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1:00 P.M. (EST)

John P. LaWare
Board of Governors of the Federal Reserve System
Before the
Consumer Federation of America
Annual Conference on
"The Consumer in the Financial Services Revolution"
Washington, D.C.
December 13, 1990

I am delighted to be here today to talk with you on a topic
which continues to attract a lot of attention —

the Community

Reinvestment Act.

As you know, last year the CRA was amended for the first
time in its thirteen-year history.

The Act as amended requires

the banking agencies to make CRA Evaluations available to the
public, for all CRA examinations conducted after July 1, 1990.
It also changes the system the agencies use to rate the CRA
performance of financial institutions.

Even with these changes, the CRA's actual legal requirements
are relatively few in number and quite straightforward.


most importantly, the burden of these legal requirements still
falls on the bank supervisory agencies.

Let me explain.

The "Requirements1 of CRA

First, the CRA requires the banking agencies to encourage
financial institutions to help meet the credit needs of their
entire community, including those of low- and moderate-income
neighborhoods, but to do so in a way consistent with safe and
sound practices.

That hasn't changed.


Second, the CRA still requires the banking agencies to
assess the performance of financial institutions in meeting those
credit needs.

We do this through examinations, the results of

which are now made public.

Finally, the CRA still requires the agencies to consider the
CRA performance of financial institutions when reviewing their
applications for expansion of depository facilities through
branching, mergers, or acquisitions.

But, it is important to

remember that the Act does not require denial of an application
solely because the institution's CRA performance is deficient.
The results of these application decisions have always been

In discharging their responsibilities, of course, the
agencies have implemented regulations which do impose specific
requirements on banks, but these are essentially technical and

For example, each bank must develop and update a CRA
Statement, delineate its community, post CRA Notices in the
lobbies of depository facilities, and maintain a Public Comment
File which may be inspected by the public and the banking

With disclosure, the agencies now require banks to

make public their CRA Evaluations within 30 business days of
their receipt from the agencies.


In brief, those are the key requirements of the Act and the
agencies' regulations.

In reviewing them, it is important to

remember several things which the Act does not require, even as

First, CRA does not require any one bank to make each and
every type of loan that a bank can make or meet all community
credit needs by itself.

Some banks focus on retail lending to

consumers, some specialize in small business lending, while
others cater to the wholesale needs of commercial customers.
Some banks make mortgage loans, and others do not.

Second, CRA does not require banks to make any specific
number or proportion of loans to certain types of individuals,
groups, or businesses.

It does not require banks to make any

proportion of loans in any particular geographic area.


consistently has rejected schemes which would mandate credit

Third, CRA does not require banks to make loans at belowmarket interest rates, or under terms and conditions inconsistent
with safe and sound lending.

CRA does not require banks to give

money away even for the worthiest of causes, though some banks

Although some banks have been willing to set aside special,


reduced-rate financing for certain community development
purposes, they are not required to do this by the CRA or any
other law.

These kinds of decisions continue to be totally

within the discretion of the bank.

CRA As A Process

Well then, what is CRA really about?

It is clear that for

banks, the essence of CRA is not necessarily contained in what
its old and new provisions require or do not require.

To focus

only on those narrow requirements is to miss the point.

I believe that CRA is a process —

a process that involves

rights, responsibilities and, especially, relationships in our
economy and our banking system.

It is not just legal

The key, however, is the result of that process —

financial products and services which are responsive to community
credit needs.

In essence, CRA says that with the rights conferred on them
by their charters, financial institutions also have
responsibilities to meet the convenience and needs, including the
credit needs, of their communities.

They have the responsibility

to conduct real and serious assessments of the credit needs of
their entire community.

And they have the responsibility to

develop and affirmatively market products and services that help


meet those community credit needs, including the legitimate needs
of economically disadvantaged persons or areas.

CRA affirms that banks have ongoing responsibilities to
maintain relationships with their communities.

Although these

relationships take many forms, they are in the final analysis
business relationships which focus on the need to know and
effectively serve a market and its sub-markets.

To know their markets, banks must establish communication
with customers and potential customers.

Banks must actively seek

working relationships with local governments and community,
business, and consumer groups in order to identify community
credit needs.

Only by developing and nurturing those working relationships
within their communities can banks develop responsible programs
and loan products to respond to community needs.

Significant Progress

How well is the CRA process working and what are its

Well, banks have always served their markets and paid

attention to community credit needs.

Bankers have recognized

that the economic, physical and social health of communities


affects the health and profitability of banks in those

But I also believe that in recent years a combination of
higher expectations and greater effort has resulted in
significant additional progress in community reinvestment.

Over the last few years, CRA has encouraged development of
programs which probably have stimulated several billion dollars
of bank loans for home mortgages, housing construction and
rehabilitation, small and minority business development, and
revitalization of commercial areas in low- and moderate-income
communities throughout the country.

