The Community Reinvestment Act (CRA) is a 42-year-old statute
that requires depository institutions “to demonstrate that their
deposit facilities serve the convenience and needs of the
communities in which they are chartered to do business …
consistent with the safe and sound operation of such
institutions.”2 The CRA ostensibly seeks to improve the
welfare of low- and moderate-income (LMI) Americans by assessing
and rating depository institutions on the basis of how much they
lend to, invest in, and serve the communities in which LMI
Americans live. Racial minorities were, and continue to be,
disproportionately represented among LMI communities, so the CRA is
considered part of the anti-discrimination legislation of the late
1960s and 1970s.3
For its first 18 years of existence, the CRA was “a vague
statement of principle without much real-world effect.”4 Notably, a
series of investigative articles in the Atlanta
Journal-Constitution in 1988 documented large and persistent
differences in the amount of bank credit extended to majority black
communities compared to majority white ones.5 The reports
uncovered evidence of redlining: the denial of services to poor and
minority geographic regions.6 It was only after 1995, when changes to
CRA enforcement shifted the focus from banks’ ex ante lending
commitments to actual lending outcomes, that bank lending and other
activities in LMI communities appeared to increase.7
But whether this increase was consistent with the safe and sound
operation of banks is unclear. There is evidence that CRA-regulated
institutions engage in significantly riskier lending in advance of
CRA assessments, compromising their safety and
soundness.8 This paper shows that, because such
risky lending results in higher rates of default and harms the
financial well-being of the borrowers who struggle to repay their
loans, it is not clear that LMI borrowers benefit from the CRA.
There are still other reasons to question the present-day
usefulness of the CRA. The 1977 act was inspired by a long-standing
American tradition of bank localism, which has since ceased to
characterize the U.S. banking system. With the removal of branching
restrictions and statutory ceilings on savings and demand deposits,
the concern that motivated the CRA’s drafters to mandate local
credit extension, namely that potential borrowers would face few
alternative suppliers, has become moot. Additionally, the use of
CRA ratings in regulators’ deliberations on bank mergers creates
incentives for inefficient lending and distracts attention from
more important factors for consumer welfare, such as local bank
This paper argues for repealing the CRA, making the case that
the act remains ill-defined in its policy objectives, arbitrary in
its assessment practices, and is liable to harm borrowers and bank
depositors. By contrast, reductions in regulatory barriers to
branching and the growth of online lenders have significantly
increased LMI Americans’ access to banking services, indicating
that competitive markets can more efficiently achieve the CRA’s
goals of serving these communities. The evidence presented here
indicates that the case for outright repeal of the act is quite
strong: short of repeal, its current system of ambiguous and
bureaucratic assessment should at least be replaced with a system
of tradable obligations related to the lending, investment, and
service provision that the CRA seeks to encourage.10
A Brief Overview of the Community Reinvestment Act
Metrics and Requirements
The CRA applies to all insured depository institutions except
credit unions.11 It is enforced by a depository
institution’s primary regulator, which may be the Office of the
Comptroller of the Currency (OCC), the Board of Governors of the
Federal Reserve System (FRB), or the Federal Deposit Insurance
Corporation (FDIC).12 As of 2018, the FDIC was the primary
regulator for 3,617 depository institutions out of the 5,644
institutions subject to the CRA. The OCC and FRB conducted CRA
examinations of 1,210 and 817 institutions,
respectively.13 Since 1990, regulators’ CRA reports
have been available to the public, enabling activist groups to use
CRA ratings to oppose bank expansions and mergers on the grounds
that the bank has failed to satisfy its obligation to fulfill the
needs of the communities where it conducts business.14
CRA examiners use multiple measures to evaluate a bank’s lending
to low- and moderate-income borrowers within a given assessment
area.15 Assessment areas consist of one or more
metropolitan statistical areas or metropolitan divisions where an
institution subject to the CRA has its main office, branches, and
deposit-taking automatic teller machines (ATMs), as well as
surrounding areas where the institution has originated or purchased
a substantial portion of its loans.16 LMI
borrowers are those whose incomes fall below 80 percent of the
median income in the metropolitan area where a bank branch is
located, as well as those who live in census tracts with an income
that is 80 percent or less than the area median, as determined by
the Census Bureau.17
In 1995, CRA regulations underwent a series of significant
revisions that shifted the focus of its assessments from processes
— how a bank planned to increase lending to LMI
communities — to outcomes — how much of its lending and
other activities actually went to LMI borrowers and
communities.18 The revised regulations also created
separate assessment tiers for banks of different asset sizes. In
2005, those tiers were indexed to the consumer price
index.19 As of January 1, 2019, institutions
with less than $321 million in assets qualified as “small banks”
for CRA examination purposes. Those with more than $321 million but
less than $1.284 billion in assets were designated “intermediate
small” banks.20 Currently, examinations for these small
and intermediate small banks are intended to be less onerous, and
less frequent, than those for larger banks. Additionally, banks
that receive high CRA examination grades (regardless of size) are
rewarded with longer periods between examination cycles. The time
between examinations can thus range from anywhere between 12 and 60
months, depending on the bank.21
Since the 1995 revisions, these examinations have taken the form
of a one-, two-, or three-pronged test, graduated according to
banks’ size. For banks with assets above the intermediate-small
threshold, CRA regulators use the full three-pronged test, which
evaluates the lending, investment, and services that banks provide
to LMI customers and communities. The lending test evaluates the
volume and distribution of an institution’s loans across borrowers’
income levels and geographic regions.22 The
investment test examines the institution’s community development
investments, such as activities that revitalize low-income
geographic regions and disaster areas.23 The service
test evaluates the geographic distribution of a bank’s branches and
ATMs, as well as how effectively the bank’s services promote
community development.24 There is some overlap in the activities
that each of the three tests is meant to evaluate, and CRA
regulations recognize this overlap by excluding activities counted
under the lending or service tests from consideration in the
investment test.25 The three tests apply only to
depository institutions above the regulatory thresholds for small
and intermediate small banks. Small banks are evaluated according
to their lending performance only; intermediate small banks are
assessed on both their lending and community development
activities.26 Depository institutions subject to the
CRA receive a rating according to their performance on each of the
relevant tests. Each rating, in turn, is based on a qualitative
assessment of the institution’s performance on the test’s different
dimensions. For example, an institution’s rating is “outstanding”
if, among other behaviors, it exhibits “excellent responsiveness to
credit needs in its assessment area.”27 However,
institutions are downgraded a notch, to “high satisfactory,” if
regulators deem their responsiveness to local credit needs as just
good.28 Perhaps unsurprisingly, the Treasury
has criticized CRA ratings for lacking clear guidelines and leaving
unexplained the criteria by which a bank can meet each level of
Table 1 reproduces the number of points awarded by CRA
regulators for a given level of performance under each of the
assessment tests. The lending test is the most heavily weighted and
therefore the most important: for each level of performance, it
counts at least as much as the other two categories
Table 2 shows how each aggregate point score translates into an
overall CRA rating. The preponderance of the lending test means
that no institution can receive an overall “satisfactory” rating
unless it scores at least “low satisfactory” on the lending
The CRA’s Flawed Foundations
The Community Reinvestment Act was one of several measures
— the others being the Fair Housing Act (FHA, 1968), Equal
Credit Opportunity Act (ECOA, 1974), and Home Mortgage Disclosure
Act (HMDA, 1975) — aimed at reducing credit discrimination
against poor and minority communities and otherwise improving those
communities’ access to financial services.32
The policymakers who supported the CRA in 1977 worried about
financial institutions engaging in “capital export.”33 This refers
to the practice of lending deposits outside of the communities
where those deposits are collected (and where the depositors
themselves typically reside). Proponents of the CRA argued that
depository institutions, most of which have enjoyed federal deposit
insurance since 1933, had an obligation to lend within the
communities from which they received their deposits.34 Sen.
William Proxmire (D-WI), then chairman of the Senate Banking
Committee and the CRA’s sponsor, argued that:
A public charter conveys numerous economic benefits and
in return it is legitimate for public policy and regulatory
practice to require some public purpose. … The authority to
operate new deposit facilities is given away, free, to successful
applicants even though the [sic] authority conveys a substantial
economic benefit to the applicant. Those who invest in new deposit
facilities receive a semiexclusive franchise. … The
Government limits … entry [that] would unduly
jeopardize existing financial institutions. The Government also
restricts competition and the cost of money to the bank
by limiting the rate of interest payable on savings
deposits and prohibiting any interest on demand deposits. The
Government provides deposit insurance through the FDIC
[and] ready access to low cost credit through the Federal Reserve
Banks or the Federal Home Loan Banks. … The regulators have …
conferred substantial economic benefits on private institutions
without extracting any meaningful quid pro quo for the
public.35 [Emphases added.]
