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Federal Reserve Bank of Cleveland

pose credit

programs, or pilot programs

to test new credit offerings. The Board
does not wish to discourage these efforts.
However, the Board will closely scrutinize
any agreements to ascertain that they are
not inconsistent with the safety and
soundness of the bank involved, and do
not establish a preference for credit extensions inconsistent with
treatment of borrowers ....

evenhanded

The response by financial institutions to
the CRA generally has been favorable. An
overwhel ming number of institutions have
become much more actively involved in
meeting with community groups, as well
as with other segments of their community.
In response to the CRA protests, a pattern
has emerged in which financial institutions
are agreeing to undertake adjustments in
their CRA performance. As previously seen,
these adjustments, mostly in the form of
commitments, demonstrate a willingness to
work with the agencies and community residents to implement the act. A number of
institutions
have voluntarily
entered into
settlement
agreements with
community
organizations. Other responses by institutions
also are beginning to emerge. Some financial
institutions have begun to assume a new
posture in community
development
by
undertaking projects or programs in which
financial

risks can be shared. Such coordi-

nated pooling of resources has permitted institutions
to undertake investments that
formerly were considered to be less viable.
An example of such efforts can be seen in
Springfield, Massachusetts, where 11 local
commercial and savings banks and two insurance companies recently re-channeled
their development efforts to revitalize the
downtown Springfield area. The institutions
formed a consortium and established three
loan pools: a $16-million mortgage pool to
finance downtown
development projects
ineligible for conventional financing; a $10million pool for the acquisition and rehabilitation
of a department store; and an
$11-million pool to attract high-technology
businesses into the downtown area. These
loan pools have proven to be a catalyst in

attracting a new flow of private investment
into downtown Springfield.5

Has CRA Been Effective?
The CRA encourages financial institutions to hel p meet the credit needs of their
communities,
including those of low-tomoderate-income neighborhoods. Whether
accomplishment
of this objective merely
requires more effective identification
of
community credit needs, or whether it will
necessitate more systematic efforts, has yet
to be determined. However, a framework
is evolving to ascertain the proper role of
financial institutions in serving the credit
needs of their entire communities. In particular, institutions have demonstrated a willingness to increase efforts to ascertain community credit needs, as well as to make
the publ ic more aware of the availabi Iitv
of credit services. These measures appear to
be prerequisites to serving community credit
needs and, in the future, may affect a financial institution's lending or other CRArelated activities.
Some concern has arisen that the enforcement of the CRA, and other consumer
banking regulations as well, may in fact be
counterproductive
and further reduce the
supply of credit in central-city neighborhoods. In a recent study prepared for the
FHLBB, Guttentag and Wachter found that
the regulations may help shift housing-

regulations will

exacerbate the problem of

urban blight because the higher costs of the
regulations eventually will reduce the supply
of housing-related credit. Less credit will be
available, and it will be more expensive,
which may disproportionately
affect precisely those individuals the regulations were
intended to benefit.

Conclusion
Overall, the response that has emerged
to the CRA has been encouraging. A pattern
of compromise between financial institutions
and community groups has begun to emerge.
With the encouragement of the regulatory
agencies, there appears to be an increased
recognition that the CRA represents an opportunity to re-examine the degree to which
financial institutions
can prudently
help
serve community credit needs.
Many of the initial implementation problems have been corrected. The regulatory
agencies have become more skilled and
knowledgeable in addressing CRA issues,
permitting
CRA-related
problems to be

handled more efficiently.
A number of issues obviously remain to
be resolved. One area of major concern is
the interpretation of the various components
of a CRA assessment. For example, should
an institution's CRA performance be compared with the experiences of other institutions, or should some minimum standards
be used to evaluate the institution's performance?
How should an institution's
strong performance under some of the assessment factors be weighed against weak performance under others? Another area of
key concern is the protest process. Although
much has been accomplished to expedite
the handl ing of CRA protests, a significant
amount of time and resources is still required to process some protests. The agencies will have to continue to monitor and
evaluate the cost of additional analysis of
protest issues against the benefits resulti ng
from having more extensive information. It
will be the task of the regulators to examine
these and other issues, balancing the objectives of solvency and profitability with that
of responsibil ity toward the community.

Federal Reserve Bank of Cleveland
Research Department
P.O. Box 6387
Cleveland,OH 44101

5.

For

more

efforts,

detailed
as well

development

projects,

of America's

Cities:

Studies,

prepared
Economic

of

Comptroller

the

Development
6.

the

of the

in the Future

National

Development

Six Case

Council

for

the

Currency,

on

Office

Community

Division.

See Jack

M. Guttentag

"Redlining

and

on Finance

and Economics,

1980-1.

regarding

Role,"

For

Public

an abbreviated

authors

on this

lining,"

Wharton

1980),

pp. 13-21.

study,

and Susan M. Wachter,

Policy,"

Monograph

New York
article

see "How

Magazine,

vol.

University,

by
to
5,

Series

the

same

Erase Redno.

1 (Fall

The Community Reinvestment Act:
Early Experience and Problems
by Thomas M. Buynak

The Community
Reinvestment Act of
1977 (CRA), effective November 6, 1978,
requires financial institutions to " ... demonstrate that their deposit facilities serve the
convenience and needs of the communities in which they are chartered to do business." The CRA directs four regulatory agencies-the Board of Governors of the Federal
Reserve System, the Comptroller of the Currency, the Federal Home Loan Bank Board
(FHLBB), and the Federal Deposit Insurance
Corporation (FDIC)-to
encourage each in-

This Economic Commentary
examines
the experience and responses of the individuals, institutions,
and agencies that have
worked with the CRA during the past 30
months. These include the community
groups that have filed CRA protests challenging the expansion plans of financial
institutions;
the regulatory agencies that
have issued various guidel ines and pol icy
statements to implement the act; and the
financial institutions that have responded to
the CRA by expanding their activities relating
to community interaction and development.
This Economic Commentary also questions
whether the act has been effective and
details the issues and factors that may
infl uence the role of financial institutions in
community reinvestment.

required to assessan institution's record of
meeting the credit needs of its community,
including low-to-moderate income neighborhoods, consistent with the safe and sound
operation of the institution. These assess- Protests Lodged
ments are to be taken into account when
The CRA offers the public an opportuthe regulatory agencies evaluate various ap- nity to challenge the expansion plans of fiplications by institutions.1
nancial institutions that are considered to

of some other

see" Investing
The Banker's

by

Urban

information

as a survey

f.£Qf)omic Commentary

stitution
under their jurisdiction
to help
meet the credit needs of the local community. The four regulatory agencies also are

related credit in the desired direction, but
only in the short run.6 Enforcement of the

these

BU LK RATE
U.S. Postage Paid
Cleveland,OH
Permit No. 385

April 20, 1981

Address correction requested

o Correct as shown
o Remove from mailing

1. Community

list

Pleasesend mailing label to the Research Department,
Federal Reserve Bank of Cleveland, P.O. Box 6387, Cleveland, OH 44101.