Commercial banks and thrifts

have developed innovative and successful public-private
partnerships which are helping rebuild urban neighborhoods and
rural communities.

An increasing number of banks have formed

community development corporations or invested in equity pools
aimed at supporting projects benefitting low- and moderate-income

Banks and thrifts also have formed a growing number of

lender consortia to pool resources and share risks while working
on community credit needs.

After what are sometimes adversarial

beginnings, banks and community groups have demonstrated over and
over again that they can work together to promote the goals of
the CRA process.


On the one hand, I believe that banks in recent years have
accomplished much more than they take or get credit for.


much of what has been accomplished can be attributed to an
increasing awareness of their responsibilities under CRA.

On the other hand, CRA ratings indicate that some banks are
still doing less than they should and could do.

For the CRA process to work, the Federal Reserve System and
other banking agencies also realize that we have to do our jobs
professionally and consistently.

And although there may be room

for improvement, I think on balance we are.

I am aware that the agencies have been criticized in the
past, and sometimes justifiably so.

But I believe that this

criticism often ignores the truly hard work we have been doing on
a day-to-day basis.

Let me review some of that with you.

The Regulators1 Roles and CRA Disclosure

For example, the Federal Reserve System has Community
Affairs Officers and programs in each Federal Reserve District

As part of our CRA "Encouragement" program, they provide

information and advice to banks on CRA and community development
matters, work with community organizations, and help banks and
community groups work together.

They also help train our



Through these activities, as well as conferences and

publications, our Community Affairs programs have reached
thousands of bankers, local government officials, and consumer
and community groups and their members.

I believe we have made a


The Federal Reserve System also allocates substantial
training time each year to our compliance examiners —

just on

That is in addition to the training examiners receive on

the myriad of other consumer laws for which they are responsible.
This training is important because the Federal Reserve System has
conducted separate and focused consumer compliance examinations,
which include CRA assessments, for more than ten years.

We are also taking steps to help our safety and soundness
examiners understand the essentials of the community development
market so they can accurately assess the quality of a bank's CRA

As you know, there is growing concern over the health of

real estate finance markets nationally and regulators are looking
very closely at real estate loans.

But we also want examiners to

recognize that there is tremendous demand for low- and moderateincome housing and other neighborhood revitalization projects and
public-private partnerships are providing affordable financing on
a safe and sound basis.

In other words, we believe that there

need be no conflict between CRA and safety and soundness.


With respect to CRA disclosure, the Federal Reserve, and all
of the other agencies, have devoted significant training
resources to ensure that examiners understand the new CRA rating
system and the disclosure process.

We are spending a lot of time

reviewing the public CRA Evaluations to ensure that they are
comprehensive, clear, and responsive to provisions of the law.

Since July 1, the Federal Reserve System has completed and
released to banks for their disclosure over 196 CRA Evaluations.
Overall, the process seems to be working well, but, like all new
programs, it is open to improvement.

Our own Consumer Advisory

Council has conducted a preliminary review of some of the early
CRA Evaluations and has made suggestions which are now being

We believe many of these suggestions will strengthen

the process.

The banking agencies do want to be responsive to public
concerns about the CRA disclosure process.

In fact, one

improvement to the process is already being implemented.

It will

provide the public with easier access to CRA Evaluation reports.

The procedures originally adopted were designed to make each
bank's CRA Evaluation report available to those most directly
affected by the bank's CRA performance —
in which the bank operates.

that is, the community

Under those procedures, CRA

Evaluations are sent to the banks which, after thirty business


days, must release them to the public upon request.

The public

is told about the existence of the Evaluation and where to obtain
it through notices posted in bank lobbies.

The problem with those procedures was that consumers had to
either visit bank lobbies or call the banks and supervisory
agencies frequently to determine whether a particular bank's CRA
Evaluation was in fact available and where it could be obtained.
In addition, we found that there is broad national, as well as
local, interest in the reports, but those not living in a bank's
community could not readily find out whether a bank's report was

After considering this problem, the Federal Financial
Institutions Examination Council voted at its December 7 meeting
to recommend that each banking agency make public a regularly
updated list of financial institutions examined by that agency
for which CRA Evaluations are available.

For all of you

interested in obtaining CRA Evaluations for particular banks, the
lists will take the guesswork out of the process.

Getting the Most Out of CRA

Prior to disclosure of CRA Evaluations, public interest in
CRA was centered almost exclusively on two related issues.
First, how well have financial institutions performed?



how vigorously have the banking agencies fulfilled their

Those are valid questions, since they are the

focus of CRA's primary legal obligations.

But I think that dealing only with those two issues obscures
the most important question of all.
the most out of CRA?

