Texas Community Reinvestment Update 2007

The Community Reinvestment Act (CRA): 1977-2006

Passed by Congress in 1977, the Housing and Community Development Act (CRA) encourages commercial banks and savings and loans to help meet the credit needs of all segments of the communities where they operate.[6] The CRA was one of the first legislative acts passed by the U.S. Congress to address redlining by banks and savings and loan institutions. CRA applies to all federally insured depository institutions, national banks, thrifts and state-chartered commercial and savings banks.

Community Development and CRA Goals

The CRA's main goal is to improve access to credit for businesses and individuals in low- and moderate-income communities. Initially, Congress aimed to resolve geographic discrimination by financial institutions that didn't meet the credit needs of communities where they were chartered. Since CRA's passage in 1977, the Act has helped affordable housing and community development advocates evaluate the lending performance of CRA-regulated financial institutions while improving home ownership opportunities to underserved populations.

Financial institutions comply with the CRA's requirements for meeting the credit needs of communities by making loans to support:

  • building and rehabilitation of affordable housing and permanent financing for multifamily rental property for low- and moderate-income persons;
  • community development activities of local, state and tribal governments including financing for geographic areas recovering from natural disasters and middle-income census tracts in distressed or under-served rural counties;
  • community development corporations (CDCs), community financial institutions (CDFIs) and minority- and women-owned financial institutions;
  • community services targeted to low- and moderate-income individuals including credit and homebuyer counseling, school savings programs, technical assistance for economic revitalization programs and other activities;
  • construction of community facilities in low- and moderate income areas; and
  • financing for environmental clean up activities and redevelopment of industrial sites in low- and moderate-income communities.

The Financial Services Industry and the CRA

The U.S. financial industry has evolved since the 1977 passage of the CRA. Some changes resulted in response to market forces, consolidation of large and small banks, deregulation of the banking industry and the effects of technological advances. In the past 30 years, banks and other financial institutions benefited from financial industry competition, check cashing and credit card services, the marketing of insurance products and sales of securities across state lines. Companies in the financial and insurance services sectors have expanded into mortgage banking, providing loans without traditional banking regulatory oversight.

Changes in the U.S. economic, financial and environments prompted amendments of CRA regulations three times in the past 30 years-1989, 1995 and 2005. Originally, the CRA was enacted to address the depressed condition of lower-income and minority neighborhoods in American cities in the 1970s. The CRA was only one of a number of bills passed by Congress at the time to promote access to credit, reduce lending discrimination and make loans and lending more transparent. Examples of related legislation included the Equal Credit Opportunity Act and the Home Mortgage Disclosure Act.

Congress passed the Financial Institution Reform and Recovery Act of 1989 (FIRREA) due to public concern over continued access to credit issues. This law created four CRA ratings to reflect a supervised bank's compliance with the CRA: 1 for outstanding, 2 for satisfactory, 3 for needs to improve and 4 for substantial noncompliance. The act also required public disclosure of CRA examination ratings and written evaluations by regulatory agencies. By the mid-1990s, the public's worry about the growth of bank acquisitions and mergers prompted Congress to enact the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. This legislation led banks to direct more resources to their CRA programs to develop plans for managing their CRA activities to comply with new regulations.

The 1980s and 1990s brought banking deregulation and technological advances in the form of improved data retrieval, processing and storage and the use of credit-scoring. By 1994, the Community Development Financial Institutions Act (CDFI) was passed, which opened up new community development financial opportunities. In 1995, other CRA regulations changed to create a lending test for large banking institutions to promote innovation to meeting credit needs for community development. Regulatory agencies planned to review the CRA again in 2002 for effectiveness of the changes made in 1995. By 2005, banking and community organization advocates agreed that the CRA regulation structure was sound. The regulatory agencies' research led to several new definitions for "small" banks including an "intermediate small" bank and the expansion of the meaning of "community development."[7]

History of CRA Rules

Amendments to CRA regulations have enhanced the public's accessibility to CRA examination schedules, results and related data. The changes have also expanded the options for investment by financial institutions that count as credit toward their CRA compliance rating.