Reinvestment,

Board of Governors
Sec. 228.2-Purposes.
tions,

see Thomas

Reinvestment

Act,"

Regulation

BB,

of the Federal Reserve System,
For a review
M. Buynak,
Economic

"The

Thomas

Commentary,

Fed·

eral Reserve Bank of Cleveland, December 26, 1978.

is an economic

The views stated

of the regula·
Community

Buynak

analyst,

Federal

Reserve Bank of Cleveland.
and
Bank

not

necessarily

of Cleveland

herein are those of the author
those of

the Federal

or of the Board

of the Federal Reserve System.

Reserve

of Governors

be unresponsive to the credit needs of the
community. Nationwide, approximately 100
protests have been filed against the applications of financial
institutions
on CRA
grounds; most of these have been lodged by
community organizations. Although the protests have been widespread, the majority
have occurred in Boston, New York City,
Philadelphia, Cleveland, Toledo, Detroit, St.
Louis, San Francisco, and Los Angeles.
Community groups were somewhat hampered in their initial efforts to utilize the
CRA by their unfamiliarity with the operations of regulatory and financial institutions.
Following this period of uncertainty, various
strategies were developed by community
groups to use the act more effectively. A
major outgrowth of these campaigns has
been the filing of well-documented protests.
Such protests have given community groups
leverage in seeking CRA concessions from
financial institutions.
Protesting grou ps seem to have Iittle complaint regarding the technical requirements
of the act. A financial institution is required
to adopt a CRA statement, maintain public
CRA files, and display a CRA notice in its
offices. The CRA statement must include
a delineation of the area that comprises the
institution's community ; a Iist of the principal types of credit that the institution is
prepared to extend; and a copy of the CRA
notice displayed in its offices. The public
CRA files must, among other things, contain
any signed comments received from the public on the financial institution's record of
serving the credit needs of its community.
The CRA notice includes information on the
availability of the institution's CRA statement. Some community groups have been
critical of the lack of initiative of financial institutions to incorporate unrequired, but suggested, items into their CRA statements. Institutions have been encouraged, for example,
to incorporate into their CRA statements a
description of their marketing programs on
the availability of credit services.
One issue that consistently has been
raised in the protests is the failure of financial institutions
to serve adequately the
housing-related credit
needs of low-to-

moderate-income,
minority,
and transitional (i.e.. racially integrating) neighborhoods. This allegation essentially reasserts
concern over the longstanding, yet controversial, issue of redl ining-the alleged practice
of institutions of systematically refusing, or
severely limiting, credit to certain urban
neighborhoods because of the location or
age of the property without regard to the
credit worth iness of the appl icant or concern
for the condition of the property. To document this assertion, community groups have
relied on data supplied by financial institutions under the Home Mortgage Disclosure
Act (HMDA). These data, coupled in some
cases with census information on housing,
income, and population, have been used to
analyze the lending patterns of institutions
across various neighborhoods.
Protestants have registered many other
complaints. These include a failure of institutions to advertise the availability of
housing-related credit in low-to-moderateincome neighborhoods; a low level of involvement in the Small Business Association
(SBA) loan program; excessively restrictive
mortgage loan policies, such as high downpayment requirements vis-a-vis other institutions in the community; the pre-screening
of potential loan applicants; and inadequate
efforts to ascertain community credit needs.

Regulatory

Response

Implementing the CRA has been more
difficult than anticipated. Unlike previously
enacted consumer legislation affecting financial institutions,
regulatory agencies were
charged not only with implementing and enforcing the CRA but also with defining it.
The CRA lacks specific direction and reflects the congressional ambivalence existing during its passage over the extent to
which government should become involved
in supervising the lending decisions of private financial institutions.
Consequently,
implementation has been slowed by the lack
of guidance from Congress as to what the
scope and impact of the CRA should be.
Regulatory agencies discharge a number
of functions under the CRA. The agencies
assess each institution's

record of

perfor-

mance in helping to meet community credit
needs. These assessmentsare taken into consideration when the agencies evaluate an institution's application for a charter, branch,
office relocation, deposit insurance, merger,
or acquisition. The agencies in fact may deny
an institution's appl ication if it is judged not
to comply with the substantive provisions of
the CRA. Furthermore, since the CRA extends an opportunity to the public to challenge a financial institution's
application,
the agencies must evaluate the merits of
CRA objections and take those found to
be meritorious into account when considering an institution's application.
The CRA assessmentor examination consists of two parts-a review of technical
compliance and an evaluation of an institution's performance in serving the credit
needs of its community. The assessment of
an institution's
CRA performance focuses
on several factors enumerated in the regulations; these items have been incorporated

into uniform examination procedures that
were issued shortly after the CRA was implemented (see box). A uniform
rating
system 'also has been issued for consistent
interpretation of ratings assigned to various
performance levels. Although this uniform

conditions or commitments into approvals
in many cases where institutions have exhibited questionable CRA perforrnance.f

rating system exists, the CRA assessment
differs in an important respect from the

CRA adjustments of institutions as a result
of their own examination process. For example, roughly one-half of the FD IC's
commitments
and conditions
have been
imposed as a direct result of the examination process without protests or an appl ication pending by the institution.

other parts of the consumer exam ination.
Specifically, in formulating the examination
procedures, the agencies did not assign
explicit weights to, nor design an explicit
scoring system for, the assessmentfactors. It
was believed that such weighting or scoring
would limit an institution's
responses to
local credit needs. A significant aspect of the
CRA examination thus is the overall interpretation
assigned to each of these assessment factors.