And that is:

How can we get

And, the answer to that is not simple.

One reason is that there is at least one more very important
element critical to the success of the CRA process and that's the
role of the public (consumers, community groups, and others
interested in community revitalization) and the part banks can

These groups, including state and local governments, can

be extremely important players in helping the CRA process work.

Certainly the banks must continue to take their CRA
responsibilities seriously.

Certainly we at the banking agencies

must continue to pursue our responsibilities vigorously.
can assure you that we at the Federal Reserve will.

But is that all there is to it?

Not really.

And I


Potential Roles for Community and Consumer Groups

Without strong and effective consumer and community group
participation, I believe that CRA will never live up to its full

We all recognize that community groups always have played a
role in the CRA process.
banking applications —

Through CRA-related public comments on
commonly called CRA protests —


and community groups have made their concerns about bank
performance known.

Local groups also have played important roles

in helping structure effective programs that involve banks, and
other public and private funds.

They have shown time and again

that they can bring their collective knowledge of local markets
and programs to the table and help banks fashion appropriate
responses to community needs.

But there are several other roles community groups can play.
The first is effective use of the new CRA Evaluation disclosures.
All of the regulations, all of the report preparation, and all of
the procedures for public release, are not worth putting in place
unless the disclosures are used constructively.

It is likely that all the judgments we make in CRA
Evaluations will never totally satisfy either the banks or the


community groups.

Assessing CRA performance is, after all, in

large measure, a subjective process and reasonable people can

We expect some criticism of the public Evaluations and

we will continue to do everything we can to improve the
examination process, and ensure that the public CRA Evaluations
are done well.

I think the real point of the CRA Evaluation exercise is to
provide a mechanism to encourage public dialogue between
financial institutions and their communities on how best to meet
important community credit needs.

I would hate to see the

process bogged down in discussions with regulators as to whether
a bank's public Evaluation and CRA rating was precisely correct.
Although we value constructive criticism of our efforts, at some
point the focus must turn to the business of the bank and the
needs of its community.

Otherwise, the focus is misplaced.

Instead, I would hope that both community groups and banks
would be more inclined to use the CRA Evaluations as a jumpingoff point for constructive discussions about what needs to be
done in the community and how the banks might play a role.


goes for banks with "Outstanding" and "Satisfactory" CRA ratings
as well as those rated "Needs to Improve" or worse.

In fact, I have been urging bankers that —
their CRA ratings come out —

no matter how

they themselves might find it


useful to publish their CRA Evaluations in local newspapers,
along with their responses, to help stimulate dialogue.


course, many banks with "Outstanding" performance ratings would
want to publish their CRA Evaluations.

But I think they should

also consider including information on how they intend to
maintain that performance in the face of changing community

In my view, even banks rated "Needs to Improve" should not
hesitate to publish their reports.

Instead of being fearful

about their reports, these banks should consider openly revealing
them, along with any positive ideas they have about how the bank
might proceed to address their CRA responsibilities going

They could also use that opportunity to specifically

invite the community to provide its ideas on how the bank might
improve its program and best target its activities to help meet
the most pressing needs.

In other words, banks can turn the CRA Evaluation into a
positive opportunity to open, or continue, dialogue with the

In using the CRA disclosure reports to begin or continue
dialogue with banks, I also hope consumer and community groups
will recognize several important factors which may shape

One is that a CRA Evaluation of a bank is only an


assessment of a bank's CRA performance.

It is not, and should

not be confused in any way with, the results of examinations we
conduct focused on the safety and soundness of the bank.


Evaluation is not an evaluation of the financial condition of an
institution and should never be represented as such.

This is a

major concern of the banks and the banking agencies and I cannot
overemphasize the importance of responsible action on this point.
Consequently, we sincerely hope that community groups will play a
positive role in helping the public understand the difference.

Another factor is that the CRA Evaluations and ratings are
only snapshots in time.

Each Evaluation report, in fact,

includes specific introductory language explaining that the CRA
rating is based on an examination conducted as of a certain date.
Further, each report states that the Evaluation "does not reflect
any CRA-related activities that may have been initiated or
discontinued after completion of the examination."

Put simply, CRA performance is not static, while the
Evaluation report produced by the bank's supervisory agency is
only a measure of CRA performance at a moment in time.

A bank

may have taken quick action based on its CRA Evaluation,
especially if it shows that the bank needs to improve its

On the other hand, a bank receiving an

"Outstanding" or "Satisfactory" CRA rating may have changed its
CRA program after release of the Evaluation and its rating may,


therefore, no longer accurately reflect its record of

The point here is that there is always room for dialogue and
discussion with a bank, no matter what its latest CRA Rating
might be.

Community needs change just as a bank's CRA

performance changes.