Federal and state authorities limited entry into the U.S.
banking system, argued Proxmire, so it was only fair to require
banks to lend in the communities from which they were able to
extract rents — profits in excess of what the banks could
earn in a competitive market — courtesy of government
The idea that bank deposits should remain in the areas where the
depositors live is a long-standing one in American banking. Small
agricultural interests were early supporters of this type of
localism and were happy to support granting bankers local monopoly
charters in exchange for the bankers’ commitment to lend to them in
both good times and bad.36 Localism also informed the persistence
of regulatory restrictions on intrastate and interstate branching
well into the 1980s.37 Indeed, the prevalence of unit banking
— that is, a statutory prohibition on operating more than one
bank office — was deeply rooted in popular culture for much
of American history. For example, the 1946 movie It’s a
Wonderful Life — “one of the most beloved in American
cinema”38 — presents small-town thrift
banker George Bailey (Jimmy Stewart) as the community’s bulwark
against evil big business.39
Yet economically, the practice of confining savings to the
localities where they are collected is very costly. A useful
function of banks is to pool depositor savings and to deploy those
funds as loans. Pooling facilitates beneficial diversification:
acting on their own, individuals can only commit funds to one or a
handful of projects, exposing themselves to the specific risks of
those borrowers each time they do so. Banks, on the other hand, can
allocate funds among hundreds of thousands of different lending
opportunities. Diversification therefore both reduces portfolio
risk for a given level of returns and helps depositors earn more at
lower risk.40 Furthermore, trade in credit —
that is, borrowing and lending funds — is like other forms of
trade in that it is mutually beneficial, enabling the depositor to
earn a satisfactory rate of return and enabling the borrower to
secure capital for consumption and investment.41 Just as
restricting trade in goods is harmful to the welfare of consumers
and producers, restricting trade in credit (for instance, by
requiring the borrower to reside in the same location as the
depositor) can only reduce profitable opportunities for credit
Moreover, bank branching enables banks to diversify their loan
portfolios across assets and places, which in turn makes bank
failure less likely.42 Banks with multiple branches can offset
losses in some hard-hit areas with earnings from relatively less
affected areas. For example, when the Great Depression began,
California had the most developed bank branch network in the United
States.43 Branch banking in that state not only
made the banks that operated branches more stable; it also made the
unit banks in competition with branch banks more stable than unit
banks in places without branch banks, suggesting that competitive
pressure provided a healthy check on inefficient unit bank
practices.44 Another example is the Canadian banking
system — characterized by a small number of large banks
— which has exhibited a great deal of stability over 150
years, without detriment to depositor rates of return.45
Although restrictions against branching were the main impediment
to bank loan diversification at the time of the CRA’s passage, the
CRA further undermined geographic diversification, which helps to
mitigate risk, by implicitly requiring that a share of deposits be
lent out where those deposits are collected.46 Because
only certain types of lending — mainly mortgages and
small-business loans — and investment count for CRA credit,
the CRA also reduces a bank’s opportunities for asset
diversification. Furthermore, and contrary to the philosophy that
informed the CRA, the deposit-taking activities of banks benefit
communities quite apart from any related lending operations.
Deposit facilities give their holders access to the benefits of
loan diversification. They also contribute to depositors’ credit
histories, facilitating future use of other credit products.
Finally, deposit accounts give depositors a valuable reward for
their funds, in the form of low-cost banking and payments, and, for
some demand deposits, regular interest payments.
At the 1977 Senate hearings, Proxmire argued that the CRA would
ultimately assist bank diversification by “alleviating fears that a
more liberal branching policy would be inimical to community
welfare,” thereby making the removal of branching restrictions more
politically palatable.47 However, his suggestion overlooked the
fact that, if branching were in fact permitted, the CRA would limit
both its attractiveness to banks and banks’ ability to take full
advantage of it.
It is difficult to picture a scenario, absent considerable
information asymmetries, in which political direction of bank
lending could improve upon the allocation resulting from market
prices: if attractive projects in the local community can yield an
adequate return for a given risk, there is no need for a political
directive to mandate lending. If there are better opportunities
elsewhere, such a mandate is harmful to depositor returns and
banks’ safety and soundness. Proponents of the CRA in the 1970s and
1980s claimed that bank redlining warranted political intervention.
As argued below, however, CRA regulations may be undermining LMI
communities’ efforts toward financial inclusion in today’s
much-changed banking environment.
The regulators charged with enforcing the CRA (the OCC, the FRB,
and the FDIC) voiced some of these concerns in 1977. Then
comptroller of the currency Robert Bloom warned that the CRA would
harm credit institutions “established primarily to serve the needs
of a particular segment of the United States population
nationwide,” using as an example the case of an American Indian
bank that aimed to offer banking services to that group on a
nationwide basis.48 Fed Chairman Arthur Burns worried that
mandating “standards for setting the proportion of total loans that
an institution should allocate to local credit would necessarily be
arbitrary.”49 FDIC Chairman Robert Barnett raised the
concern that the CRA could “discourage financial institutions from
making applications for offices in neighborhoods where funds are
badly needed because of the reexamination that this would entail in
[the] areas where they already have offices.” Barnett also worried
about increased concentration of bank branches in affluent areas,
and the duplicative reporting burden on institutions that were
already subject to the Home Mortgage Disclosure Act.50
The Changing U.S. Banking Landscape
Two structural trends in U.S. banking since 1977 further
strengthen the case for reconsidering the CRA: bank consolidation
as a result of the removal of branching restrictions, and the
growing market share of online (fintech) lenders.51 This
section considers the merits of current CRA assessments in light of
the rise of branch banking. A later section argues that the rise of
fintech lending bolsters the case for repealing the CRA
Many of the anti-competitive restrictions that Proxmire cited to
justify the CRA in 1977 have since been removed, improving the
welfare of bank customers and weakening the case for the CRA’s
implicit local lending mandates. The most important of these policy
changes has been the steady liberalization of bank branching, that
is, the ability of a single bank to operate multiple offices within
states and beyond their home state. In 1970, only 13 states allowed
banks to operate branches, and no state allowed out-of-state banks
to operate branches within its borders.52 From the
1970s onward, however, a growing number of states authorized
in-state and out-of-state branching, so that by 1990, all but five
states allowed intrastate branching, and the same number (although
not the same states) permitted interstate branching.53 This
process of steady liberalization culminated in 1994 with the
passage of the Riegle-Neal Act, which removed federal restrictions
Branching deregulation ushered in rapid bank consolidation, with
the average annual number of bank mergers more than doubling
between the 1960s and the 1990s.55 The number of FDIC-insured
commercial banks peaked at 14,496 in 1984 (see Table 3). It stood
at 10,453 by the passage of the Riegle-Neal Act, dropping to 7,279
on the eve of the financial crisis, and to 4,918 by the end of
2017. The number of branches, on the other hand, had expanded from
42,731 in 1984 to 79,163 by 2017, only slightly lower than its 2009
peak of 83,130.56 This means that the number of bank
offices (headquarters plus branches) is much higher today than at
any time before the consolidation trend started — albeit
below the number of bank offices in operation just before the
The CRA was passed during a period of extensive branching
restrictions. At the time, there was a worry that without strict
regulation, communities where locally headquartered banks did not
lend would struggle to find a competing supplier. In addition,
between 1933 and 1986 the Federal Reserve set an interest rate
ceiling on bank savings deposits through Regulation Q.57 This
regulation also banned interest on demand deposits until 2011. By
restricting the interest that banks could offer to depositors,
Regulation Q subsidized bank funding, creating rents for banks
above the return they would earn in a competitive market. The
weakened competition, both from Regulation Q’s subsidies and from
branching restrictions, arguably strengthened the case for local
lending mandates that forced banks to share some of their
regulatory rents with customers.58 However, these rents were a
product of interest rate controls and anti-competitive regulations,
not market factors, so they could have been better addressed by
repealing Regulation Q and liberalizing bank branching sooner. At
any rate, the rationale for community reinvestment that Regulation
Q provided disappeared with its repeal.59
Branching deregulation had several beneficial effects. First, it
increased the efficiency of the banking sector by facilitating the
expansion of the best-performing institutions and removing
anti-competitive protections for the worst-performing ones. Greater
competition in turn lowered both the share of bad loans on bank
balance sheets and the average loan interest rate.60 Economic
growth increased as states liberalized bank branching.61
Furthermore, thanks to branching liberalization, there are more
banks serving any given individual community today than there were
at the height of branching restrictions.62 The
increased banking options now available to consumers (regardless of
income level) have made deposit rates more competitive, increased
loan options, and enabled consumers to benefit from large fee-free
networks across the United States.63 One way to illustrate this
expansion of choice and its effects is by examining the long-term
increase in the average distance between small business borrowers
and their lenders — from 100 miles in 1996 to 250 miles by
2016.64 When prospective borrowers have access
to more distant lenders, the local bank’s willingness to lend can
no longer determine whether borrowing will occur.
Yet the CRA remains in place, restraining further competition
and growth by limiting where and to whom institutions can lend.
Indeed, today’s CRA regulations do not just require banks to lend
in the communities where they take deposits, they also ban branches
deemed “primarily for the purpose of deposit
production.”65 In other words, despite the fact that
banks have had the ability to open branches outside their home
state since the mid-1990s, regulators have the authority to close
any branches they believe to be conducting insufficient local
lending.66 While CRA enforcement authorities do
not appear to have yet used this power,67 even before
they acquired it there were reports of delayed and abandoned bank
mergers because of pending CRA examinations and concerns that a
bank’s low CRA rating might pose an obstacle to the
Contemporary Problems with the CRA
The CRA Encourages Banks to Make Riskier Loans
Although it is clear that the CRA places constraints on the way
in which banks allocate credit, the act’s proponents have long
argued that CRA loans are too small a share of total lending to
constitute a prudential risk, and that there is no evidence that
CRA loans are riskier or less profitable than other
The experience of the financial crisis suggests otherwise. In
fact, pre-crisis testimony from community organization
representatives explicitly pointed to the CRA as one cause of
overly lenient underwriting standards. In a 2007 report, for
example, the National Community Reinvestment Coalition touted
“higher debt-to-equity ratios than … conventional loans,”
“flexible underwriting standards,” “low or no down payment[s],”
“commitments by secondary market institutions [notably, the
government-sponsored enterprises (GSEs)] to purchase loans,” and
“second review” of denied applications as consequences of the
CRA.70 Raising loan-to-value ratios, relaxing
borrower standards, and pushing secondary market institutions to
buy more bank loans all make lending riskier.
The financial crisis cast a bright light upon the extent to
which many households, particularly LMI ones, had taken on large
housing debts.71 There is considerable evidence that the
regulatory push to extend mortgage lending to LMI communities,
which accelerated in the mid-1990s, and the accompanying promise
that the GSEs (Freddie Mac and Fannie Mae) would buy those
mortgages, drove that debt increase.72 The extent
to which the CRA is responsible for unprofitable lending to LMI
households remains a matter of debate, but the $4.5 trillion in CRA
commitments between 1992 and 2007 tracks closely with the excess in
affordable housing loans made by the GSEs (relative to their
historical norm) during that same period.73
Even if the CRA was not the main contributor to bad mortgage
credit growth in the run-up to the financial crisis, it may have
enabled the proliferation of credit by giving aggressive lending
practices the respectable cover of community reinvestment.
