Community Reinvestment Act

Community Reinvestment Act

In 1977, Congress passed a federal law called the Community Reinvestment Act. The purpose of this act was to help families with low and moderate incomes afford homes. The act made homes affordable by encouraging financial institutions to help meet credit requirements of the local area or community. The need for this act was caused by banks supporting unfavorable loans to low income communities in the 1960’s and 1970’s. Having federal financial supervisory agencies incite the commercial banks on credit requirements made it possible for low income families to afford a home. Meeting the requirements for low income was what the act called “redlining”. Ironically,

Ironically, even though the CRA’s objective was to help low income communities, the term “redlining” stemmed from Congress. In 1934, the federal government had adopted a program that was commissioned by the federal Home Loan Bank Board. The board drew out maps of the nation’s 200 plus cities that identified neighborhoods that were ranked most to least risky. For example, if a risky area served to be redlined then it would be deemed or categorized as “hazardous”.

Constant changes were occurring throughout the years to the Community Reinvestment Act. In 1995, President Clinton asked regulators to enhance the CRA by having it reformed. There were three performance measures that were added into the regulation. The lending test was the most weighted overall to score an institution. There were 5 criteria’s in this test to determine how an institution is supporting its community by meeting credit needs. The second test was the Investment test. This was to measure the “record of helping meet the credit needs of its community.” This was illustrated by the investing or donating of funds to community development. Lastly was the Service test, this measured the financial institutions distribution strategy on providing retail banking services.

The purpose of Clinton’s regulatory changes seems to be to loosen the housing rules to obtain a home. It also intends to add more pressure to financial institutions to lend more by meeting certain scores and criteria’s. In addition, by making the CRA ratings available publicly online, made activist also pressure the banks into easier lending. I almost wonder if Clinton at the time had Oprah Winfrey as his Chief HUD advisor “you get a house, you get a house, and everyone gets a house”.

At first glance I see that Clinton is trying to make an American dream possible for people to fundamentally have a right to own a home. However, owning a home is a privilege to us in America. We must earn this privilege by proving to the banks that we are responsible and credit worthy of owning the home. With proper underwriting ratings and guidelines provides a balance to America and provides safe and soundness to financial institutions to manage their risk properly.

Fannie Mae and Freddie Mac were government sponsored agencies that purchase and securitize mortgages from the private lenders. They’re role in the Community Reinvestment Act operation was to purchase and acquire a certain percentage of mortgages targeted to low and moderate income borrowers. The Department of Housing and Urban Development mandated a 42%-50% of their investment must belong to CRA eligible borrowers. In addition the GSE’s had to meet the lending criteria that the CRA put in place. By purchasing the debt from other banks, the debt would be taken off the mortgage companies balance sheets.

The GSE’s understood the risks they were taking on and went to Wall Street for “market analysis and financial