Congress passed the Financial Institution Reform, Recovery, and Enforcement Act (FIRREA) in 1989. This created four composite CRA ratings to reflect a supervised bank's compliance with the CRA: 1 for outstanding, 2 for satisfactory, 3 for needs to improve and 4 for substantial noncompliance. The act also required public disclosure of CRA examination ratings and written evaluations by regulatory agencies.

In 1991, Congress passed a second amendment requiring public discussion of a regulator's evaluation of financial institutions' CRA performance to allow community groups to discuss results with regulators. A third amendment followed in 1992 that allows CRA regulators to provide their supervised banks credit under the CRA for investing in minority- and women-owned financial institutions and low-income credit unions.

An amendment enacted in 1994 requires institutions with interstate branches to receive a separate examination and rating for each state in which they conduct business. This amendment mandates separate evaluations for banks with branches in two or more states in the same metropolitan area. In 1995, revised regulations implemented three tests-a lending, investment and service test, with the lending test carrying most of the weight in calculating total CRA credit.[8]

In 2002, Section E of the CRA was enacted to prohibit any bank or branch of a bank controlled by an out-of-state bank holding company from establishing or requiring a branch or branches out of its home state under the Riegle-Neal Act, primarily for the purpose of deposit production.

Effective January 1, 2003, a Federal Reserve Board amendment required lenders to ask applicants their national origin or race and sex in loan applications taken by telephone. The telephone application rule now applies to mail and Internet applications.

As of January 1, 2004, HMDA and CRA reporters were required to use the June 6, 2003 geographic statistical area designations provided by the U.S. Office of Management and Budget (OMB) for data collection and reporting in March 2005. OMB's revised metropolitan statistical area boundaries led to changes in definitions updated in February 2004 and effective December 2003. The terms MSAs (used in lieu of metropolitan area) and MetroDivs (Metropolitan Divisions) became required for HMDA and CRA reporting. The $25 million volume test was added to the existing percentage-based coverage test for non-depository lenders. The asset threshold for depository lenders was raised to $33 million for 2004 data collection and remained unchanged at $10 million or less for non-depository institutions.

Starting March 21, 2005, a change from 2004 required lenders to collect and report additional data on home loans and financing for manufactured homes, including loan pricing information, lien status, e.g., secured by a first or subordinate lien, or unsecured lien.[9]

Increasing numbers of lenders sought liquidity in the mid- and late-1990s by selling primary mortgages to obtain funds to originate new loans. The secondary mortgage market grew, and the total number of home mortgage loans by financial institutions increased. Internet technology advances encouraged consumers to seek loans and pay bills online. Banks continued to consolidate and banks implemented credit scoring software programs to determine a prospective borrower's ability to repay debts and loans.

In August 2004, the OTS expanded the category of "small savings associations" to include those with less than $1 billion in assets, regardless of affiliate holding company affiliation.[10]

Competition continues to heat up among financial service institutions. In 2006, credit unions exempt from federal taxes and CRA requirements, enlarged their portfolios at rates similar to FDIC-insured institutions while posting greater growth rates in credit card balances and real estate loans. During that year, credit union deposit growth lagged behind that of banks, and bank interest income jumped 23 percent, while credit union interest income grew only 16 percent. This resulted in a tighter net interest margin for credit unions.

While the banking industry continues to consolidate, the U.S. witnessed the largest year of growth in 2005 of new community banks opened for business since 1999. The U.S. has about 9,000 community banks, including commercial banks, thrifts and savings institutions. Community banks make up 95 percent of all banks and continue proliferating, according to the Independent Community Bankers of America. While the total number of banks is decreasing across the U.S., community-based banks continued growing in terms of asset quality, capital and earnings in 2005 and 2006, according to Governor Susan Schmidt Bies at the Federal Reserve Board.[11]

Evaluations of Financial Institutions

Federally-insured depository institutions, national banks, savings associations, state-chartered commercial and savings banks must comply with CRA regulations. Four separate federal agencies-the FDIC, the FRB, the OCC and the OTS-evaluate the CRA record of institutions they regulate before approving applications for charters or for approval of mergers, acquisitions, and branch openings. (See Appendix A for details on the evaluation process and changes to the definition of small banks.)