The following list comprises a few
of the factors that regulators consider

Four applications have been denied on
CRA grounds to date. Three denials were by
the FD IC, two involving branch applications
and one a merger. All three FD IC caseswere
protested by local community organizations.
The fourth denial was issued by the Comptroller of the Currency and was decided despite the lack of a CRA protest. Of the four
denials, three since have been approved after

in a CRA assessment:

steps were undertaken by the institutions to

D Activities

ample, in reconsidering the branch appl ica-

CRA Assessment Factors''

undertaken by an institution
to ascertain community
credit needs, including the extent
of efforts to make its community
aware of available credit services;
D An institution's origination or purchase of
loans for residential
mortgages, housing rehabilitation,
home improvements,
and small
farms within its community;
D The geographic distribution of an
institution's credit extensions, applications, and denials;
D Any evidence of prohibited discriminatory or other illegal credit
practices.
a.

See

lation

Community

BB, Board

Reinvestment,
of Governors

eral Reserve System,

Regu-

of the Fed-

Sec. 228.7- Assessing

the Record of Performance,

pp. 5-6.

improve their CRA performance. As an extion of the Dauphin Deposit Bank and Trust
Company of Harrisburg, Pennsylvania, the
FDIC stated that " ...
significant and substantial negotiations have taken place between the appl icant and the protestants, the
results of which constitute, in part, the
'marked improvement' called for." As embodied in the written agreement between
appl icant and protestants, the bank had,
among other things, agreed to hire a fulltime community
relations specialist; improve its marketing and advertising programs; institute procedures to review loan
denials originating
in low-to-moderate-income neighborhoods; and commit specific
funds for mortgage and home improvement
loans over the next three years in the city's
low-to-moderate-income neighborhoods.
While the regulatory agencies have issued
only four denials, they have incorporated

Most conditional approvals, moreover, have
involved applications against which a protest
was filed. The agencies also have required

The CRA adjustments required by the
agencies have varied, but the most common
is a commitment to increase efforts to communicate with the institution's community
and to improve community awareness of
the institution's credit services. Some of the
other commitments or conditions imposed
include designating a CRA officer; upgrading
the institution's
commitment
to extend
mortgage credit throughout its entire community; improving the training programs
for lending personnel; making publicly
available the institution's
real-estate appraisal standards; and participating
in
special lending programs.

tutions. The agencies generally have shown
a balance between past and future performance. Moreover, they have stressed that
they will assessnot only the significance of
any commitments, but also the likelihood
of future improvement in CRA performance
of financial institutions.

Response of Financial Institutions
The CRA has been a controversial piece
of legislation since its beginning. While community groups allege that redl ining is a widespread practice, financial institutions assert
that they are meeting neighborhood credit
needs in a manner consistent with prudent
lending practices. Prior to passage of the
CRA, much of the financial community's
opposition warned that the act's passage
would represent a major move in the direction
of nonmarket credit allocations. These concerns still exist, even though the regulatory
agencies have stressed repeatedly that the
act does not represent a regulatory scheme
in which financial institutions are required
to allocate credit. The Federal Reserve
Board has explicitly stated:3
Although CRA is directed at the problem
of meeting sound community
credit
needs, it was not intended to establish
a regulatory influence on the allocation
of credit. In implementing the Act, the
Board has acted on the belief that banks
are in the best position to assess the
credit needs of their own local communities ....

Since the agencies are required to evaluate and take into account CRA claims filed
by the public when deciding upon an application, they have issued a number of guidelines and policy statements to inform and involve the public in the application process.
The Federal Reserve System, for example,
has issued information on the requ irements
of the act and procedures for applications
and protests. In addition, the agencies have
implemented a system for sharing and exchanging CRA information,
such as consumer exam ination reports, as part of their
efforts to coordinate enforcement.
It is the explicit policy of the agencies
to encourage discussion between applicants
and protestants to help resolve their differences. In many cases, such resolution has
resulted in commitments by financial insti-

The Board has further indicated that it
will not endorse any agreements to allocate credit. In this connection, the Board
has indicated that:"
[It] is aware that many banks have on
their own in itiative adopted special pur-

3.

Federal

vestment

Reserve
Act,

System,

Information

Community
Statement,

ReinJanuary

3,1980, p.l.
2. The distinction

between commitments

and condi-

tions hinges primarily

on the fact that without

dition,

otherwise

an application

would

a con-

be denied.

4.

Federal

vestment

Reserve
Act,

3,1980, p.3.

System,

I nformation

Community
Statement,

ReinJanuary

be unresponsive to the credit needs of the
community. Nationwide, approximately 100
protests have been filed against the applications of financial
institutions
on CRA
grounds; most of these have been lodged by
community organizations. Although the protests have been widespread, the majority
have occurred in Boston, New York City,
Philadelphia, Cleveland, Toledo, Detroit, St.
Louis, San Francisco, and Los Angeles.
Community groups were somewhat hampered in their initial efforts to utilize the
CRA by their unfamiliarity with the operations of regulatory and financial institutions.
Following this period of uncertainty, various
strategies were developed by community
groups to use the act more effectively. A
major outgrowth of these campaigns has
been the filing of well-documented protests.
Such protests have given community groups
leverage in seeking CRA concessions from
financial institutions.
Protesting grou ps seem to have Iittle complaint regarding the technical requirements
of the act. A financial institution is required
to adopt a CRA statement, maintain public
CRA files, and display a CRA notice in its
offices. The CRA statement must include
a delineation of the area that comprises the
institution's community ; a Iist of the principal types of credit that the institution is
prepared to extend; and a copy of the CRA
notice displayed in its offices. The public
CRA files must, among other things, contain
any signed comments received from the public on the financial institution's record of
serving the credit needs of its community.
The CRA notice includes information on the
availability of the institution's CRA statement. Some community groups have been
critical of the lack of initiative of financial institutions to incorporate unrequired, but suggested, items into their CRA statements. Institutions have been encouraged, for example,
to incorporate into their CRA statements a
description of their marketing programs on
the availability of credit services.
One issue that consistently has been
raised in the protests is the failure of financial institutions
to serve adequately the
housing-related credit
needs of low-to-

moderate-income,
minority,
and transitional (i.e.. racially integrating) neighborhoods. This allegation essentially reasserts
concern over the longstanding, yet controversial, issue of redl ining-the alleged practice
of institutions of systematically refusing, or
severely limiting, credit to certain urban
neighborhoods because of the location or
age of the property without regard to the
credit worth iness of the appl icant or concern
for the condition of the property. To document this assertion, community groups have
relied on data supplied by financial institutions under the Home Mortgage Disclosure
Act (HMDA). These data, coupled in some
cases with census information on housing,
income, and population, have been used to
analyze the lending patterns of institutions
across various neighborhoods.
Protestants have registered many other
complaints. These include a failure of institutions to advertise the availability of
housing-related credit in low-to-moderateincome neighborhoods; a low level of involvement in the Small Business Association
(SBA) loan program; excessively restrictive
mortgage loan policies, such as high downpayment requirements vis-a-vis other institutions in the community; the pre-screening
of potential loan applicants; and inadequate
efforts to ascertain community credit needs.