Pre-crisis accounts of the CRA’s “success” support this hypothesis,
as they focus on the growth of LMI lending and homeownership,
rather than the CRA’s suitability for borrowers or its implications
for bank safety and soundness.74 Even before the financial crisis,
CRA supporters recognized the difficulty of attributing increases
in low-income lending to the act, since both high rates of economic
growth and other government policies — such as the loosening
of GSE standards — could better explain the observed increase
in lending to those communities.75
However, proving that the CRA was a success requires showing
that it led to higher lending volumes without compromising
the lenders’ safety and soundness. Pre-crisis evidence of the CRA’s
impact, even when it suggested significant growth in LMI lending by
depository institutions, failed to show that such credit was
sound.76 The crisis and its aftermath, on the
other hand, showed that mortgage lending on lenient terms could
harm financial institutions and borrowers alike. It is not
surprising that institutions subject to the CRA, especially those
looking to grow and merge with others, would increase their LMI
lending, since regulators take CRA ratings into account when
approving bank expansions.77 Such lending may even have benefited
banks and their managers in the short term. But was it good for
borrowers, bank shareholders, taxpayers, and the economy in the
Some of the evidence says no. A 2012 National Bureau of Economic
Research (NBER) paper looking at CRA lending between 1999 and 2009
finds that banks significantly increased their lending around the
time of CRA examinations, and that such loans were riskier.
Specifically, lending volume increased by 5 percent and default
rates increased by 15 percent in the quarters surrounding a bank’s
examination.78 The increase in lending is particularly
large and significant for banks with more than $50 billion in
assets, which is consistent with the hypothesis that larger
institutions, being more likely to expand and merge, will have a
greater incentive to strive for high CRA ratings in hopes of having
their mergers approved.79 The study’s authors also find that the
increase in risky lending became more pronounced in the later years
of the housing boom.80 Their finding agrees with the
contention made by, among others, former Federal Reserve governor
(and 1990s CRA reform architect) Lawrence Lindsey that, to avoid a
CRA rating downgrade, before the crisis banks increasingly reached
out to riskier borrowers as the demand from more creditworthy
borrowers was satisfied.81
The NBER paper has been criticized for focusing on the quarters
surrounding CRA examinations, thus failing to recognize that these
examinations themselves evaluate lending in periods well before
those dates.82 The authors counter, however, that
depository institutions have an incentive to concentrate their CRA
lending close to the exam so as to minimize recorded default rates,
which might fall foul of the CRA’s requirement that lending be
consistent with safety and soundness.83
In contrast, a 2013 Federal Reserve bulletin found that LMI loan
delinquency rates in banks’ CRA assessment areas were lower than
those outside their assessment areas, suggesting — according
to the authors — that the impact of the CRA on financial
fragility, if any, was comparably minor.84 However,
the study cited only one year of evidence; furthermore, it showed
that credit scores of LMI borrowers within the surveyed banks’
assessment areas were higher, and those borrowers much less likely
to be subprime, than in the case of LMI borrowers outside CRA
assessment areas.85 More creditworthy borrowers are less
likely to default. Their preponderance among the LMI borrower
cohorts of banks’ assessment areas suggests that banks might be
“skimming the top”: lending to the most creditworthy borrowers in
LMI areas to fulfill their CRA requirements while also minimizing
risk.86 Such behavior may satisfy regulators,
but it contradicts the assertion that CRA loans serve the marginal
borrowers and communities that the statute ostensibly targets.
Furthermore, evidence that CRA-motivated lending was less risky
than other types of lending to LMI borrowers does not prove that
the CRA was beneficial, or even neutral, for bank balance sheets
and the health of the wider banking system. Indeed, as recently as
2006, regulators issued draft rules to exempt CRA-related equity
investments — such as providing capital and employment for
community development purposes — from higher Basel II capital
charges.87 Pro-CRA activists encouraged this move,
which made it more attractive to make CRA investments at the
expense of bank safety and soundness.88
Yet another problem with citing increases in LMI lending as
evidence for the economic gains associated with the CRA is that the
opportunity costs of CRA-induced lending may exceed the benefits.
Gross growth rates of LMI loans ignore opportunity costs. Consider
the scenario in Table 4, where a bank with $10 million worth of
available funds faces a choice of four projects to finance.
In the absence of the CRA, and assuming for simplicity that all
prospective borrowers face a similar interest rate, the bank would
pick the projects with the highest likelihood of repayment; that
is, Projects A, B, and C. Under the CRA, however, if the bank
believes that its loan to Project B will not suffice to get the
bank a high CRA rating, it may choose Project D over Project C
because the loan applicant in D (with income below 80 percent of
the area median) qualifies for LMI status, whereas the applicant in
C does not.
While the philosophy of the CRA implies that lending to
applicant D over applicant C has positive benefits beyond its
return to the bank, it is important to note that rejecting
applicant C comes with costs: first, to the bank’s shareholders,
who will receive a lower expected return on capital; second, to
applicant C, who, while not low-income by the regulatory
definition, is not much better off than applicant D and still
places below the median income of the bank’s assessment area. In
fact, a 2000 Fed survey showed that 44 percent of respondent banks
found their CRA mortgage loans to be less profitable than their
other mortgage loans.89 Furthermore, 52 percent of respondents
indicated that CRA-related mortgage loans were costlier to
originate, on a per dollar basis, than non-CRA loans.90 These
results suggest that, for many institutions, CRA lending involves
higher costs than non-CRA lending — and these costs are
passed on to other borrowers and shareholders as well.
The 2007-2009 financial crisis illustrated the harm that a
single-minded drive to increase mortgage lending could do to
vulnerable communities. It was a surfeit of politically induced
housing credit, rather than a scarcity of it, that left households
badly exposed when the crisis hit.91 Yet the CRA continues to assess
depository institutions primarily on their lending to LMI areas,
despite evidence that such lending is riskier and costlier to
Compliance with the CRA Is Unnecessarily Burdensome
There are four levels of CRA performance: “outstanding,”
“satisfactory,” “needs to improve,” and “substantial
noncompliance.”92 Between 2006 and 2014, no more than 3.5
percent of depository institutions subject to the CRA received an
overall rating below satisfactory in any year. More than 90 percent
of institutions received a satisfactory rating in 2014.93 These
statistics have caused some analysts to conclude that compliance
with the CRA is not a burden on depository institutions.94 Their
assumption is that, if the CRA were onerous, more institutions
would fail their CRA exams.
In fact, things are not so simple. An institution’s CRA ratings
tell us only that it passed the evaluation; they say nothing about
the resources it dedicated toward doing so. Just as the low number
of bank failures prior to the 2007-2009 financial crisis did not
imply the absence of financial fragility, one cannot conclude that
a high pass rate means the CRA is not burdensome.95 The
resources a bank dedicates to merit a satisfactory or outstanding
evaluation can be substantial, and these often come with further
direct and indirect costs to banks, shareholders, and consumers. In
fact, the CRA is responsible for 7.2 percent of community banks’
compliance costs, according to a Federal Reserve Bank of St. Louis
survey.96 That is despite the fact that more than
80 percent of community banks, that is, those with less than $10
billion in assets, are subject to the less burdensome small or
intermediate small CRA assessment protocols. As compliance costs
represent between 5 and 10 percent of community banks’ noninterest
expenses overall, the CRA can make a perceptible dent on bank
operating margins, particularly on those of smaller banks that have
lately seen higher compliance costs and lower rates of
The CRA Fails to Promote Financial Inclusion
At the time of the CRA’s passage, there was a concern that
certain depository institutions would systematically refuse to lend
to minority communities, even when doing so would not mean taking
on undue credit risk.98 Investigative reporting, notably by the
Atlanta Journal-Constitution, continued to expose this
practice of redlining in the years immediately after the CRA went
into effect.99 However, 42 years later, the barriers
to financial inclusion for low-income and minority communities are
different. The CRA not only fails to address those barriers; it may
contribute to the difficulty of overcoming them.
According to the FDIC, as of 2017 there were 8.4 million U.S.
households (6.5 percent of households) without a bank account.
Another 24.2 million have only limited access to banking services
and must instead resort to alternative — usually costlier
— providers.100 Unbanked rates are much higher for
minorities: 16.9 percent of black households and 14 percent of
Hispanic ones are unbanked, compared to 3 percent of white ones.
Additionally, more than half of black and Hispanic households with
incomes below $30,000 report no mainstream source of
Two commonly cited reasons for lacking a bank account are not
having enough money to deposit and account fees being too
high.102 Regulatory compliance costs are a
principal driver of both account fees and minimum deposit
requirements to avoid those (and other) fees. As mentioned earlier,
CRA loans are costlier to originate than other loans, and CRA
compliance costs account for 7.2 percent of all community bank
compliance costs.103 While this is lower than the share of
bank costs related to the Bank Secrecy and Truth in Lending Acts,
it is still significant, especially considering that overall bank
compliance costs have increased in recent years.104 Thus,
while it might appear that the CRA’s low-income lending mandates
promote financial inclusion among lower-income borrowers, its
indirect impact on account charges likely reduces access to deposit
and credit services among the very populations the CRA is meant to
The decline of small banks (despite a steady rise in the number
of bank offices), further bank consolidation since the
financial crisis, and rising compliance costs have all contributed
to the phenomenon of so-called banking deserts. These are census
tracts with no bank branches within a 10-mile radius of their
centers.105 As of 2016, 3.7 million Americans
lived in banking deserts, while another 3.9 million lived in areas
that may soon lose their last bank office.106 Banking
deserts are mostly rural and therefore do not account for a large
share of the unbanked population.107 Nevertheless, some states with a
high population share living in banking deserts, such as Arizona,
Nevada, and New Mexico, also have above-average unbanked rates
Median household incomes in banking deserts are lower than they
are in nondeserts. Even for potential banking deserts, median
household income sits at 10 to 20 percent below the nationwide
median.108 The population of banking deserts is
therefore not much different in its socioeconomic characteristics
from the groups that the CRA aims to help.
