CRA Is Politicized Credit Allocation, Regulation Says

March/​April 1995 • Policy Report

The Community Reinvestment Act is nothing more than coercive credit allocation on behalf of politically favored groups, writes Vern McKinley, an analyst at the Resolution Trust Corporation, in the latest issue of Regulation (1994, no. 4). The issue is devoted to deregulation of financial services.

In “The Community Reinvestment Act: Ensuring Credit Adequacy or Enforcing Credit Allocation?” McKinley writes that the CRA, which mandates that lending institutions meet the credit needs of their local communities, has become a way of imposing an ever‐​expanding definition of discrimination in lending. In a case involving Chevy Chase Federal Savings, the Justice Department went beyond the dubious criterion of minorities’ being more likely to be denied loans than are whites.

Finding no lending bias, McKinley writes, the government alleged that Chevy Chase failed to have enough branches in minority communities. Chevy Chase, like Shawmut National before it, chose to settle with the government rather than submit to costly and prolonged litigation. “The CRA should be repealed,” McKinley argues. “Altering the underlying regulations merely leaves the way open for future administrations to utilize the statute as a government credit allocation scheme.”

Competitive Enterprise Institute policy analyst Christopher L. Culp and Virginia Tech finance professor Robert J. MacKay defend derivatives, showing that they are composed of financial instruments and arrangements that have been around for decades. The authors warn that “excessive and hasty regulation will accomplish little more than driving this vital and dynamic domestic business overseas.”

Craig Pirrong of the University of Michigan shows how the Commodity Exchange Act of 1936 impedes the dynamism of futures markets by attempting to squelch manipulation before it occurs. Even worse, argues Pirrong, anti‐​manipulation regulation may cause damaging distortions that undermine confidence in the market.

Wendy L. Gramm, former head of the Commodity Futures Trading Commission, and Gerald D. Gay, former CFTC chief economist, chronicle their attempts to prevent the CFTC from stifling innovation in the futures markets. They learned that was no easy task because of the bureaucratic mentality of lifetime staffers.

Indianapolis mayor Stephen Goldsmith wraps up the issue with a call for cities to “restore the principles of the marketplace” by keeping taxes under control and avoiding irrational regulations. He describes his experience in creating the Regulatory Study Commission to lighten the burden of regulation on the citizens and businesses of Indianapolis.