The FDIC conducts CRA examinations of state-chartered institutions that are not a member of the Federal Reserve System. The Governors of the Federal Reserve System regulates state-chartered banks that are members of the Federal Reserve System, bank holding companies and branches of foreign banks.[12] The FDIC, the OCC and the OTS examine depository institutions not supervised by the FRB. The FRB considers the CRA record of its member banks before approving applications to open new deposit-taking facilities.

CRA regulation 12 CFR 25 requires the OCC to conduct CRA exams of national banks every three years. The regulation also requires the OCC to assess a national bank's record of helping meet credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with safe and sound operations before approving any applications requesting to merge bank operations.[13]

Under the CRA regulation 12 CFR Part 563e, the OTS is required to assess a savings association's record of helping to meet the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with safe and sound operations. OTS must also consider that record in its evaluation of a savings association's application for new branches or relocation of an existing branch, mergers and consolidations and other corporate activities.[14]

Changes in CRA Rules in 2005 and 2006

Revised Community Reinvestment Act rules became effective September 1, 2005. The Office of the Comptroller of the Currency noted "the CRA has been beneficial for banks and communities, but complying with the CRA was a burden for smaller banks." Regulators' changes to the CRA in 2005 helped lessen the data collection and reporting requirements for small community banks and encourage community development activities in designated disaster areas and distressed and underserved rural areas. The 2005 changes do not affect thrifts regulated by the Office of Thrift Supervision.

Small Banks and Intermediate Small Banks

"Small bank" describes a bank that had assets of less than $1.033 billion as of December 31 of either of the prior two calendar years. This change became effective January 1, 2007. Effective September 1, 2005, new CRA rules helped relieve about 1,800 intermediate small banks with $250 million to $1 billion in assets from previous CRA data collection requirements and from testing of bank investments and service to their respective communities.

A second small bank definition was created by the FDIC, the FRB and the OCC, called the "Intermediate small bank (ISB)." This applies to small banks with assets of at least $258 million as of December 31 of both of the prior two calendar years and less than $1.033 billion as of December 31 of either of the two prior calendar years. Regulators will continue evaluating small banks using a streamlined small bank lending test.

In 2005, new CRA rules replaced the investment, lending and service tests with two separately rated tests for ISBs. These two tests are the existing lending test for small banks and a new community development test for ISBs. The lending test evaluates five performance criteria including the loan-to-deposit ratio, lending in and out of the assessment area, responses to complaints, the geographic distribution and the borrower distribution of loans.[15] The ISB test was designed to allow ISBs more say in the way they structure community development activities to meet community development needs in their assessment areas. An ISB may choose to be evaluated as a large bank under the three-part lending, investment and service test if the bank collects and submits required loan data outlined in regulation 12 CFR 25.21(a)(3). ISBs did not have to submit any collected CRA data in 2005 and 2006.[16] Regulators will judge an ISB on its business strategy, bank capacity and the community development needs of the ISB's local service area. The community development test does not consider retail banking services and does not review a bank's record of opening and closing branches.[17]

Large Banks

"Large" banks, defined by the regulatory agencies, have total assets of at least $1.033 billion on December 31 of both of the previous two calendar years. Large banks are required to collect and submit CRA loan data, but are not examined with a large bank test until their bank has collected one full year of data. Any size bank may choose to be examined with the large bank test if it has collected and submitted required CRA loan data. Regulators will continue to evaluate large banks using the lending, investment and service test once every two years to grade the lending institution's lending, investments and services in low- and moderate-income neighborhoods. Large bank examinations are based on lending, investment and service performance and must disclose data on their mortgage lending in non-metropolitan areas, community development activities and to small businesses. An unsatisfactory or weak CRA record can result in the denial of a financial institution's requests to expand operations.