Growing regulatory compliance expenses contribute significantly
to the rising cost of operating bank branches, increasing the
likelihood of branch closures and contributing to the spread of
banking deserts.109 CRA branching restrictions worsen this
problem by discouraging the establishment of bank branches and ATMs
in sparsely populated areas. Without the implicit lending
requirements of the CRA, depository institutions might be more
willing to take deposits in, and to serve, low-density geographies.
CRA regulations also discourage banks from expanding to areas with
few lending opportunities by making it costlier to operate a
branch, thus reducing banks’ incentive to open new branches or
maintain old ones in marginally profitable locations.
The CRA Has Not Resolved “Rational Redlining”
Even some critics believe that the CRA may be justified, if
informational asymmetries specific to LMI communities lead banks to
ration credit more with them than they do among other populations
— what one author calls “rational redlining.”110 For
example, credit rationing can occur if a community has witnessed
only a limited number of local property transactions, generating
insufficient data on home prices and complicating banks’ capacity
to make accurate loan appraisals.111 Uncertain appraisals, in turn,
raise the down payments demanded by banks, further dampening loan
However, even if rational redlining is a problem in some
present-day LMI communities, CRA regulations can be of only limited
help. The CRA’s assessment policy links lending obligations to
deposit-taking. But that cannot resolve rational redlining: if
banks take deposits within a community, they will have access to
information about its credit quality, economic conditions, and
property values. On the other hand, banks lacking such information
are unlikely to operate or take deposits in that community
precisely because they face uncertainty regarding available lending
opportunities. CRA regulations target institutions that already
have operations in local communities and have information about
local market conditions. A better way to facilitate greater credit
extension is to increase competition by attracting new lenders into
communities, thereby helping to correct any information failures.
As argued below, the CRA works against these efforts.
The CRA Is a Harmful Industrial Policy
One way that the CRA encourages bank compliance is by directing
regulators to take a bank’s CRA rating into account when evaluating
its application for a deposit facility — that is, whenever
that bank wants to set up a branch or merge with another
bank.113 On the one hand, such use of CRA
ratings encourages regulators and activist groups to oppose the
applications of banks that they perceive as having underperformed
in their lending to LMI communities.114 Indeed,
groups such as the National Community Reinvestment Coalition have
explicitly linked periodic waves of bank mergers to increases in
those banks’ commitments to lend, suggesting that the merger would
not have taken place without the banks’ lending
promises.115 On the other hand, a bank’s positive
CRA record can lead regulators to overlook other concerns related
to its activities, such as the impact a large bank merger could
have on local credit spreads — the difference between the
interest banks charge borrowers and what they pay to depositors.
Because the credit spread is a proxy measure for competition within
a local banking market, it is often a more economically significant
indicator of a merger’s impact on consumer welfare than the merging
banks’ CRA ratings.116
The CRA has thus become a tool of industrial policy, rewarding
institutions for meeting political goals and threatening to punish
those perceived to have fallen short. This facet of the CRA raises
three important concerns. First, it may reduce efficiency by
blocking consolidation that would lower bank operating costs and
increase loan diversification, which, as discussed above, promotes
safety and soundness. There has been a steady trend of bank
consolidation since passage of the Riegle-Neal Act, but many small
banks remain: for example, as of the third quarter of 2018, the
FDIC reported 1,335 supervised institutions with assets below $100
million, with an average return on equity 3 percentage points below
that for larger banks.117 Both figures suggest that some gains
from economies of scale remain to be grasped in U.S. banking.
Foreclosing such efficiency-enhancing mergers would harm depositor
returns and undermine bank safety and soundness.
Second, the CRA may reduce competition if a bank merger gives
the resulting institution sufficient market power to raise prices.
The United States has a long history of monopolistic and
oligopolistic local banking markets. Competition only started to
become the norm from the late 1980s onward, and the evidence
suggests it has had positive effects on economic growth and
consumer well-being.118 The CRA, by making it costlier to
establish branches and expand operations, can have a deleterious
impact on local bank competition.119 This possibility is particularly
worrying in the post-crisis U.S. banking landscape, which is
characterized by very few new banks120 and strong
restrictions on the number of new charters issued by the
Finally, CRA regulations weaken the incentive for banks to guard
against unprofitable lending, if banks perceive the benefits from
easier consolidation to outweigh the losses incurred from CRA
loans.122 Between 1992 and 2007, cumulative CRA
lending commitments increased 500-fold, suggesting that banks were
willing to spend heavily to please their regulators once branching
liberalization increased merger and expansion
opportunities.123 As discussed earlier, the evidence
also suggests that loans timed to coincide with banks’ CRA
evaluations are riskier than other loans.124
Credit volumes are an imperfect proxy, and certainly not a
substitute, for the welfare of communities and households. In 1977,
the CRA focused on LMI lending because there was evidence of
widespread redlining, abetted by nationwide restrictions on bank
branching. Four decades later, the CRA, as currently enforced,
raises many concerns regarding the effectiveness of its LMI lending
mandates, its compliance cost to banks, and its impact on
prudential standards. It also fails to address the contemporary
issues facing LMI communities, such as the high rate of unbanked
households and the growth of banking deserts.
Better Ways to Promote Community Development
If the goal of the CRA is to raise the real incomes of LMI
communities, then a more diverse array of policies offers greater
promise for achieving it. These alternative policies would also
have fewer adverse consequences for bank safety and soundness than
the CRA’s implicit lending mandate. They include liberalizing
zoning laws to lower the cost of housing, reducing low-income tax
burdens, curbing occupational licensing to facilitate employment
and entrepreneurship, lowering tariffs on food and clothing
imports, and relaxing overly strict childcare
regulations.125 The high cost of living in many urban
areas hurts LMI communities in particular, but that is a problem
that neither banks nor financial regulation can readily solve.
Of course, improving LMI households’ access to credit can also
improve the well-being of those households. But there are better
ways to facilitate LMI access to credit than by imposing CRA
mandates. The most effective alternative is to ease banks’ entry
into the lending business.
Facilitate Lender Entry
Regulators should make entry into local lending markets easier
by issuing more charters and reducing regulatory barriers for
nondepository institutions. The rate of new bank creation has
slowed dramatically, from an average of more than 100 banks per
year between 1990 and 2008 to just 13 for the eight years between
2010 and 2018.126 While low interest spreads and higher
post-crisis rates of regulatory burden account for some of the
decline, the FDIC also toughened its capital and supervisory regime
for new banks in 2009, discouraging newcomers’ entry into lending
markets.127 Since then, the stabilization of the
financial system and expansion of the economy, together with new
leadership at the FDIC, have created an opportunity to ease new
charter policy for the benefit of depositors and
In the meantime, the growth of online lending has further
reduced the loan market share of CRA-subject depository
institutions.129 The volume of CRA lending has thus
become less representative of overall credit conditions in LMI
communities. Online lenders have devised ways to allocate credit
profitably and competitively without an established relationship
with prospective borrowers. Indeed, recent evidence suggests that
online lenders can allocate credit more efficiently — with
higher loan volumes at lower interest rates — than depository
institutions.130 Online lending has therefore reduced
the potential for asymmetric information to lead to rationing in
local credit markets.131 Other research suggests that online
lenders tend to serve communities with a small number of banks and
bank branches, which increases competition and credit availability
in areas to which banks may not previously have fully
The OCC’s proposed special-purpose national bank charter for
fintech firms promises to make nationwide operations by nonbank
lenders easier and less expensive (currently, the cost of
state-by-state licensing and examinations can reach up to $30
million).133 Comptroller Joseph Otting has
previously estimated that as many as 30 to 40 online lenders could
apply for a fintech charter.134 Unfortunately, state-level legal
challenges to the charter have led to policy uncertainty,
discouraging firms from taking up the OCC’s offer for the time
Branching liberalization and the advent of online lending have
allowed for freer local bank entry, substantially reducing the
likelihood of persistently low lending rates in LMI communities.
For example, as Table 6 shows, recent Home Mortgage Disclosure Act
data reveal that on average, 26.2 percent of mortgages originated
by the largest nonbank lenders (including fintech) are issued to
LMI borrowers. Among those same lenders, 23.9 percent of all
mortgage loans are issued to minorities. By comparison, LMI
borrowers and minorities account for 20 percent and 22.2 percent of
mortgages from the largest banks, respectively.136 (Together,
the top 25 banks and nonbanks — including mortgage companies
and credit unions — account for 33.6 percent of all loan
originations.137) In short, market developments are
already solving the primary issues that the CRA has spent the past
42 years trying to address.
Additionally, racial desegregation of many inner-city
neighborhoods, itself a welcome development, has weakened the link
between geography and CRA-targeted populations. For example, CRA
lending in the historically black Philadelphia neighborhood of
Point Breeze now seems to be reaching mostly newer (and better-off)
white residents.138 Because CRA regulations evaluate a
census tract’s LMI status by comparing its median income with the
median income of the metropolitan area, loans to better-off
borrowers in LMI tracts still count for CRA assessment
purposes.139 Urban desegregation, perversely, has
undermined the CRA’s effectiveness in promoting lending to
Let Fair Lending Laws Help
The objectives of the CRA remain vague and ill-defined.
Regulators should clarify these objectives, both among themselves
and to eligible institutions and community organizations. Is the
goal of the CRA to fight lending discrimination, to increase
lending in LMI communities, to raise living standards in LMI
communities, or to achieve other public-interest goals?