Regulatory

Response

Implementing the CRA has been more
difficult than anticipated. Unlike previously
enacted consumer legislation affecting financial institutions,
regulatory agencies were
charged not only with implementing and enforcing the CRA but also with defining it.
The CRA lacks specific direction and reflects the congressional ambivalence existing during its passage over the extent to
which government should become involved
in supervising the lending decisions of private financial institutions.
Consequently,
implementation has been slowed by the lack
of guidance from Congress as to what the
scope and impact of the CRA should be.
Regulatory agencies discharge a number
of functions under the CRA. The agencies
assess each institution's

record of

perfor-

mance in helping to meet community credit
needs. These assessmentsare taken into consideration when the agencies evaluate an institution's application for a charter, branch,
office relocation, deposit insurance, merger,
or acquisition. The agencies in fact may deny
an institution's appl ication if it is judged not
to comply with the substantive provisions of
the CRA. Furthermore, since the CRA extends an opportunity to the public to challenge a financial institution's
application,
the agencies must evaluate the merits of
CRA objections and take those found to
be meritorious into account when considering an institution's application.
The CRA assessmentor examination consists of two parts-a review of technical
compliance and an evaluation of an institution's performance in serving the credit
needs of its community. The assessment of
an institution's
CRA performance focuses
on several factors enumerated in the regulations; these items have been incorporated

into uniform examination procedures that
were issued shortly after the CRA was implemented (see box). A uniform
rating
system 'also has been issued for consistent
interpretation of ratings assigned to various
performance levels. Although this uniform

conditions or commitments into approvals
in many cases where institutions have exhibited questionable CRA perforrnance.f

rating system exists, the CRA assessment
differs in an important respect from the

CRA adjustments of institutions as a result
of their own examination process. For example, roughly one-half of the FD IC's
commitments
and conditions
have been
imposed as a direct result of the examination process without protests or an appl ication pending by the institution.

other parts of the consumer exam ination.
Specifically, in formulating the examination
procedures, the agencies did not assign
explicit weights to, nor design an explicit
scoring system for, the assessmentfactors. It
was believed that such weighting or scoring
would limit an institution's
responses to
local credit needs. A significant aspect of the
CRA examination thus is the overall interpretation
assigned to each of these assessment factors.

The following list comprises a few
of the factors that regulators consider

Four applications have been denied on
CRA grounds to date. Three denials were by
the FD IC, two involving branch applications
and one a merger. All three FD IC caseswere
protested by local community organizations.
The fourth denial was issued by the Comptroller of the Currency and was decided despite the lack of a CRA protest. Of the four
denials, three since have been approved after

in a CRA assessment:

steps were undertaken by the institutions to

D Activities

ample, in reconsidering the branch appl ica-

CRA Assessment Factors''

undertaken by an institution
to ascertain community
credit needs, including the extent
of efforts to make its community
aware of available credit services;
D An institution's origination or purchase of
loans for residential
mortgages, housing rehabilitation,
home improvements,
and small
farms within its community;
D The geographic distribution of an
institution's credit extensions, applications, and denials;
D Any evidence of prohibited discriminatory or other illegal credit
practices.
a.

See

lation

Community

BB, Board

Reinvestment,
of Governors

eral Reserve System,

Regu-

of the Fed-

Sec. 228.7- Assessing

the Record of Performance,

pp. 5-6.

improve their CRA performance. As an extion of the Dauphin Deposit Bank and Trust
Company of Harrisburg, Pennsylvania, the
FDIC stated that " ...
significant and substantial negotiations have taken place between the appl icant and the protestants, the
results of which constitute, in part, the
'marked improvement' called for." As embodied in the written agreement between
appl icant and protestants, the bank had,
among other things, agreed to hire a fulltime community
relations specialist; improve its marketing and advertising programs; institute procedures to review loan
denials originating
in low-to-moderate-income neighborhoods; and commit specific
funds for mortgage and home improvement
loans over the next three years in the city's
low-to-moderate-income neighborhoods.
While the regulatory agencies have issued
only four denials, they have incorporated

Most conditional approvals, moreover, have
involved applications against which a protest
was filed. The agencies also have required

The CRA adjustments required by the
agencies have varied, but the most common
is a commitment to increase efforts to communicate with the institution's community
and to improve community awareness of
the institution's credit services. Some of the
other commitments or conditions imposed
include designating a CRA officer; upgrading
the institution's
commitment
to extend
mortgage credit throughout its entire community; improving the training programs
for lending personnel; making publicly
available the institution's
real-estate appraisal standards; and participating
in
special lending programs.

tutions. The agencies generally have shown
a balance between past and future performance. Moreover, they have stressed that
they will assessnot only the significance of
any commitments, but also the likelihood
of future improvement in CRA performance
of financial institutions.

Response of Financial Institutions
The CRA has been a controversial piece
of legislation since its beginning. While community groups allege that redl ining is a widespread practice, financial institutions assert
that they are meeting neighborhood credit
needs in a manner consistent with prudent
lending practices. Prior to passage of the
CRA, much of the financial community's
opposition warned that the act's passage
would represent a major move in the direction
of nonmarket credit allocations. These concerns still exist, even though the regulatory
agencies have stressed repeatedly that the
act does not represent a regulatory scheme
in which financial institutions are required
to allocate credit. The Federal Reserve
Board has explicitly stated:3
Although CRA is directed at the problem
of meeting sound community
credit
needs, it was not intended to establish
a regulatory influence on the allocation
of credit. In implementing the Act, the
Board has acted on the belief that banks
are in the best position to assess the
credit needs of their own local communities ....