Small Savings Associations

For "small savings associations," the OTS proposed in 2006 to align its CRA rules with the FDIC, the FRB and the OCC. The proposed regulation would change the definition of "small savings associations" with $251 million to $1 billion in assets to "intermediate small savings associations" and establish a new community development test for them; eliminate the option for alternative weighting under the large retail savings association test; index asset thresholds based on changes to the Consumer Price Index (CPI); and clarify the impact of discrimination on an association's CRA rating.[18] The change would end the option to choose alternative weights for lending, investment and service under the large, retail savings association test, create a new community development test for thrifts holding assets between $250 million and $1 billion; and annually index the asset threshold for small and intermediate small associations in line with Consumer Price Index (CPI) changes.

CRA Regulatory Examinations

Examiners customize federal regulatory tests to examine limited purpose and wholesale banks that specialize in large commercial deposits and provide credit cards but do not make home loans or accept small deposits. Customized tests focus on the number of community development loans and investments, including low-income housing tax credits or investments in small businesses that a bank has made in its service area.

Each quarter, the four federal regulatory agencies publish lists of CRA examination schedules for CRA-regulated banks and savings institutions. Regulators maintain the lists on their agency Web sites and provide them to the public.

The OCC examines banks on a cycle determined by the bank's asset size and performance on previous examinations. Banks with more than $250 million in assets fall in the risk-based cycle, which begins 36 months after the bank's previous OCC examination. Under the Gramm-Leach-Bliley Act, the OCC follows an extended exam cycle for small banks with aggregate assets of $250 million or less and an overall outstanding CRA rating. OCC exams of small banks with an overall CRA rating of satisfactory cannot begin sooner than 48 months after its most recent exam and no earlier than 60 months after its last CRA exam if it was ranked "Outstanding" on its last exam. The OCC may remove banks from the extended exam cycle when a bank has applied for a depository facility or for reasonable cause.

Under the new 2005 CRA rules, a bank must receive a "satisfactory" on the community development and lending tests before it can open new deposit-taking branches. The new community development test analyzes four areas of bank activity: affordable housing, community services, economic development, revitalization and stabilization activities.

The affordable housing and community services evaluation applies to low- or moderate-income individuals. The economic development evaluation applies to small businesses and farms, and the revitalization or stabilization analysis evaluates bank services provided to low-or moderate-income census tracts or underserved rural areas.[19]

The OCC widened the definition of community development to include activities that stabilize and strengthen designated disaster areas and "underserved and distressed" rural areas.[20]

The Office of Thrift Supervision (OTS), monitors data collection and reporting for OTS-regulated small banks. All savings associations, except small institutions, are subject to data collection and reporting requirements.

  • A small OTS institution is a thrift with under $1 billion in assets as of December 31 of either of the prior two calendar years.[21]
  • The OTS uses a streamlined examination under CRA regulations for "small institutions," which focuses on the institution's lending record.[22]
  • A rule created by the FDIC, FRB and OCC in August 2005: 1) created a new community development test for intermediate small banks with assets between $250 million and $1 billion; 2) provided criteria for evidence of discrimination or practices in violation of laws, rules or regulations that may negatively affect the CRA rating of an institution; 3) adjusted regulated institutions' asset thresholds annually for inflation by the Consumer Price Index (CPI); and 4) tightened evaluation options for large banks in the areas of lending, investment and services by maintaining weight allocations of 50 percent on lending, 25 percent on investments and 25 percent on services.

To be consistent, OTS revised its rule in March 2007 to align its CRA regulation with those of the other federal banking regulatory agencies. The rule takes effect July 1, 2007 with rule changes applying to exams beginning in the third quarter of 2007.[23]

Lending institutions of any size can choose to develop a strategic plan instead of being examined by regulators. The strategic plan option allows the financial institution to structure its CRA evaluation criteria and objectives to the unique needs of the community it serves based on its own lending capacities, banking strategies and expertise.