If the CRA is supposed to fight discrimination, then the Fair
Housing Act and the Equal Credit Opportunity Act are better tools,
as they specifically address the disparate treatment of prospective
borrowers according to race, gender, age, marital status, or other
protected characteristics because they prohibit lending
discrimination in the mortgage and small-business lending markets
that the CRA targets.140 There are concerns that the Consumer
Financial Protection Bureau has been overbroad in its
interpretation of the ECOA’s meaning in recent enforcement
actions.141 Yet, unlike the CRA, the FHA and the
ECOA focus on preventing the unfair treatment of individual
vulnerable borrowers. Also unlike the CRA, they explicitly ban
discriminatory practices and instruct financial regulators to
prosecute violations.142 These are more efficient means of
achieving public-policy goals than the CRA’s implicit requirement
that banks lend in specific locations or risk having future
expansion or merger applications rejected.
Increasing lending to poor communities is not a sound policy
goal on its own, as it can encourage unprofitable loans that end up
harming borrowers and bank balance sheets. There was a time when
banks could profitably ration credit and exclude vulnerable
populations due to branching restrictions and interest-rate caps.
But the liberalization of bank branching in the 1980s and 1990s and
the growth of nonbank lenders have increased competition in local
banking markets and given consumers a more diverse set of credit
options. Today, ensuring that public policies do not drive credit
to borrowers who can ill afford it is as important as enabling
financial institutions to serve all communities.
How Should the CRA Change if It Remains in Place?
There is reason to believe that the CRA is outdated and
ill-suited to the current needs of LMI communities. Given how
radically banking and credit markets in the United States have
changed since 1977, Congress should strongly consider repealing the
act. If the CRA remains in force, however, it would be a mistake to
expand its mandate to cover nonbanks, such as fintech lenders and
credit unions. Short of repealing the act, Congress and regulators
should consider more efficient ways for depository institutions to
discharge their CRA duties, such as by establishing a system of
tradable lending obligations.
Allow Fintech Firms to Remain Exempt
The growth of online lending has led proponents of the CRA to
call for the act’s extension to “branchless” fintech
lenders.143 Such an extension would not be
possible under the present CRA evaluation framework, which defines
eligible assessment areas as those where institutions have offices,
branches, or ATMs.144 Moreover, the rationale for mandating
community reinvestment by banks — that they enjoy government
deposit insurance — fails to apply to fintech and other
The proposed extension would also have negative practical
effects. Nonbank fintech lenders have gained a substantial foothold
in mortgage lending over the last decade, owing to their
technological advantage as well as new regulations placed on
banks.146 Indeed, critics of the CRA — as
well as some regulators — have warned of the act’s
potentially adverse impact on depository institutions’ ability to
compete with nonbank lenders.147 The answer to these criticisms,
however, is not to subject fintech lenders to the same CRA
regulations: that would discourage their participation in marginal
lending markets, which are the very markets that fintech lenders
are more likely to serve than traditional lenders. Their withdrawal
would have a disproportionately adverse impact on credit conditions
and welfare in those communities.148
In 1977, politicians justified the CRA by claiming that the
government was underwriting bank credit risk and granting economic
privileges to banks through restricted charters and federal deposit
insurance.149 That argument does not apply to
fintech lenders, who neither hold charters nor enjoy the benefits
of a taxpayer-guaranteed public deposit insurance
scheme.150 Extending the CRA to nondepository
institutions such as fintech firms would therefore not create a
level playing field. Rather, it would broaden the scope of a
statute whose policy efficacy is already in doubt to institutions
for which it was never intended.
Allow Credit Unions to Remain Exempt
Credit unions, which are exempt under the CRA’s current
provisions, have recently become the target of similar calls for
the act’s expansion. A bill introduced by Sen. Elizabeth Warren
(D-MA) in September 2018 would have made credit unions, as well as
nonbank lenders, subject to the CRA,151 although
Warren subsequently revised her bill to remove credit unions from
the set of institutions covered.152 The American Bankers Association,
in a recent public filing with the OCC, likewise called for
applying CRA regulations to credit unions.153
Subjecting credit unions to CRA regulations would be
counterproductive. In order to meet the conditions of the Federal
Credit Union Act (FCUA), credit unions are already subject to
restrictions on their activity that make them fundamentally
different, for the CRA’s purposes, than banks.154 The FCUA
restricts credit union membership to groups that share a “common
bond of occupation or association,” and to “persons or
organizations within a well-defined community, neighborhood, or
rural district.”155 These common-bond provisions are at
once redundant and incompatible with the CRA. Both acts are similar
in that they aim to ensure that lending institutions serve their
constituents. Yet the FCUA’s provisions would make enforcing the
CRA among credit unions impossible: whereas CRA compliance relates
to a bank’s lending activities within a given geographic region,
the common bond that credit union members share under the FCUA may
be professional, social, or demographic instead of geographic.
Thus, credit unions are an example of the type of institutions that
Comptroller Bloom, during the 1977 hearings, feared the CRA would
Additionally, there is evidence that credit unions already serve
CRA-targeted populations. Since the financial crisis, the share of
mortgages originated by credit unions has increased steadily,
rising from 2.6 percent in 2007 to 8.7 percent as of
mid-2018.156 Recent HMDA data also show that credit
unions originate a larger share of their mortgage loans to LMI
borrowers than small banks do: 13.4 percent versus 12.5
percent.157 Several factors could be behind these
findings. For one, credit unions securitize a smaller portion of
their loans than other mortgage originators, which may make them
more sensitive to portfolio risk and lead them to spend more
resources screening for creditworthy LMI borrowers.158 Indeed,
credit unions reject a larger share of mortgage loan applicants
than do other institutions, which is consistent with the hypothesis
of tighter screening owing to increased risk
sensitivity.159 Moreover, perhaps the increase in
mortgage lending regulation has affected small banks more than
credit unions, or perhaps banks are more vulnerable to nonbank
lender competition than credit unions are. Finally, it could be
that the FCUA’s common-bond provisions facilitate risk management
by giving credit unions information about the credit quality of
their borrowers that other institutions, whose customers need not
share similar characteristics, cannot easily observe.
Credit unions appear to be achieving the CRA’s policy goals
without being subject to its regulations. Applying the CRA to
credit unions would impose substantial new compliance costs that
are both unnecessary and incompatible with the nature of credit
unions themselves. If policymakers are concerned about the changing
business model of credit unions — particularly larger ones
— the appropriate route to address such concerns is to revise
A Quantitative Score Has Clear Advantages — but Also
The Treasury’s April 2018 memorandum on improving the CRA
recommended “an approach to … CRA that incorporates less
subjective evaluation techniques.”161 The memorandum pointed out that
relevant performance indicators in CRA assessments, “such as
‘excellent,’ ‘substantial,’ and ‘extensive,’ are
undefined.”162 Other analysts have raised similar
concerns on the use of “innovativeness” and “complexity” in the CRA
investment test.163 The OCC has subsequently suggested the
use of a metric-based framework for CRA performance
assessments.164 While the details of a quantitative
approach remain unclear, it would likely involve assigning CRA
ratings based on the share of CRA-eligible loans, investments, and
services in bank deposits, assets, or capital.165
There are clear advantages to a metric-based approach. It would
make assessments less arbitrary and provide greater certainty to
institutions regarding the expectations of regulators. Quantitative
assessment would also make it easier to compare performance between
institutions and time periods. In these ways, a metric-based
approach could reduce the administrative and compliance costs of
Yet a metric-based approach also raises new concerns. Banks have
warned that a quantitative method might not account for differences
in business context across assessment areas.166
Furthermore, in practice a metric-based approach would resemble a
quota system for bank lending, investment, and services, unless
regulators linked quantitative scores to qualitative judgements.
Quotas, however, contradict the spirit of the CRA, which — in
the words of Senator Proxmire — should not involve “costly
subsidies, or mandatory quotas, or a bureaucratic credit allocation
The advantage of a metric-based approach is that it would make
it easier for banks to understand how best to demonstrate their LMI
lending to regulators and estimate their performance in advance of
an evaluation. But if regulators want to move toward quantitative
forms of CRA assessment, there are more efficient ways to do so
than a rigid quota scheme. Instead of fixed quotas, regulators
should quantify the aggregate amount of CRA lending they expect to
see in each assessment area and allow the most productive
institutions to bid for their fulfillment.
Make CRA Obligations Tradable
If the CRA remains in place, there is a better way to encourage
banks to improve the quality of the lending and other financial
services they provide to LMI communities: create a market for
tradable CRA obligations.168 Under this system, the regulator would
define the specific lending, investment, and services obligations
among banks within a given assessment area. Obligations could be
allocated in various ways, but for consistency with present CRA
practice — which ties lending obligations to deposit-taking
— it might be easiest to determine them according to an
institution’s local deposit-market share. Lenders, including
nondepository institutions such as fintech firms and community
development financial institutions, would be able to bid for the
obligation to fulfill CRA lending in exchange for a fee from
A system of tradable CRA obligations would have several
advantages over the current CRA enforcement regime. First, it would
ask regulators to quantify the lending, investment, and services
needs of the various LMI communities, thus introducing rigor into
the assessment process and making explicit the community
obligations of banks. As a result of trading in CRA obligations, a
price would emerge to reflect the cost of fulfilling the act’s
requirements. Importantly, the price of individual CRA obligations
would vary according to the difficulty of profitably fulfilling
them. For example, since it becomes more difficult to find
creditworthy borrowers the more a community’s credit needs are
satisfied, the price of a CRA lending obligation would rise as
local CRA lending increased, serving as a useful bellwether for
excessive lending in a particular community.
Second, a system of tradable obligations would encourage
specialization and competition among lenders while ensuring that
CRA obligations continued to be met.169 The CRA as
currently enforced deters specialization by requiring banks to lend
roughly proportionately wherever they take deposits.170 Under a
tradable obligation regime, lenders from outside the assessment
area, including those not subject to the CRA, would have an
incentive to participate in the market if they could lend
efficiently to local LMI communities. Given the role that fintech
lenders play in providing credit to lower-income communities, for
instance, their participation in such a trading scheme could
increase the efficiency of CRA lending.171 As
competition increased, the cost — that is, the market price
for a representative obligation — of complying with the CRA
Third, tradable obligations would give CRA-subject banks
increased opportunities for portfolio diversification. Because of
the capital export rationale underpinning the 1977 act, the CRA
currently forces banks to restrict some of their lending to the
communities where they operate branches, even if they would like to
lend elsewhere. For small banks in particular, the CRA’s local bias
can impair geographic diversification. A system of tradable
obligations, on the other hand, would enable depository
institutions to lend in the locations best suited to their
expertise and overall loan portfolio, while compensating other
institutions for fulfilling CRA obligations on their behalf.