Consequently, we expect banks to have an

ongoing program for outreach and communication with their

We would also hope that consumer and community groups

would recognize the need to initiate constructive dialogue and
discussion on community needs with banks on an ongoing basis.
CRA Evaluations should not get in the way of that process.

A second role community groups can play, one that often
helps stimulate dialogue, is continued use of the bank's Public
Comment file.

Consumer and community groups should not be

reluctant to put their concerns and constructive suggestions
about bank CRA performance in writing and send them to the bank.
It is also useful to send copies of such letters to a bank's
supervisory agency.

Banks are required to put these letters and

supporting information in a public comment file which is open to
review by consumers and is used by regulators when they conduct
CRA examinations.

Surprisingly, our examiners continue to report that they see
few letters from consumer and community representatives in CRA


Public Comment files when conducting CRA examinations.

We hope

that consumers who do have concerns about a bank's CRA
performance will write to the bank.

Often such letters

facilitate discussions with the banks and can result in
development of responsive actions.

They also help alert

regulators to concerns in the community about a bank's CRA

A third role community groups can play is in helping promote
an accurate understanding of what CRA is and is not.

As I noted

earlier, CRA is not a charitable or giveaway program and it is
not in anyone's best interest to foster this view.


between banks and uninformed members of the community based on
this approach will probably not be very productive.

CRA-related lending is not a substitute for charitable
contributions or for government programs.

These funding sources

provide the subsidies often necessary to structure effective
financing that meets the needs of lower income communities.
Subsidy, however, is not the function of private financial
institutions, though their loans and investments may be combined
with subsidy to produce affordable financing.

To the extent that CRA-related loans are really loans and
not giveaways, CRA programs will have much wider support from the
banking industry.


Fourth, and related, community groups can help play a
constructive role by recognizing that economically unsound
community lending programs are counterproductive in the long run.
The long-term success of a program is much more important than
short-term approaches designed to throw money at a problem.
Long-term success is based on development of a sound plan, and
appropriate loan products that meet both the needs of the
community and the needs of the participating banks.

There are many examples of housing and neighborhood
revitalization programs which have demonstrated delinquency and
default rates equal to or better than a bank's conventional loan
portfolios, while creating a real positive impact in the

But that kind of success does not happen by accident.

It requires good planning, respect for bank experience and use of
sound underwriting guidelines.

No one has a bigger stake in building long-term support for
CRA than consumer and community groups.

To ensure that support,

I believe that these groups must be in the forefront of those
emphasizing the economic soundness of community development

A bank weakened by unsound community lending will be a

weak partner for community groups in getting desirable results.

Fifth, in addition to helping plan sound programs, community
groups have demonstrated that they are effective partners in


implementing those programs as well.
for banks to neighborhoods.

They can serve as a bridge

They can ensure that, once a program

has begun, there is continuing community input so that
adjustments can be made if necessary.

Community groups can help

market loan products that have been tailored to meet particular
neighborhood needs and they can suggest effective bank
advertising and outreach techniques.

And some community groups

can help develop clean loan packages for presentation to banks.

Finally, I would suggest that consumer and community groups,
at both the national and local levels, have an important role to
play in helping share CRA success stories.

And by that I do not

necessarily mean war stories about CRA protests.

I mean share with banks information on bank and community
partnership programs that work:

information based on experience

with proven working partnerships among banks and their
communities, and information about how government programs and
various forms of subsidy can be used to help create good loan

Many of our Reserve Banks are producing such information.
Bank trade associations also have begun to develop case examples
to share with their members.

And many community groups have

developed information-sharing networks that highlight effective
approaches to community reinvestment.

But I think you would


agree that more needs to be done, and we need to work together to
get the best result.


This is a very critical period for CRA.

Its long-term

viability as an effective means to foster community
revitalization is being tested.

The effects of banking agency pressure, the disclosure of
CRA Evaluations, and, yes, the honest enthusiasm of many banks
have combined to result in a noticeable upturn in bank CRA

We have to make sure, however, that there is adequate

capacity within the community to absorb on a sound basis the
dollars and goodwill now being offered.

I think community groups

can play their most valuable role in helping banks identify good
opportunities and develop successful lending programs.

I began this talk by saying that CRA was, in part, really a
process that involves rights and responsibilities under law and
relationships in our economy and banking system.

It is a dynamic

process that requires a cooperative effort involving financial
institutions, banking agencies, local governments, and, equally
important. consumer and community groups.


Financial institutions need to live up to their
responsibilities and we as banking regulators will do our best to
make sure that they do.
procedures in place.

We have put the legal apparatus and

Now it is time to think much more about how

we get the most out of CRA —

how we can best develop the long­

term working relationships among banks and their communities that
will guarantee successful reinvestment.
partners, not adversaries.

They need to be

In a partnership, each party makes an

investment and all share in the results, both good and bad.