The Gramm-Leach-Bliley (GLB) Act and the CRA

Following the Great Depression, Congress originally passed the Glass-Steagall Act to eliminate high-risk financial behavior including uninsured deposits in questionable securities. The Gramm-Leach-Bliley (GLB) Act, known as the Financial Services Modernization Act of 1999, repealed restrictions found in sections 20 and 32 of the Glass-Steagall Act of 1933 concerning the affiliation of banks and securities firms. The GLB Act ended legal barriers among the banking, insurance and securities industries, which allowed them to combine services and provide financial products. The GLB Act also created a system for federal and state financial regulatory compliance, requiring the Federal Reserve Board to supervise financial holding companies.

Under the GLB Act, state insurance departments were designated as the functional regulators of the insurance business activities of banks and all financial firms involved in the business of insurance. The GLB Act created new forms of financial institutions called "Financial Holding Companies" (FHCs) as part of section 4 of the Bank Holding Company Act.[24] The GLB Act requires that financial holding companies, insured depository institutions affiliated with a financial holding company or stand-alone insured depository institutions may only be approved for expanded activities or acquisitions if its latest CRA examination rating is satisfactory or better.

Regulatory examiners use the Federal Financial Institutions Examination Council's (FFIEC) revised interagency examination procedures to assess financial institutions' compliance with the provisions in the CRA "Sunshine Requirements" of the Gramm-Leach-Bliley Act (GLBA). Generally, sunshine provisions require all parties to an agreement to file a report with the appropriate regulatory agency each year and require examiners to investigate and describe the institution's covered agreement disclosure practices. Effective April 1, 2001, the CRA Sunshine Requirements make agreements between or among agencies, nongovernment entities or persons, FDIC-insured banks or savings institutions that accept deposits and their affiliates to make the agreements available to the public and to file annual reports with the appropriate federal banking agency. The CRA Sunshine Requirements apply to funds of an insured depository institution or any affiliate with an aggregate value of more than $10,000 in a calendar year and financial institutions having loans with aggregate principal value of more than $50,000 in a calendar year.[25] When management determines that a financial institution is a party to one or more covered agreements, the regulation requires examiners to investigate and describe the institution's covered agreement disclosure practices.

Home Mortgage Disclosure Act (HMDA) Data Disclosure

Enacted by Congress in 1975, the Home Mortgage Disclosure Act (HMDA) requires most mortgage lenders in metropolitan areas to collect data on housing-related lending activity. Lenders must report this data to the government annually and ensure that the data is publicly available. HMDA data apply to transactions for home improvement loans, purchases and refinancings. Under the CRA, agencies that evaluate insured depository institutions use HMDA data when evaluating banks, savings and loan associations, credit unions and mortgage and consumer finance companies' records of helping meet their communities' mortgage credit needs.

Originally, HMDA was used to help determine whether financial institutions serve the housing needs of their communities and to enforce fair lending practices. Combined with the Federal Reserve Board's Regulation C, HMDA requires the majority of depository institutions and certain for-profit, non-depository institutions to collect, report and disclose data concerning originations and purchases of home purchase and improvement loans, refinancing of homes and related loan applications.

In 1989, Congress changed HMDA to collect data about denied home loan applications and related applicant or borrower information. In 2002, the Federal Reserve Board amended HMDA Regulation C to require new data fields and price information for loans covered by the Home Ownership and Equity Protection Act (HOEPA) including lien status, loan pricing and whether an application or loan involves a manufactured home.[26] The institutions must report the type, purpose, amount of loan; the property's location; and the applicant's ethnicity, income, race and sex. HMDA data includes most home-secured loans, except for home equity loans for credit card debt consolidation or medical expense payments. Regulations make reporting of home equity lines of credit (HELOCs) financing optional.

