more focused rural lending or to require testing of mortgage companies and sub-prime lenders.[113] Many community activists would like to expand the CRA-testing regime from LMI tracts to entire geographic regions where their lending market share exceeds .05% of the local lending market.[114] One academic has suggested it might be fair to loosen Lending Test requirements in exchange for increased focus on the provision of banking services and community development.[115]

Nevertheless, under the George W. Bush Administration, the regulators have largely embraced the financial sector's views to the exclusion of community groups or even neutral studies.[116] As the drafting of the most recent regulations has shown, there was a near-Manichean split between the banking industry and community-based organizations. Most banks and thrifts favored getting rid of the investment test for small intermediate banks.[117] By contrast, most community organizations favored retaining the mandatory investment test.[118] There was a similar divergence between Republicans and Democrats. Twenty-eight Democratic members of the House of Representatives, including 12 members of the Committee on Financial Services, filed a joint letter calling on OTS to withdraw its proposal to remove the service and lending tests.[119] Thirty Democratic senators followed suit.[120]

Indeed, by focusing on the "burden" to intermediate small institutions, the regulators have forgotten that the purpose of the CRA is to benefit LMI census tracts rather financial institutions. [121] As OTS concluded in its final rules on making the lending and service tests optional, "[p]art of the idea behind allowing [a thrift to choose which tests are weighted] is not to force a savings association to provide a service or make an investment… that may not even be a central part of its business."[122] This is contrary to the language of the actual CRA statute, which is often overlooked in this area of dense administrative law, but which remains important as a touchstone for the congressional mandate underlying the regulations. Financial institutions have a "continuing and affirmative obligation to help meet the credit needs of the local communities in which they are located."[123] The law does not require a balancing of burdens between financial institutions and community needs.[124] Rather, it makes clear that community needs are paramount.

The George W. Bush Administration has consistently favored the interests of contributors over those of other parties, even when the interests at stake appear to support the President's own stated policy objectives. Whether the issue is the acceptable level of arsenic in the water, road-building in inaccessible areas of national forests, the regulation of power plant emissions, or drilling for oil in the Arctic National Wildlife Refuge, the Administration has repeatedly supported the interests of large contributors at the expense of community groups.[125]

While the Administration has not prioritized environmental protection, the purchase of a home or the creation of a new enterprise is central to President Bush's idea of an "ownership" society.[126] As the President has remarked:

Another priority … is to build an ownership society, because ownership brings security and dignity and independence. Thanks to our policies, home ownership in America is at an all-time high. Tonight we set a new goal: 7 million more affordable homes in the next 10 years, so more American families will be able to open the door and say, "Welcome to my home."[127]

Nevertheless, the President simultaneously criticized the government programs that have helped to further this goal:

In all these proposals, we seek to provide not just a government program, but a path, a path to greater opportunity, more freedom and more control over your own life.[128]

The contradiction between furthering minority and LMI borrowing, while at the same time, cutting back on government regulation has created a quandary. It has pitted influential backers against less affluent citizens who vote in fewer numbers and often for the opposing party.

In the end, the President and his regulatory appointees have chosen deregulation over increasing LMI and minority home-ownership. Without vigilant regulators and a clear, transparent CRA testing regime, there is no guarantee smaller financial institutions will continue to pursue LMI and minority borrowers or to aid them in their passage towards home and business ownership.