Since the agencies are required to evaluate and take into account CRA claims filed
by the public when deciding upon an application, they have issued a number of guidelines and policy statements to inform and involve the public in the application process.
The Federal Reserve System, for example,
has issued information on the requ irements
of the act and procedures for applications
and protests. In addition, the agencies have
implemented a system for sharing and exchanging CRA information,
such as consumer exam ination reports, as part of their
efforts to coordinate enforcement.
It is the explicit policy of the agencies
to encourage discussion between applicants
and protestants to help resolve their differences. In many cases, such resolution has
resulted in commitments by financial insti-

The Board has further indicated that it
will not endorse any agreements to allocate credit. In this connection, the Board
has indicated that:"
[It] is aware that many banks have on
their own in itiative adopted special pur-

3.

Federal

vestment

Reserve
Act,

System,

Information

Community
Statement,

ReinJanuary

3,1980, p.l.
2. The distinction

between commitments

and condi-

tions hinges primarily

on the fact that without

dition,

otherwise

an application

would

a con-

be denied.

4.

Federal

vestment

Reserve
Act,

3,1980, p.3.

System,

I nformation

Community
Statement,

ReinJanuary

be unresponsive to the credit needs of the
community. Nationwide, approximately 100
protests have been filed against the applications of financial
institutions
on CRA
grounds; most of these have been lodged by
community organizations. Although the protests have been widespread, the majority
have occurred in Boston, New York City,
Philadelphia, Cleveland, Toledo, Detroit, St.
Louis, San Francisco, and Los Angeles.
Community groups were somewhat hampered in their initial efforts to utilize the
CRA by their unfamiliarity with the operations of regulatory and financial institutions.
Following this period of uncertainty, various
strategies were developed by community
groups to use the act more effectively. A
major outgrowth of these campaigns has
been the filing of well-documented protests.
Such protests have given community groups
leverage in seeking CRA concessions from
financial institutions.
Protesting grou ps seem to have Iittle complaint regarding the technical requirements
of the act. A financial institution is required
to adopt a CRA statement, maintain public
CRA files, and display a CRA notice in its
offices. The CRA statement must include
a delineation of the area that comprises the
institution's community ; a Iist of the principal types of credit that the institution is
prepared to extend; and a copy of the CRA
notice displayed in its offices. The public
CRA files must, among other things, contain
any signed comments received from the public on the financial institution's record of
serving the credit needs of its community.
The CRA notice includes information on the
availability of the institution's CRA statement. Some community groups have been
critical of the lack of initiative of financial institutions to incorporate unrequired, but suggested, items into their CRA statements. Institutions have been encouraged, for example,
to incorporate into their CRA statements a
description of their marketing programs on
the availability of credit services.
One issue that consistently has been
raised in the protests is the failure of financial institutions
to serve adequately the
housing-related credit
needs of low-to-

moderate-income,
minority,
and transitional (i.e.. racially integrating) neighborhoods. This allegation essentially reasserts
concern over the longstanding, yet controversial, issue of redl ining-the alleged practice
of institutions of systematically refusing, or
severely limiting, credit to certain urban
neighborhoods because of the location or
age of the property without regard to the
credit worth iness of the appl icant or concern
for the condition of the property. To document this assertion, community groups have
relied on data supplied by financial institutions under the Home Mortgage Disclosure
Act (HMDA). These data, coupled in some
cases with census information on housing,
income, and population, have been used to
analyze the lending patterns of institutions
across various neighborhoods.
Protestants have registered many other
complaints. These include a failure of institutions to advertise the availability of
housing-related credit in low-to-moderateincome neighborhoods; a low level of involvement in the Small Business Association
(SBA) loan program; excessively restrictive
mortgage loan policies, such as high downpayment requirements vis-a-vis other institutions in the community; the pre-screening
of potential loan applicants; and inadequate
efforts to ascertain community credit needs.

Regulatory

Response

Implementing the CRA has been more
difficult than anticipated. Unlike previously
enacted consumer legislation affecting financial institutions,
regulatory agencies were
charged not only with implementing and enforcing the CRA but also with defining it.
The CRA lacks specific direction and reflects the congressional ambivalence existing during its passage over the extent to
which government should become involved
in supervising the lending decisions of private financial institutions.
Consequently,
implementation has been slowed by the lack
of guidance from Congress as to what the
scope and impact of the CRA should be.
Regulatory agencies discharge a number
of functions under the CRA. The agencies
assess each institution's

record of

perfor-

mance in helping to meet community credit
needs. These assessmentsare taken into consideration when the agencies evaluate an institution's application for a charter, branch,
office relocation, deposit insurance, merger,
or acquisition. The agencies in fact may deny
an institution's appl ication if it is judged not
to comply with the substantive provisions of
the CRA. Furthermore, since the CRA extends an opportunity to the public to challenge a financial institution's
application,
the agencies must evaluate the merits of
CRA objections and take those found to
be meritorious into account when considering an institution's application.
The CRA assessmentor examination consists of two parts-a review of technical
compliance and an evaluation of an institution's performance in serving the credit
needs of its community. The assessment of
an institution's
CRA performance focuses
on several factors enumerated in the regulations; these items have been incorporated

into uniform examination procedures that
were issued shortly after the CRA was implemented (see box). A uniform
rating
system 'also has been issued for consistent
interpretation of ratings assigned to various
performance levels. Although this uniform

conditions or commitments into approvals
in many cases where institutions have exhibited questionable CRA perforrnance.f

rating system exists, the CRA assessment
differs in an important respect from the

CRA adjustments of institutions as a result
of their own examination process. For example, roughly one-half of the FD IC's
commitments
and conditions
have been
imposed as a direct result of the examination process without protests or an appl ication pending by the institution.

other parts of the consumer exam ination.
Specifically, in formulating the examination
procedures, the agencies did not assign
explicit weights to, nor design an explicit
scoring system for, the assessmentfactors. It
was believed that such weighting or scoring
would limit an institution's
responses to
local credit needs. A significant aspect of the
CRA examination thus is the overall interpretation
assigned to each of these assessment factors.

The following list comprises a few
of the factors that regulators consider

Four applications have been denied on
CRA grounds to date. Three denials were by
the FD IC, two involving branch applications
and one a merger. All three FD IC caseswere
protested by local community organizations.
The fourth denial was issued by the Comptroller of the Currency and was decided despite the lack of a CRA protest. Of the four
denials, three since have been approved after

in a CRA assessment:

steps were undertaken by the institutions to

D Activities

ample, in reconsidering the branch appl ica-

CRA Assessment Factors''

undertaken by an institution
to ascertain community
credit needs, including the extent
of efforts to make its community
aware of available credit services;
D An institution's origination or purchase of
loans for residential
mortgages, housing rehabilitation,
home improvements,
and small
farms within its community;
D The geographic distribution of an
institution's credit extensions, applications, and denials;
D Any evidence of prohibited discriminatory or other illegal credit
practices.
a.

