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Remarks by
John P. LaWare
Member, Board of Governors of the
Federal Reserve System
at the Community Reinvestment Conference
Sponsored by the
Federal Reserve Bank of Dallas
Dallas, Texas
August 13, 1992

Today I am going to talk about the Community Reinvestment
Act and some of the intended and unintended results of its
progressive augmentation and implementation.

Certainly among bankers and community group and civil rights
leaders the CRA is one of the hottest topics around and the level
of controversy has sustained and heightened the interest and
participation of Members of Congress.

The public disclosure of

CRA ratings, mandated by Congress, has sharpened the focus on the
CRA performance of banks and provided the media a potentially
controversial topic for exploitation.

And banks, already bent

under a heavy burden of overregulation, have focused much of
their lobbying efforts against what they see as a crushing and
unnecessary burden of record keeping in order to prove CRA

All of this creates a highly charged environment which is
probably not going to go away in the near term for several


reasons which I will get to a bit later.

For now, let's step

back a bit from the controversy and take an objective look at CRA

what it is and what it is not.

At first glance the CRA is a rather simple straightforward
statute only a few pages long.

The law formally establishes the

obligation of banks to help meet the credit needs of the entire

That obligation is inherent in the charters granted

to banks which require that they meet the convenience and needs
of the communities in which they operate.

CRA makes that

obligation an affirmative one by requiring banks to deliberately
and specifically assess and help satisfy the legitimate credit
needs in low and moderate income neighborhoods just as they
presumably do in more affluent ones.

But it is just as important to understand what CRA does not

It does not require banks to make bad loans.

It does not require banks to make loans at rates below

It does not require banks to make charitable


It does not require banks to make every type of loan or
to try to meet all of a community's credit needs by

It does not require a specific number of loans or
specific percentages of loans to various kinds of

It is not an attempt at credit allocation.

Those "it is nots" need to be remembered by both bankers and
regulators if we are to keep CRA in perspective.

I am sure most of you are aware of Peter Uberroth's efforts
to organize the rebuilding of the devastated neighborhoods in Los

He has appealed for broad corporate support and

investment on the grounds that it is "good business" to
rehabilitate the physical structures and assist the inhabitants
of the neighborhoods and the operators of local businesses.

I am personally firmly convinced, based on my own direct
experience in New York and Boston, that an intelligently managed
CRA compliance effort is good business and can be satisfactorily

Now, let's examine that statement in the context of

what the statute and related regulations require banks to do.


Make a conscious assessment of community credit needs
by contacting individuals and organizations in the

targeted community, including low and moderate income


Develop products designed to help meet those particular


Market those products throughout the community,
including to low and moderate income areas.


Establish mechanisms for senior management and the
board of directors to monitor and oversee the CRA
program as they do other parts of the bank's operation.

That doesn't sound like heavy lifting.
like normal business practice.

In fact, it sounds

The difference is that it is

specifically directed at that part of the community often
overlooked —

the low and moderate income sector.

Many banks,

including both of the ones I have been associated with, have
followed those good business practices and in the process have
generated good profitable business with no greater incidence of
loss than in other business lines.

Conferences, like this one sponsored by the Federal Reserve
Bank of Dallas and other Reserve Banks across the country, have
helped bankers to get acquainted with a variety of approaches to
sound lending programs in low and moderate income neighborhoods.


A particularly effective way to address CRA issues is
through community development lending and investment.


private partnerships are useful tools which enable banks to share
loan and investment participation with local, state, or federal

Those partnerships often make possible projects which

neither the public nor the private sector could accomplish alone.
Partnerships sometimes offer special access to credit
enhancements which can make the project work.

Loan guarantees, interest rate subsidies, blended rate
loans, and equity investment options improve loan
quality and the partnership concept enables a bank to
share costs as well as risks.


You have heard a lot about community development here.
It works in rural development as well as low and
moderate income housing and small business financing.

Another technique being used more frequently now is the

Banks, corporations, and government join

together to create pools of loan and investment funds
for small businesses or low and moderate income

These are attractive vehicles of

participation for lenders who lack experience
themselves in these specialized fields.


Florida, California, Washington, and New York all have
successful examples of community lending consortia.



In addition to partnerships and consortia, CDCs are
useful vehicles for some banks and bank holding

Recently this technique has been more

widely used to focus on small business development and
economic revitalization to create local jobs.

The variety of mechanisms to create programs with greater
clout and more safety for the lender put affirmative CRA programs
within reach of almost every bank.