Effective January 1, 2007, the FRB increased the asset-size exemption for banks, consumer finance companies, credit unions, mortgage companies with offices in metropolitan areas and savings and loan associations. Lenders with $36 million or less on December 31, 2006 do not have to collect or report data under HMDA in 2007.[27]

Home Equity Lines of Credit (HELOC) in Texas

Texas voters authorized two amendments to the Texas Constitution in 2003. The first permitted lenders to provide home equity lines of credit (HELOCs) to Texas homeowners. The second allowed the refinancing of a home equity loan with a reverse mortgage. Interest rates are lower on a HELOC than on unsecured loans from most lenders, and interest paid on a HELOC can be deductible from federal income taxes.[28]

Home equity loan funds may have a value equal to 80 percent of the market value of the home less any loans secured with the home and can be used as needed for any type of expense. A traditional home equity loan is extended for a specific time period with required repayment of interest and principal in equal monthly payments at fixed interest rates. A HELOC is a revolving account that allows the homeowner to borrow from time to time up to a certain credit limit.[29]

The financial services industry, the U.S. Census Bureau and the Federal Reserve Board collect and report HELOC data. Banks and finance companies report HELOCs as receivables on quarterly Call Reports, and mutual savings banks report HELOCs on Federal Reserve Call Reports. Federal savings banks and savings and loan associations report credit line receivables on Call Reports. Finance companies, however, report commercial and residential mortgages without separating HELOCs from traditional loans.[30]

The CRA: Problems and Progress

Opponents and supporters continue to debate the problems and progress created by the CRA. Critics argue that the CRA reduces profits of regulated financial institutions, increases regulatory and reporting burdens and forces banks to make unprofitable high risk loans. Supporters of the CRA point to empirical research showing CRA widened access to credit for low-income, moderate-income and minority borrowers at relatively low cost in the 1990s. These supporters also highlight research showing that for most banks low- and moderate-income home purchase lending has become as profitable as home purchase lending to other income groups.[31] Generally, CRA scholars argue that the CRA encourages lenders to not ration credit in low- and moderate-income communities, where economic activity is often stunted due to relatively low property values, a low volume of comparative property appraisals and reduced liquidity.[32]

When the CRA was passed in 1977, banks and savings and loan institutions issued most home purchase loans. The CRA promoted homeownership lending through access to credit for low- and moderate-income persons by the CRA-regulated institutions in their communities between 1977 and 2005. In the past 30 years, bank activity in low-income communities has grown as CRA regulations changed. For small businesses, CRA advocates suggest progress has been made. However, they recommend further rulemaking and laws to consider the impact of financial services and home mortgage services industry consolidation. CRA supporters argue that small business lending is not repeating the gains made in homeownership lending in low-income areas in the 1990s.

CRA reform advocates urged federal regulators to revise the CRA in 2005. CRA advocates, consumer protection groups and the Consumer Bankers Association among others quickly voiced concerns. They were concerned that regulators' changes to bank size definitions, the new community development test and the reduction of CRA data collection requirements for small and intermediate banks had removed the original reservoir of annual demographic and lending data previously used by consumer protection groups to monitor banks' CRA compliance-related service activities and lending practices. The National Community Reinvestment Coalition argued that the new CRA 2005 rules put the regulated banks' interests above those of the public. On behalf of large banks, the Consumer Bankers Association opposed the size-based bank testing rules arguing that CRA tests should be equally applied to all banks.[33]

Since the 2005 hurricane disasters, CRA advocates have focused their attention on rule changes to the financial industry to stimulate economic activity through community development lending in all areas, not just urban centers. In response, the OTS modified its definition of community development applied to savings associations to conform to that of the FRB, the OCC and the FDIC's final rule of August 2005 that applies to banks. As a result, OTS' April 12, 2006 rule encourages savings associations to increase community development loans and services, and qualified investments in nonmetropolitan middle-income areas and areas affected by disasters.