See

lation

Community

BB, Board

Reinvestment,
of Governors

eral Reserve System,

Regu-

of the Fed-

Sec. 228.7- Assessing

the Record of Performance,

pp. 5-6.

improve their CRA performance. As an extion of the Dauphin Deposit Bank and Trust
Company of Harrisburg, Pennsylvania, the
FDIC stated that " ...
significant and substantial negotiations have taken place between the appl icant and the protestants, the
results of which constitute, in part, the
'marked improvement' called for." As embodied in the written agreement between
appl icant and protestants, the bank had,
among other things, agreed to hire a fulltime community
relations specialist; improve its marketing and advertising programs; institute procedures to review loan
denials originating
in low-to-moderate-income neighborhoods; and commit specific
funds for mortgage and home improvement
loans over the next three years in the city's
low-to-moderate-income neighborhoods.
While the regulatory agencies have issued
only four denials, they have incorporated

Most conditional approvals, moreover, have
involved applications against which a protest
was filed. The agencies also have required

The CRA adjustments required by the
agencies have varied, but the most common
is a commitment to increase efforts to communicate with the institution's community
and to improve community awareness of
the institution's credit services. Some of the
other commitments or conditions imposed
include designating a CRA officer; upgrading
the institution's
commitment
to extend
mortgage credit throughout its entire community; improving the training programs
for lending personnel; making publicly
available the institution's
real-estate appraisal standards; and participating
in
special lending programs.

tutions. The agencies generally have shown
a balance between past and future performance. Moreover, they have stressed that
they will assessnot only the significance of
any commitments, but also the likelihood
of future improvement in CRA performance
of financial institutions.

Response of Financial Institutions
The CRA has been a controversial piece
of legislation since its beginning. While community groups allege that redl ining is a widespread practice, financial institutions assert
that they are meeting neighborhood credit
needs in a manner consistent with prudent
lending practices. Prior to passage of the
CRA, much of the financial community's
opposition warned that the act's passage
would represent a major move in the direction
of nonmarket credit allocations. These concerns still exist, even though the regulatory
agencies have stressed repeatedly that the
act does not represent a regulatory scheme
in which financial institutions are required
to allocate credit. The Federal Reserve
Board has explicitly stated:3
Although CRA is directed at the problem
of meeting sound community
credit
needs, it was not intended to establish
a regulatory influence on the allocation
of credit. In implementing the Act, the
Board has acted on the belief that banks
are in the best position to assess the
credit needs of their own local communities ....

Since the agencies are required to evaluate and take into account CRA claims filed
by the public when deciding upon an application, they have issued a number of guidelines and policy statements to inform and involve the public in the application process.
The Federal Reserve System, for example,
has issued information on the requ irements
of the act and procedures for applications
and protests. In addition, the agencies have
implemented a system for sharing and exchanging CRA information,
such as consumer exam ination reports, as part of their
efforts to coordinate enforcement.
It is the explicit policy of the agencies
to encourage discussion between applicants
and protestants to help resolve their differences. In many cases, such resolution has
resulted in commitments by financial insti-

The Board has further indicated that it
will not endorse any agreements to allocate credit. In this connection, the Board
has indicated that:"
[It] is aware that many banks have on
their own in itiative adopted special pur-

3.

Federal

vestment

Reserve
Act,

System,

Information

Community
Statement,

ReinJanuary

3,1980, p.l.
2. The distinction

between commitments

and condi-

tions hinges primarily

on the fact that without

dition,

otherwise

an application

would

a con-

be denied.

4.

Federal

vestment

Reserve
Act,

3,1980, p.3.

System,

I nformation

Community
Statement,

ReinJanuary

Federal Reserve Bank of Cleveland

pose credit

programs, or pilot programs

to test new credit offerings. The Board
does not wish to discourage these efforts.
However, the Board will closely scrutinize
any agreements to ascertain that they are
not inconsistent with the safety and
soundness of the bank involved, and do
not establish a preference for credit extensions inconsistent with
treatment of borrowers ....

evenhanded

The response by financial institutions to
the CRA generally has been favorable. An
overwhel ming number of institutions have
become much more actively involved in
meeting with community groups, as well
as with other segments of their community.
In response to the CRA protests, a pattern
has emerged in which financial institutions
are agreeing to undertake adjustments in
their CRA performance. As previously seen,
these adjustments, mostly in the form of
commitments, demonstrate a willingness to
work with the agencies and community residents to implement the act. A number of
institutions
have voluntarily
entered into
settlement
agreements with
community
organizations. Other responses by institutions
also are beginning to emerge. Some financial
institutions have begun to assume a new
posture in community
development
by
undertaking projects or programs in which
financial

risks can be shared. Such coordi-

nated pooling of resources has permitted institutions
to undertake investments that
formerly were considered to be less viable.
An example of such efforts can be seen in
Springfield, Massachusetts, where 11 local
commercial and savings banks and two insurance companies recently re-channeled
their development efforts to revitalize the
downtown Springfield area. The institutions
formed a consortium and established three
loan pools: a $16-million mortgage pool to
finance downtown
development projects
ineligible for conventional financing; a $10million pool for the acquisition and rehabilitation
of a department store; and an
$11-million pool to attract high-technology
businesses into the downtown area. These
loan pools have proven to be a catalyst in

attracting a new flow of private investment
into downtown Springfield.5

Has CRA Been Effective?
The CRA encourages financial institutions to hel p meet the credit needs of their
communities,
including those of low-tomoderate-income neighborhoods. Whether
accomplishment
of this objective merely
requires more effective identification
of
community credit needs, or whether it will
necessitate more systematic efforts, has yet
to be determined. However, a framework
is evolving to ascertain the proper role of
financial institutions in serving the credit
needs of their entire communities. In particular, institutions have demonstrated a willingness to increase efforts to ascertain community credit needs, as well as to make
the publ ic more aware of the availabi Iitv
of credit services. These measures appear to
be prerequisites to serving community credit
needs and, in the future, may affect a financial institution's lending or other CRArelated activities.
Some concern has arisen that the enforcement of the CRA, and other consumer
banking regulations as well, may in fact be
counterproductive
and further reduce the
supply of credit in central-city neighborhoods. In a recent study prepared for the
FHLBB, Guttentag and Wachter found that
the regulations may help shift housing-

regulations will

exacerbate the problem of

urban blight because the higher costs of the
regulations eventually will reduce the supply
of housing-related credit. Less credit will be
available, and it will be more expensive,
which may disproportionately
affect precisely those individuals the regulations were
intended to benefit.