Fourth, a system of tradable obligations would reduce assessment
uncertainty for depository institutions. Instead of grappling with
a mounting list of ill-defined objectives, banks would discharge
their obligations either by lending and investing directly, or by
paying more efficient competitors to do so on their behalf. This
would reduce compliance costs for CRA-eligible firms and reduce
evaluation costs for the regulator. Meanwhile, communities would
get what they need — or at least, what regulators think they
In fact, quantifying CRA commitments based on the needs of
individual communities would require regulators to face an
important challenge. The difficulty of ascertaining the level of
unmet, yet profitable, credit demand is precisely why developed
financial systems largely rely on markets — not regulators
— to make determinations about credit allocation.172 As of now,
the CRA forecloses this possibility. If regulators are required to
set individual CRA obligations by region, however, they will likely
have to do so in conjunction with banks and community groups in
order to enlist their local market knowledge. This form of
decisionmaking is still imperfect, as it would leave such
obligations, and therefore regulatory compliance, vulnerable to
interest-group pressures. But that is already the case under the
current CRA’s uncertain and bureaucratic assessment regime. Moving
to a system of tradable obligations would facilitate the benefits
listed above while revealing the opportunity costs of the CRA
— in terms of both foregone loans and overall safety
The lending landscape in the United States has changed
substantially since the 1977 enactment of the CRA. Written for what
was then a competitive environment shaped by branching
restrictions, the act took no account of the possibility that
technological innovation would expand the opportunities for
financial services provision. Today, the CRA is ill-suited to
address the problems of unequal access to banking and credit as
they currently affect low- and moderate-income borrowers.
In today’s landscape of widespread branching and diverse lending
sources, the CRA has become a law in search of a public policy
role. Congress should consider whether the benefits of preserving
it justify the costs, or whether the act’s original goals can be
(and already are) more effectively fulfilled through other
channels. Fair lending laws can better prevent financial exclusion.
Supply-side policies outside of financial regulation stand a
greater chance of improving living standards in LMI communities.
Perhaps the time of the CRA has simply passed.
However, if the CRA remains in place, policymakers should
take steps to make compliance less arbitrary and costly for banks.
Implementing a system of tradable obligations that can be fulfilled
by the most efficient lender at a market-determined rate combines
the benefits of a clearly defined, quantitative approach with the
flexibility and choice that America’s highly diverse credit market
demands. Such a system would increase the efficiency of CRA
enforcement and finally recognize that U.S. retail credit markets
are much changed, and in many ways much improved, from the
landscape that prevailed 42 years ago.
This paper is an expanded version of the author’s public filing
with the Office of the Comptroller of the Currency. See Diego
Zuluaga, “Reforming the Community Reinvestment Act Regulatory
Framework,” Docket ID OCC-2018-0008, November 28, 2019.
1 “Community Credit Needs:
Hearings on S. 406, Before the Senate Committee on Banking,
Housing, and Urban Affairs,” 95th Cong. (January 24,
1977)(statement of Robert Bloom).
2 Community Reinvestment Act of
1977, 12 U.S.C. § 2901 (1977).
3 Raymond H. Brescia, “Part of
the Disease or Part of the Cure: The Financial Crisis and the
Community Reinvestment Act,” University of South Carolina Law
Review 60 (2009): 627-28.
4 Jonathan R. Macey and Geoffrey
P. Miller, “The Community Reinvestment Act: An Economic Analysis,”
Virginia Law Review 79, no. 2 (March 1993): 292.
5 Bill Dedman, “The Color of
Money,” Atlanta Journal-Constitution, May 1-4, 1988.
6 Redlining is “the practice of
denying services, either directly or through selectively raising
prices, to residents of certain geographies.” See Department of the Treasury, “Memorandum
for the Office of the Comptroller of
the Currency, the Board of Governors of the Federal Reserve System,
the Federal Deposit Insurance Corporation: Community Reinvestment Act — Findings
and Recommendations,” April 3, 2018.
7 Richard Marsico, “Democratizing
Capital: The History, Law, and Reform of the Community Reinvestment
Act,” New York Law School Review 49 (2004-2005): 723.
8 Sumit Agarwal, Efraim
Benmelech, Nittai Bergamn, and Amit Seru, “Did the Community
Reinvestment Act (CRA) Lead to Risky Lending?,” Kreisman Working
Papers Series in Housing Law and Policy no. 8, October 2012, pp.
9 Charles W. Calomiris and
Stephen H. Haber, in Fragile by Design: The Political Origins
of Banking Crises and Scarce Credit (Princeton: Princeton
University Press, 2014), pp. 208-11, 216-26, document the ways in
which the CRA influenced regulators’ decisions on bank mergers.
10 Michael Klausner, “A Tradable
Obligation Approach to the Community Reinvestment Act,” in
Revisiting the CRA: Perspectives
on the Future of the Community Reinvestment Act (Boston/San
Francisco: Federal Reserve Banks of Boston and San Francisco,
11 Office of the Comptroller of
the Currency, “Fact Sheet: Community Reinvestment Act,” March
12 12 U.S.C. § 2901.
13 Department of the Treasury,
“Memorandum,” April 3, 2018, p. 28.
14 Macey and Miller, “The
Community Reinvestment Act,” pp. 322-23.
15 However, financial
institutions face uncertainty about individual LMI loans’
eligibility for CRA credit. See ABA Banking Journal,
“Bonus Podcast: Key Points on CRA Modernization,” American Bankers
Association, November 14, 2018, podcast audio, 3:45,
16 12 C.F.R. 25.41 (1995, amended
17 Ben Horowitz, “Defining ‘Low-
and Moderate-Income’ and ‘Assessment Area,’” in Community
Dividend (Minneapolis: Federal Reserve Bank of Minneapolis,
March 8, 2018).
18 Brescia, “Part of the Disease
or Part of the Cure,” p. 634.
19 Darryl E. Getter, “The
Effectiveness of the Community Reinvestment Act,” Congressional
Research Service, January 7, 2015, p. 5.
20 Federal Financial Institutions
Examination Council (FFIEC), “Explanation of the Community
Reinvestment Act Asset-Size Threshold Change.”
21 Community Reinvestment Act of
1977, 12 U.S.C. § 2908 (1977); and William C. Apgar and Mark Duda,
“The Twenty-Fifth Anniversary of the Community Reinvestment Act:
Past Accomplishments and Future Regulatory Challenges,” Federal
Reserve Bank of New York Economic Policy Review (June 2003):
22 12 C.F.R. 25.22.
23 12 C.F.R. 25.23. The
regulatory definition of community development includes affordable
housing, community services aimed at LMI individuals, local
economic development activities, and activities that revitalize or
stabilize distressed areas. See 12 C.F.R. 25.12.
24 12 C.F.R. 25.24.
25 12 C.F.R. 25.23.
26 12 C.F.R. 25.26.
27 12 C.F.R. 25 Appendix A.
28 12 C.F.R. 25 Appendix A.
29 Department of the Treasury,
“Memorandum,” pp. 9-10.
30 FFIEC, “Community Reinvestment
Act: Interagency Questions and Answers Regarding Community
Reinvestment,” 66 Fed. Reg. 36639, 33640 (July 12, 2001).
31 Apgar and Duda, “The
Twenty-Fifth Anniversary of the CRA,” p. 174.
32 Brescia, “Part of the Disease
or Part of the Cure,” p. 628.
33 Brescia, “Part of the Disease
or Part of the Cure,” p. 630.
34 “Community Credit Needs:
Hearings on S. 406,” Senate Committee on Banking, Housing, and
Urban Affairs, 95th Cong. (January 24, 1977)(statement of William
35 Proxmire, “Community Credit
Needs,” pp. 9-10.
36 Charles A. Calomiris, U.S.
Bank Deregulation in Historical Perspective (New York:
Cambridge University Press, 2000), pp. 61-62.
37 Calomiris and Haber,
Fragile by Design, pp. 183-95.
38 “It’s a Wonderful Life,”
Wikimedia Foundation, last modified March 3, 2019,
39 Macey and Miller, “The
Community Reinvestment Act,” pp. 303-11.
40 Ross Levine, “Finance and
Growth: Theory and Evidence,” in Handbook of Economic
Growth, vol. 1A, eds. Philippe Aghion and Steven Durlauf
(Amsterdam: North Holland, 2005).
41 Macey and Miller, “The
Community Reinvestment Act,” pp. 307-10.
42 Calomiris, U.S. Bank
Deregulation in Historical Perspective, pp. 22-28.
43 Mark Carlson and Kris James
Mitchener, “Branch Banking as a Device for Discipline: Competition
and Bank Survivorship during the Great Depression,” Journal of
Political Economy 117, no. 2 (April 2009): 169.
44 Carlson and Mitchener, “Branch
Banking as a Device for Discipline,” pp. 201-03.
45 Michael D. Bordo, Hugh
Rockoff, and Angela Redish, “The U.S. Banking System from a
Northern Exposure: Stability versus Efficiency,” The Journal of
Economic History 54, no. 2 (June 1994): 325-41.
46 Marsico, in “Democratizing
Capital,” pp. 724-25, argued that CRA regulators should assess
compliance by comparing a bank’s share of loans to low-income
communities with its competitors’ shares. Such a reform would
significantly increase the role of regulation in credit
47 Proxmire, “Community Credit
Needs,” p. 11.
48 Proxmire, “Community Credit
Needs,” p. 13.
49 Proxmire, “Community Credit
Needs,” p. 14.
50 Proxmire, “Community Credit
Needs,” pp. 15-16.
