Statement by Lawrence B. Lindsey, Member, Board of Governors of the Federal Reserve System, before the Subcommittee on Consumer Credit and Insurance of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, February 18, 1993 - Statements to Congress - Transcript

Federal Reserve Bulletin, April, 1993

Statement by Lawrence B. Lindsey, Member, Board of Governors of the Federal Reserve System, before the Subcommittee on Consumer Credit and Insurance of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, February 1, 1993(1)

I appreciate the opportunity to provide the Federal Reserve's perspective on the current status of the Community Reinvestment Act (CRA). I will include a few comments on the Home Mortgage Disclosure Act (HMDA) and the fair lending laws, but they are extensive subjects in their own right.

The CRA continues to be the source of concern and frustration. Many members of the banking community consider the CRA as unnecessary, vague, burdensome, and unfair. Community and consumer groups often view enforcement as weak and have suggested several changes, including new disclosure provisions, to help ensure that banks and supervisory agencies effectively approach their CRA responsibilities.

We, as regulators, are often caught in the middle. Despite a dramatic increase in resources and efforts devoted to the CRA, we continue to receive brickbats from all sides. Bankers think that we grade too harshly and that we focus on process and paperwork instead of assessing "real" community lending. Community groups say that our grades are too high and that our effort is lax.

Over the years, critics have made many other charges about bank and supervisory agency performance, some of which have little foundation in the CRA's intent, actual provisions, or regulations. For example, some believe that an institution's record of making mortgage loans in minority areas should be the only CRA criteria, while others think that if a bank has a community development corporation (CDC), it should automatically get a "pass" on the CRA. But the CRA is more complex than the taking into account of home lending and CDCs.

Hearing this cacophony of divergent critiques, ideas, and proposals over the past few years, you would likely have concerns that the CRA may not be working as intended. In considering this point, I would like to cover several related areas in my testimony today. First, as a basis for my comments, I want to provide an overview of the act and its implementing regulation. Second, I would like to bring the subcommittee up to date on recent activities by the supervisory agencies to strengthen our CRA assessment programs. Third, I would like to touch on some of the recurring issues affecting the CRA that are of concern to bankers, community representatives, and the supervisor agencies. Finally, I want to share with you some thoughts on the CRA's impact - which we believe has been quite considerable.

I want to make it clear, however, that agencies other than the Federal Reserve are also deeply involved with the CRA. In fact, from an examination perspective we have by far the smallest number of supervised institutions - less than 10 percent of the total. I caution the subcommittee, therefore, that a serious exploration of the CRA would require testimony from others. This requirement, of course, would also be true with regard to HMDA and fair lending.

WHAT THE CRA SAYS AND REQUIRES

Let me begin by reviewing the act and its implementing regulations. Given what seems like a blizzard of recent proposals to change the CRA, increase its scope, provide safe harbors, or reduce its burden, it is especially important that the discussion be grounded in a clear understanding about the objectives of the act and its current requirements.

On its face, the CRA is a short, rather simple law, as banking laws go. It is only a few pages. It reminds financial institutions that they have a continuing obligation to help meet the credit needs of their entire community, including those of low- and moderate-income neighborhoods. These obligations stem from bank charters that state that banks should meet the convenience and needs of the communities they serve.

But the CRA also emphasizes that the obligation to help meet community credit needs, including those of low- and moderate-income areas, is an affirmative one. The CRA's fundamental message is simply that each financial institution should, as part of its day-to-day business functions, be as attentive to the credit needs of low- and moderate-income areas of its community as it is to other areas.

When considering the CRA's overall message, I think that it is important to recognize that the actual legislative language contains few directives and virtually no requirements that fall directly on financial institutions.

The CRA does not require that an institution make any specific types of loans, make any quantity of loans to particular types of persons or businesses, or make any specific number of loans in any targeted geographic area. The Congress has wisely avoided mandating credit allocation. The CRA does not require that institutions make housing loans, nor does it require that they make loans with below-market interest rates or loans with other terms and conditions that would be inconsistent with safe and sound lending. None of these items are required, or, in my view, even implied by the CRA.