Conclusion
Overall, the response that has emerged
to the CRA has been encouraging. A pattern
of compromise between financial institutions
and community groups has begun to emerge.
With the encouragement of the regulatory
agencies, there appears to be an increased
recognition that the CRA represents an opportunity to re-examine the degree to which
financial institutions
can prudently
help
serve community credit needs.
Many of the initial implementation problems have been corrected. The regulatory
agencies have become more skilled and
knowledgeable in addressing CRA issues,
permitting
CRA-related
problems to be

handled more efficiently.
A number of issues obviously remain to
be resolved. One area of major concern is
the interpretation of the various components
of a CRA assessment. For example, should
an institution's CRA performance be compared with the experiences of other institutions, or should some minimum standards
be used to evaluate the institution's performance?
How should an institution's
strong performance under some of the assessment factors be weighed against weak performance under others? Another area of
key concern is the protest process. Although
much has been accomplished to expedite
the handl ing of CRA protests, a significant
amount of time and resources is still required to process some protests. The agencies will have to continue to monitor and
evaluate the cost of additional analysis of
protest issues against the benefits resulti ng
from having more extensive information. It
will be the task of the regulators to examine
these and other issues, balancing the objectives of solvency and profitability with that
of responsibil ity toward the community.

Federal Reserve Bank of Cleveland
Research Department
P.O. Box 6387
Cleveland,OH 44101

5.

For

more

efforts,

detailed
as well

development

projects,

of America's

Cities:

Studies,

prepared
Economic

of

Comptroller

the

Development
6.

the

of the

in the Future

National

Development

Six Case

Council

for

the

Currency,

on

Office

Community

Division.

See Jack

M. Guttentag

"Redlining

and

on Finance

and Economics,

1980-1.

regarding

Role,"

For

Public

an abbreviated

authors

on this

lining,"

Wharton

1980),

pp. 13-21.

study,

and Susan M. Wachter,

Policy,"

Monograph

New York
article

see "How

Magazine,

vol.

University,

by
to
5,

Series

the

same

Erase Redno.

1 (Fall

The Community Reinvestment Act:
Early Experience and Problems
by Thomas M. Buynak

The Community
Reinvestment Act of
1977 (CRA), effective November 6, 1978,
requires financial institutions to " ... demonstrate that their deposit facilities serve the
convenience and needs of the communities in which they are chartered to do business." The CRA directs four regulatory agencies-the Board of Governors of the Federal
Reserve System, the Comptroller of the Currency, the Federal Home Loan Bank Board
(FHLBB), and the Federal Deposit Insurance
Corporation (FDIC)-to
encourage each in-

This Economic Commentary
examines
the experience and responses of the individuals, institutions,
and agencies that have
worked with the CRA during the past 30
months. These include the community
groups that have filed CRA protests challenging the expansion plans of financial
institutions;
the regulatory agencies that
have issued various guidel ines and pol icy
statements to implement the act; and the
financial institutions that have responded to
the CRA by expanding their activities relating
to community interaction and development.
This Economic Commentary also questions
whether the act has been effective and
details the issues and factors that may
infl uence the role of financial institutions in
community reinvestment.

required to assessan institution's record of
meeting the credit needs of its community,
including low-to-moderate income neighborhoods, consistent with the safe and sound
operation of the institution. These assess- Protests Lodged
ments are to be taken into account when
The CRA offers the public an opportuthe regulatory agencies evaluate various ap- nity to challenge the expansion plans of fiplications by institutions.1
nancial institutions that are considered to

of some other

see" Investing
The Banker's

by

Urban

information

as a survey

f.£Qf)omic Commentary

stitution
under their jurisdiction
to help
meet the credit needs of the local community. The four regulatory agencies also are

related credit in the desired direction, but
only in the short run.6 Enforcement of the

these

BU LK RATE
U.S. Postage Paid
Cleveland,OH
Permit No. 385

April 20, 1981

Address correction requested

o Correct as shown
o Remove from mailing

1. Community

list

Pleasesend mailing label to the Research Department,
Federal Reserve Bank of Cleveland, P.O. Box 6387, Cleveland, OH 44101.

Reinvestment,

Board of Governors
Sec. 228.2-Purposes.
tions,

see Thomas

Reinvestment

Act,"

Regulation

BB,

of the Federal Reserve System,
For a review
M. Buynak,
Economic

"The

Thomas

Commentary,

Fed·

eral Reserve Bank of Cleveland, December 26, 1978.

is an economic

The views stated

of the regula·
Community

Buynak

analyst,

Federal

Reserve Bank of Cleveland.
and
Bank

not

necessarily

of Cleveland

herein are those of the author
those of

the Federal

or of the Board

of the Federal Reserve System.

Reserve

of Governors

Federal Reserve Bank of Cleveland

pose credit

programs, or pilot programs

to test new credit offerings. The Board
does not wish to discourage these efforts.
However, the Board will closely scrutinize
any agreements to ascertain that they are
not inconsistent with the safety and
soundness of the bank involved, and do
not establish a preference for credit extensions inconsistent with
treatment of borrowers ....