51 Regulators have explicitly
cited these two trends as reasons to review CRA enforcement. See
Office of the Comptroller of the Currency, “Reforming the Community
Reinvestment Act Regulatory Framework,” September 5, 2018, p.
52 Jith Jayaratne and Philip E.
Benefits of Branching Deregulation,” Regulation 22,
no. 1 (Spring 1999): 10.
53 Jayaratne and Strahan, “The
Benefits of Branching Deregulation,” p. 10. The states that did not
allow intrastate branching as of 1990 were Arkansas, Colorado,
Iowa, Minnesota, and New Mexico. The states that still forbade
interstate branching as of that year were Hawaii, Iowa, Kansas,
Montana, and North Dakota.
54 Riegle-Neal Interstate Banking
and Branching Efficiency Act of 1994, H.R. 3841, 103rd Cong.
55 Margaret Z. Clarke,
“Geographic Deregulation of Banking and Economic Growth,”
Journal of Money, Credit and Banking 36, no. 5 (October
56 Federal Deposit Insurance
Corporation, “Number of Institutions, Branches and Total Offices,”
Historical Bank Data, 2019, https://www.fdic.gov/bank/statistical/.
The number of FDIC-supervised commercial banks had dropped to 4,774
as of September 30, 2018. See Federal Deposit Insurance
Corporation, “FDIC Statistics at a Glance,” September 2018,
57 Paul Calem, “The New Bank
Deposit Markets: Goodbye to Regulation Q,” Federal Reserve Bank of
Philadelphia Business Review (November/ December 1985), p. 20.
58 R. Alton Gilbert, “Requiem for
Regulation Q: What It Did and Why It Passed Away,” Federal Reserve
Bank of St. Louis, February 1986.
59 76 Fed. Reg. 42015.
60 Jayaratne and Strahan, “The
Benefits of Branching Deregulation,” p. 11.
61 Clarke, in “Geographic
Deregulation,” pp. 938-940, reports statistically significant
increases in income growth of 1.2 percent as a result of branching
deregulation, using the size of banks’ geographic market as a
62 Esteban Rossi-Hansberg,
Pierre-Daniel Sarte, and Nicholas Trachter report a decreased local
market concentration in the finance, insurance, and real estate
sector that has accompanied the increase in concentration at the
national level. See Esteban Rossi-Hansberg, Pierre-Daniel Sarte,
and Nicholas Trachter, “Diverging Trends in National and Local
Concentration,” NBER Working Paper no. 25066, National Bureau of
Economic Research, Cambridge, Massachusetts, September 2018.
63 Katherine Ho and Joy Ishii,
“Location and Competition in Retail Banking,” International
Journal of Industrial Organization 29, no. 5 (September 2011):
537-46; Astrid A. Dick, “Nationwide Branching and Its Impact on
Market Structure, Quality, and Bank Performance,” Journal of
Business 79, no. 2 (March 2006): 591.
64 João Granja, Christian Leuz,
and Raghuram Rajan, “Going the Extra Mile: Distant Lending and
Credit Cycles,” NBER Working Paper no. 25196, National Bureau of
Economic Research, Cambridge, Massachusetts, October 2018. Other
scholars have noted a similar increase in the distance between
borrower and lender in mortgage markets. See James Charles Smith,
“The Structural Causes of Mortgage Fraud,” Syracuse Law
Review 60 (2010): 473-503.
65 12 C.F.R. 25.61 (1997). This
provision was added to the CRA with passage of the 1994 Riegle-Neal
Act (H.R. 3841), which removed restrictions on interstate bank
66 12 C.F.R. 25.65 (1997).
67 Author’s private
correspondence with OCC officials.
68 Macey and Miller, “An Economic
Analysis,” pp. 322-24.
69 See, for instance, Raymond H.
Brescia, “The Community Reinvestment Act: Guilty, but Not as
Charged,” St. John’s Law Review 88, no. 1 (Spring 2014):
2-3; Michael S. Barr, “Credit Where It Counts: The Community
Reinvestment Act and Its Critics,” New York University Law
Review 80 (May 2005): 516; and Neil Bhutta and Daniel Ringo,
“Assessing the Community Reinvestment Act’s Role in the Financial
Crisis,” FEDS Notes, Board of Governors of the Federal Reserve
System, May 26, 2015.
70 National Community
Reinvestment Coalition (NCRC), “CRA Commitments,” September 2007,
71 Edward J. Pinto, “Government
Housing Policies in the Lead-Up to the Financial Crisis: A Forensic
Study,” American Enterprise Institute discussion draft, February 5,
2011, pp. 5-6,
72 Calomiris and Haber,
Fragile by Design, pp. 231-246; and Pinto, “Government
Housing Policies,” p. 15.
73 Pinto, “Government Housing
Policies,” p. 14.
74 Barr, “Credit Where It
Counts,” pp. 566-67.
75 Barr, “Credit Where It
Counts,” pp. 568, 74.
76 Barr, “Credit Where It
Counts,” pp. 560-80. Barr gives a comprehensive review of
econometric evidence on the effects of the CRA. Even the studies
that find the CRA increased lending do not address the question of
the loans’ impact on bank soundness.
77 Community Reinvestment Act of
1977, 12 U.S.C. § 2903 (1977). See also NCRC, “CRA Commitments,”
September 2007, p. 5, which recounts how CRA commitments by
financial institutions ebbed and flowed with the waves of bank
mergers in the late 1990s and 2000s.
78 Agarwal et al., “Did the CRA
Lead to Risky Lending?,” p. 3.
79 Agarwal et al., “Did the CRA
Lead to Risky Lending?,” p. 17.
80 Agarwal et al., “Did the CRA
Lead to Risky Lending?,” p. 22.
81 Lawrence B. Lindsey, “The CRA
as a Means to Provide Public Goods,” in Revisiting the CRA:
Perspectives on the Future of the Community Reinvestment Act
(Boston/San Francisco: Federal Reserve Banks of Boston and San
Francisco, September 2009), p. 164.
82 Bhutta and Ringo, “Assessing
the CRA’s Role in the Financial Crisis.”
83 Agarwal et al., “Did the CRA
Lead to Risky Lending?,” p. 15.
84 Neil Bhutta and Glenn B.
Canner, “Mortgage Market Conditions and Borrower Outcomes: Evidence
from the 2012 HMDA Data and Matched HMDA-Credit Record Data,”
Federal Reserve Bulletin 4, no. 99 (November 2013):
85 Bhutta and Canner, “Mortgage
Market Conditions and Borrower Outcomes,” p. 34.
86 Anecdotal evidence that banks
in CRA-eligible communities prefer to lend to newer, wealthier
residents is consistent with the hypothesis that banks are
“skimming the top.” See Aaron Glantz and Emmanuel Martinez,
“Gentrification Became Low-Income Lending Law’s Unintended
Consequence,” RevealNews.org, February 16, 2018,
87 Office of the Comptroller of
the Currency, Board of Governors of the Federal Reserve System, and
Federal Deposit Insurance Corporation, “Risk-Based Capital
Standards: Advanced Capital Adequacy Framework and Market Risk;
Proposed Rules and Notices,” 71 Fed. Reg. 55895, no. 185 (September
25, 2006). The Basel Committee on Banking Supervision is an
international body that promulgates standards for the prudential
regulation of banks. There is no economic reason why prudential
standards should be laxer for CRA-related equity investments by
banks than for their other investments.
88 “Poverty, Public Housing and
the CRA: Have Housing and Community Investment Incentives Helped
Public Housing Families Achieve the American Dream?,” Subcommittee
on Federalism and the Census of the Committee on Government Reform,
U.S. House of Representatives (June 20, 2006)(statement of Judith
A. Kennedy), p. 58.
89 “The Performance and
Profitability of CRA-Related Lending,” report by the Board of
Governors of the Federal Reserve System, submitted to the Congress
pursuant to section 713 of the Gramm-Leach-Bliley Act of 1999, July
17, 2000, p. 45.
90 “The Performance and
Profitability of CRA-Related Lending,” p. 51.
91 Pinto, “Government Housing
Policies in the Lead-Up to the Financial Crisis,” p. 26ff.
92 FFIEC, “CRA: Interagency
Questions and Answers,” p. 36639.
93 Getter, “The Effectiveness of
the CRA,” p. 9.
94 Kenneth H. Thomas, “Dear
Regulators: Don’t Take CRA’s Revamp Too Far,” American
Banker, editorial, October 30, 2018.
95 For a year-by-year summary of
bank failures since 2001, see FDIC, “Bank Failures in Brief,” May
31, 2019, https://www.fdic.gov/bank/historical/bank/.
96 Federal Reserve Bank of St.
Louis, “Compliance Costs, Economies of Scale and Compliance
Performance: Evidence from a Survey of Community Banks,” April
2018, p. 5.
97 Federal Reserve Bank of St.
Louis, “Compliance Costs, Economies of Scale and Compliance
Performance,” p. 9. For the comparably poor performance of small
banks, see, for example, FDIC, “Quarterly Banking Profile: Third
Quarter 2018,” p. 7. FDIC-supervised institutions with fewer than
$100 million in assets have an average return on equity of 8.28
percent, compared to 11 to 13 percent for larger banks.
98 Raymond H. Brescia, “The
Community Reinvestment Act: Guilty, but Not as Charged,” St.
John’s Law Review 88, no. 1 (Spring 2014): 5-6.
99 Dedman, “The Color of
100 FDIC, “National Survey of
Unbanked and Underbanked Households, 2017,” October 2018, pp. 17,
101 FDIC, “National Survey of
Unbanked and Underbanked Households,” p. 11. A household is
considered to have used mainstream credit if it used a credit card;
a personal loan or line of credit from a bank; a store credit card;
an auto loan; a student loan; a mortgage, home equity loan, or home
equity line of credit (HELOC); or other personal loans or lines of
credit from a company other than a bank in the past 12 months. The
FDIC’s definition of mainstream credit does not include alternative
financial services (AFS), such as money orders, check cashing,
international remittances, payday loans, refund anticipation loans,
rent-to-own services, pawn shop loans, and auto title loans (see p.
