A CRA for the 21st Century: Congress Considers the Community Reinvestment Modernization Act of 2009

Abstract

The Community Reinvestment Act of 1977 (CRA) has received a great deal of attention over the last year. For some commentators, it was one of the main causes of the current financial crisis. According to its critics, the CRA forced banks to make risky loans to unworthy borrowers. The CRA has had its defenders, however, bank regulators and bankers alike, who cite the value of the CRA in encouraging banks to explore previously untapped markets and to lend in previously underserved communities in a safe and sound manner. The reality is that the CRA is narrow in scope; it requires only that depository institutions meet the credit needs of the communities in which they receive deposits, including low- and moderate-income communities. Because of this fact, it is difficult to blame it for the present financial crisis. Quite the contrary, the narrow scope of the CRA meant that the overwhelming majority of risky lending at the root of the crisis was beyond the reach of the CRA. Most subprime lending was beyond the scope of the CRA because it was carried out by non-depository institutions, or by depository institutions acting beyond their CRA “assessment areas” (the communities from which such institutions receive their deposits), or by the exempt subsidiaries of depository institutions. Thus, the CRA was powerless to stop the subprime mortgage frenzy.

On Capitol Hill, Congress has taken up the cause of strengthening the CRA in light of the gaps in its coverage exposed by the financial crisis. This article provides a brief overview of the current CRA and then outlines some of the key features of legislation currently pending before Congress that would strengthen the CRA: the Community Reinvestment Modernization Act of 2009. It concludes with an assessment of some additional amendments that Congress might consider to make the CRA even stronger, including the recognition of a private right of action through which community members could bring suit against regulators for their failure to enforce the CRA according to its terms.

Keywords: Financial Crisis, Community Reinvestment Act, Financial Re-Regulation

JEL Classification: G21, I30, K23, K42