evenhanded

The response by financial institutions to
the CRA generally has been favorable. An
overwhel ming number of institutions have
become much more actively involved in
meeting with community groups, as well
as with other segments of their community.
In response to the CRA protests, a pattern
has emerged in which financial institutions
are agreeing to undertake adjustments in
their CRA performance. As previously seen,
these adjustments, mostly in the form of
commitments, demonstrate a willingness to
work with the agencies and community residents to implement the act. A number of
institutions
have voluntarily
entered into
settlement
agreements with
community
organizations. Other responses by institutions
also are beginning to emerge. Some financial
institutions have begun to assume a new
posture in community
development
by
undertaking projects or programs in which
financial

risks can be shared. Such coordi-

nated pooling of resources has permitted institutions
to undertake investments that
formerly were considered to be less viable.
An example of such efforts can be seen in
Springfield, Massachusetts, where 11 local
commercial and savings banks and two insurance companies recently re-channeled
their development efforts to revitalize the
downtown Springfield area. The institutions
formed a consortium and established three
loan pools: a $16-million mortgage pool to
finance downtown
development projects
ineligible for conventional financing; a $10million pool for the acquisition and rehabilitation
of a department store; and an
$11-million pool to attract high-technology
businesses into the downtown area. These
loan pools have proven to be a catalyst in

attracting a new flow of private investment
into downtown Springfield.5

Has CRA Been Effective?
The CRA encourages financial institutions to hel p meet the credit needs of their
communities,
including those of low-tomoderate-income neighborhoods. Whether
accomplishment
of this objective merely
requires more effective identification
of
community credit needs, or whether it will
necessitate more systematic efforts, has yet
to be determined. However, a framework
is evolving to ascertain the proper role of
financial institutions in serving the credit
needs of their entire communities. In particular, institutions have demonstrated a willingness to increase efforts to ascertain community credit needs, as well as to make
the publ ic more aware of the availabi Iitv
of credit services. These measures appear to
be prerequisites to serving community credit
needs and, in the future, may affect a financial institution's lending or other CRArelated activities.
Some concern has arisen that the enforcement of the CRA, and other consumer
banking regulations as well, may in fact be
counterproductive
and further reduce the
supply of credit in central-city neighborhoods. In a recent study prepared for the
FHLBB, Guttentag and Wachter found that
the regulations may help shift housing-

regulations will

exacerbate the problem of

urban blight because the higher costs of the
regulations eventually will reduce the supply
of housing-related credit. Less credit will be
available, and it will be more expensive,
which may disproportionately
affect precisely those individuals the regulations were
intended to benefit.

Conclusion
Overall, the response that has emerged
to the CRA has been encouraging. A pattern
of compromise between financial institutions
and community groups has begun to emerge.
With the encouragement of the regulatory
agencies, there appears to be an increased
recognition that the CRA represents an opportunity to re-examine the degree to which
financial institutions
can prudently
help
serve community credit needs.
Many of the initial implementation problems have been corrected. The regulatory
agencies have become more skilled and
knowledgeable in addressing CRA issues,
permitting
CRA-related
problems to be

handled more efficiently.
A number of issues obviously remain to
be resolved. One area of major concern is
the interpretation of the various components
of a CRA assessment. For example, should
an institution's CRA performance be compared with the experiences of other institutions, or should some minimum standards
be used to evaluate the institution's performance?
How should an institution's
strong performance under some of the assessment factors be weighed against weak performance under others? Another area of
key concern is the protest process. Although
much has been accomplished to expedite
the handl ing of CRA protests, a significant
amount of time and resources is still required to process some protests. The agencies will have to continue to monitor and
evaluate the cost of additional analysis of
protest issues against the benefits resulti ng
from having more extensive information. It
will be the task of the regulators to examine
these and other issues, balancing the objectives of solvency and profitability with that
of responsibil ity toward the community.

Federal Reserve Bank of Cleveland
Research Department
P.O. Box 6387
Cleveland,OH 44101

5.

For

more

efforts,

detailed
as well

development

projects,

of America's

Cities:

Studies,

prepared
Economic

of

Comptroller

the

Development
6.

the

of the

in the Future

National

Development

Six Case

Council

for

the

Currency,

on

Office

Community

Division.

See Jack

M. Guttentag

"Redlining

and

on Finance

and Economics,

1980-1.

regarding

Role,"

For

Public

an abbreviated

authors

on this

lining,"

Wharton

1980),

pp. 13-21.

study,

and Susan M. Wachter,

Policy,"

Monograph

New York
article

see "How

Magazine,

vol.

University,

by
to
5,

Series

the

same

Erase Redno.

1 (Fall

The Community Reinvestment Act:
Early Experience and Problems
by Thomas M. Buynak

The Community
Reinvestment Act of
1977 (CRA), effective November 6, 1978,
requires financial institutions to " ... demonstrate that their deposit facilities serve the
convenience and needs of the communities in which they are chartered to do business." The CRA directs four regulatory agencies-the Board of Governors of the Federal
Reserve System, the Comptroller of the Currency, the Federal Home Loan Bank Board
(FHLBB), and the Federal Deposit Insurance
Corporation (FDIC)-to
encourage each in-

This Economic Commentary
examines
the experience and responses of the individuals, institutions,
and agencies that have
worked with the CRA during the past 30
months. These include the community
groups that have filed CRA protests challenging the expansion plans of financial
institutions;
the regulatory agencies that
have issued various guidel ines and pol icy
statements to implement the act; and the
financial institutions that have responded to
the CRA by expanding their activities relating
to community interaction and development.
This Economic Commentary also questions
whether the act has been effective and
details the issues and factors that may
infl uence the role of financial institutions in
community reinvestment.

required to assessan institution's record of
meeting the credit needs of its community,
including low-to-moderate income neighborhoods, consistent with the safe and sound
operation of the institution. These assess- Protests Lodged
ments are to be taken into account when
The CRA offers the public an opportuthe regulatory agencies evaluate various ap- nity to challenge the expansion plans of fiplications by institutions.1
nancial institutions that are considered to

of some other

see" Investing
The Banker's

by

Urban

information

as a survey

f.£Qf)omic Commentary

stitution
under their jurisdiction
to help
meet the credit needs of the local community. The four regulatory agencies also are

related credit in the desired direction, but
only in the short run.6 Enforcement of the

these

BU LK RATE
U.S. Postage Paid
Cleveland,OH
Permit No. 385

April 20, 1981

Address correction requested

o Correct as shown
o Remove from mailing

1. Community

list

Pleasesend mailing label to the Research Department,
Federal Reserve Bank of Cleveland, P.O. Box 6387, Cleveland, OH 44101.

Reinvestment,

Board of Governors
Sec. 228.2-Purposes.
tions,

see Thomas

Reinvestment

Act,"

Regulation

BB,

of the Federal Reserve System,
For a review
M. Buynak,
Economic

"The

Thomas

Commentary,

Fed·

eral Reserve Bank of Cleveland, December 26, 1978.

is an economic

The views stated

of the regula·
Community

Buynak

analyst,

Federal

Reserve Bank of Cleveland.
and
Bank

not

necessarily

of Cleveland

herein are those of the author
those of

the Federal

or of the Board

of the Federal Reserve System.

Reserve

of Governors