102 FDIC, “National Survey of
Unbanked and Underbanked Households,” p. 4.
103 Federal Reserve Bank of St.
Louis, “Compliance Costs, Economies of Scale and Compliance
Performance,” p. 5.
104 Federal Reserve Bank of St.
Louis, “Compliance Costs, Economies of Scale and Compliance
Performance,” p. 13.
105 Drew Dahl and Michelle
Franke, “ ‘Banking Deserts’ Become a Concern as Branches Dry Up,”
Federal Reserve Bank of St. Louis, Regional Economist,
Second Quarter 2017, pp. 20-21.
106 Michelle Franke, “Who Would
Be Affected by More Banking Deserts?,” Federal Reserve Bank of St.
Louis, On the Economy (blog), July 17, 2017.
107 Donald P. Morgan, Maxim
Pinkovskiy, and Davy Perlman, “The ‘Banking Desert’ Mirage,”
Federal Reserve Bank of New York, Liberty Street Economics
(blog), January 10, 2018.
108 Franke, “Who Would Be
Affected by More Banking Deserts?”
109 This is both because higher
fixed compliance costs induce consolidation and higher regulatory
costs raise the required return on a bank branch. See Julie
Stackhouse, “Why Are Banks Shuttering Branches?,” Federal Reserve
Bank of St. Louis, On the Economy (blog), February 26,
110 Michael Klausner, “Market
Failure and Community Investment: A Market-Oriented Alternative to
the Community Reinvestment Act,” University of Pennsylvania Law
Review 143 (1995): 1565-68.
111 Barr, “Credit Where It
Counts,” p. 516.
112 William W. Liang and Leonard
I. Nakamura, “A Model of Redlining,” Journal of Urban
Economics 33, no. 2 (March 1993): 223-34.
113 12 U.S.C. § 2903.
114 Lindsey, “The CRA as a Means
to Provide Public Goods,” p. 160.
115 NCRC, “CRA Commitments,” p.
116 Calomiris and Haber, in
Fragile by Design, pp. 216-17, cite the Fleet
Financial-BankBoston merger of 1999 as an example of a time when
good CRA performance caused the Fed to approve a merger despite
concerns about its competitive effect.
117 FDIC, “Quarterly Banking
Profile: Third Quarter 2018,” FDIC Quarterly 12, no. 4
118 Jayaratne and Strahan, “The
Benefits of Branching Deregulation,” p. 14.
119 Lawrence J. White, “The
Community Reinvestment Act: Good Goals, Flawed Concept,” December
18, 2008, p. 5.
120 American Bankers’
Association, “ABA Data Bank: Economic Recovery Leaving De Novo
Banks Behind,” ABA Banking Journal (website), September
121 FDIC, “Enhanced Supervisory
Procedures for Newly Insured FDIC-Supervised Depository
Institutions,” FIL-50-2009, August 28, 2009.
122 Macey and Miller, “The
Community Reinvestment Act,” p. 323.
123 Pinto, “Government Housing
Policies in the Lead-Up to the Financial Crisis,” p. 15.
124 Agarwal et al., “Did the CRA
Lead to Risky Lending?,” p. 3.
125 For a comprehensive
discussion, see Ryan Bourne, “Government
and the Cost of Living: Income-Based vs. Cost-Based Approaches to
Alleviating Poverty,” Cato Institute Policy Analysis no. 847,
126 American Bankers’
Association, “ABA Data Bank.”
127 FDIC, “Enhanced Supervisory
Procedures for Newly Insured FDIC-Supervised Depository
128 FDIC Chairman Jelena
McWilliams recently indicated interest in easing de novo bank
entry. See Back to Basics, Federal Reserve Bank of Chicago
13th Annual Community Bankers Symposium, Chicago (November 16,
2018)(remarks of Jelena McWilliams).
129 Apgar and Duda, “The
Twenty-Fifth Anniversary of the CRA,” p. 180.
130 Julapa Jagtiani and Catharine
Lemieux, “The Roles of Alternative Data and Machine Learning in
Fintech Lending: Evidence from the LendingClub Consumer Platform,”
Federal Reserve Bank of Philadelphia Working Paper 18-15, April
2018, pp. 12-13.
131 Klausner, “Market Failure and
Community Investment.” Klausner cites the canonical
credit-rationing model in Joseph E. Stiglitz and Andrew Weiss,
“Credit Rationing in Markets with Imperfect Information,”
American Economic Review 71, no. 3 (June 1981):
132 Julapa Jagtiani and Catharine
Lemieux, “Do Fintech Lenders Penetrate Areas That Are Underserved
by Traditional Banks?,” Federal Reserve Bank of Philadelphia
Working Paper 18-13, March 2018, p. 12.
133 U.S. Government
Accountability Office, “Financial Technology: Additional Steps by
Regulators Could Better Protect Consumers and Aid Regulatory
Oversight,” Report to Congressional Requesters, March 2018, p.
134 Lalita Clozel (@laliczl),
“OCC’s Otting,” Twitter post, February 7, 2019, 12:35 p.m.,
135 Nutter, McClennen & Fish
LLP, “Fintech in Brief: OCC Fintech Charter Continues to Face Legal
Challenges,” January 30, 2019.
136 Author’s calculations based
on Bureau of Consumer Financial
Protection, “Data Point: 2017 Mortgage Market Activity and Trends,”
May 2018, pp. 70-72.
137 Bureau of Consumer Financial
Protection, “Data Point: 2017 Mortgage Market Activity and Trends,”
May 2018, p. 64.
138 Glantz and Martinez,
“Gentrification Became Low-Income Lending Law’s Unintended
Consequence,” RevealNews.org, February 16, 2018.
139 Horowitz, “Defining ‘Low- and
Moderate-Income’ and ‘Assessment Area.’”
140 15 U.S C. § 1691.
141 Daniel Press, “The CFPB and
the Equal Credit Opportunity Act,” Competitive Enterprise
Institute, On Point (blog), May 15, 2018.
142 15 U.S.C. § 1691c.
143 Kenneth H. Thomas, “Why
Fintechs Should Be Held to CRA Standards,” American
Banker, editorial, August 24, 2018.
144 12 C.F.R. 25.41.
145 Macey and Miller, “The
Community Reinvestment Act,” p. 313.
146 Greg Buchak, Gregor Matvos,
Tomasz Piskorski, and Amit Seru, “Fintech, Regulatory Arbitrage,
and the Rise of Shadow Banks,” NBER Working Paper no. 23288,
National Bureau of Economic Research, Cambridge, Massachusetts,
September 2018. The authors find that 60 percent of the growth of
“shadow banks” is due to regulation, whereas 30 percent is due to
147 Macey and Miller, “The
Community Reinvestment Act,” pp. 312-13; Bloom, “Community Credit
Needs,” pp. 15-16.
148 Jagtiani and Lemieux, “Do
Fintech Lenders Penetrate Areas That Are Underserved by Traditional
Banks?,” p. 10.
149 Proxmire, “Community Credit
Needs,” pp. 9-10.
150 Additionally, as discussed
earlier, deposit-taking institutions no longer operate local
monopolies or oligopolies, because of the removal of branching
151 American Housing and Economic
Mobility Act of 2018, S. 3503, 115th Cong. (2018).
152 American Housing and Economic
Mobility Act of 2019, H.R. 1737, 116th Cong. (1st Sess. 2019).
153 Krista Shonk, “Reforming the
Community Reinvestment Act Regulatory Framework,” American Bankers
Association comment letter to the Comptroller of the Currency,
November 15, 2018, p. 33,
154 Federal Credit Union Act of
1934, 12 U.S.C. §§ 1752-1775 (1934).
155 Federal Credit Union Act of
1934, 12 U.S.C. § 1759 (1934).
156 Mortgage Bankers’ Association
(MBA) and Credit Union National Association (CUNA) data. The author
is grateful to Mike Schenk from CUNA for sharing it.
157 James DiSalvo and Ryan
Johnston, “Credit Unions’ Expanding Footprint,” Banking
Trends (Philadelphia: Federal Reserve Bank of Philadelphia,
First Quarter 2017), p. 20.
158 Securitization rates are
around 35 percent for credit unions and 70 percent for all mortgage
originators. See CUNA data (note 161) and Urban Institute, “Housing
Finance at a Glance: A Monthly Chartbook,” research report, June
159 DiSalvo and Johnston, “Credit
Unions’ Expanding Footprint,” pp. 19-20.
160 Aaron Klein, “Banklike Credit
Unions Should Follow Bank Rules,” American Banker,
editorial, June 25, 2018.
161 Department of the Treasury,
“Memorandum for the OCC,” p. 11.
162 Department of the Treasury,
“Memorandum for the OCC,” p. 9.
163 Getter, “The Effectiveness of
the CRA,” p. 8.
164 Office of the Comptroller of
the Currency, “Reforming the Community Reinvestment Act Regulatory
Framework,” Advance Notice of Proposed Rulemaking, 83 Fed. Reg. 172
(September 5, 2018): 45053.
165 Office of the Comptroller of
the Currency; Shonk, “Reforming the CRA Regulatory Framework,” pp.
166 Shonk, “Reforming the CRA
Regulatory Framework,” pp. 11-12.
167 Proxmire, “Community Credit
Needs,” p. 9.
168 See Klausner, “Market Failure
and Community Investment,” and Klausner, “A Tradable Obligation
Approach,” for the original proposals that inform the approach
outlined in this section.
169 Klausner, “Market Failure and
Community Investment,” pp. 1586-88.
170 Klausner, “Market Failure and
Community Investment,” pp. 1575-76.
171 Jagtiani and Lemieux, “Do
Fintech Lenders Penetrate Areas That Are Underserved by Traditional
Banks?,” p. 10.
172 F. A. Hayek, “The Use of
Knowledge in Society,” American Economic Review 35, no. 4
(September 1945): 519-30.