But, like all bank lending

programs, any CRA effort will fall short or will be disappointing
as to profitability if it does not have behind it a firm
commitment of financial and management resources and the
participation and oversight of senior management and the

The quality of the corporate citizenship of banks has become
a topic of interest to the Congress, the media, and the general

That interest has been fueled by public disclosure of

CRA ratings and HMDA data, just at a time when confidence in
banks and bankers is badly shaken by scandals, bank and S&L
failures, and the cost of the Resolution Trust Corporation, and
refinancing the Bank Insurance Fund.

While the Congress' rationale for using the banking system
for social engineering is based on the public backing for deposit
insurance and other aspects of the federal safety net, there is
also the practical reality that most governments lack the fiscal
resources to do it by themselves.

In addition, there is a

sobering realization in recent years that public housing projects
on balance have been a dismal failure.

To put local teeth in the federal requirements many state
and local governments have linked their own deposit and finance
activities to banks who are active participants in community
lending for housing and job-producing revitalization.

And the incentive carrots are not just being used by

The American Bar Association has decreed that its

funds will only be deposited in banks with a satisfactory CRA

The U.S. Postal Service now advises postmasters of the

CRA rating of the local banks.

That information is'to be used as

one of the criteria in choosing which bank the local post office
will choose to deal with.

The HMDA data which were released last fall were broadly
interpreted as confirming long-held beliefs that banks
discriminated against minorities in mortgage lending.

This still

unconfirmed conclusion led many to question whether, in fact,
banks are serving their communities properly since minorities are
certainly a vital part of those communities.

There was an immediate outcry from interested parties for
testing and investigations to determine if illegal discriminatory
practices were denying minorities of access to mortgage credit.
However, the evidence of the HMDA data is inconclusive since it


establishes only differences in denial rates between whites and
minorities and not the underlying reasons.

Several efforts are under way to obtain the additional
analytic information to determine whether discrimination is
responsible for the disparity in the statistics.

One study under

the guidance of the Federal Reserve Bank of Boston is examining
detailed information from applications and bank records to
determine reasons for denial.

Results will not be available for

some months, but when available they may suggest additional data
to be collected in the HMDA exercise or give clear direction to
examiners to be on the alert for discrimination in some

Banks themselves have initiated some investigative and
remedial actions.

Some have shopped or tested their own mortgage

lending operations and others, disturbed by the data, have gone
into their own records to determine if decisions on mortgage
applications were unfair and discriminatory.

The new cycle of HMDA data will be released to the banks
this month and will undoubtedly be closely scrutinized by the
public and the Congress as well.

It will be important for banks

to analyze their data and look into the underlying internal
information in order to understand fully what is going on in
their own institution.

The process may be painful for some

institutions, but in the final analysis it will help pinpoint
where and whether discrimination is practiced and enable the

banks where it exists to clean up their act and fully comply with
the laws of the land.

To say that all of this is of interest to Congress is
probably a gross understatement.

Over the past three years the

Federal Reserve has testified at more hearings on CRA issues than
in the entire ten-year history of the Act prior to that.


1989 FIRREA Act required public disclosure of CRA evaluations and
ratings and FDICIA requires reporting by banks of small
agricultural and small business loans.

All of these initiatives

reflect heightened concern over the banks' role in supporting
their community and now Senate Banking is scheduling a round of
hearings to review recent changes to the Act and how they have
been implemented.

Included in FDICIA is a section called the Bank Enterprise
Act which would give banks lower FDIC insurance premiums if they
increased their lending to low and moderate income borrowers.
And lower premiums would be assessed on those banks which started
or increased lifeline banking services for low income depositors.
The effect of these changes on funding for the Bank Insurance
Fund is potentially significant.

Another initiative of Senator Riegle, chairman of Senate
Banking, called the Community Development Demonstration Act,
would provide federal funding to help bank holding companies
capitalize chartered "development banks," community development
corporations, or other institutions focused exclusively on


lending to low and moderate income borrowers.

That bill is in

the very early stages of consideration.

Congressional interest, then, is heightened rather than
diminished and my guess is that if banks can't demonstrate that
they are aggressively tackling the credit-related problems of
minorities and low and moderate income citizens, Congress will
legislate new specific requirements for banks to meet.

In that context, the role of bank supervisors is clear.


must assure compliance with existing law and regulation and we
must assist the banks in understanding their obligations and how
best to satisfy regulatory requirements.

Obviously, an audit

trail is essential and this has created a heavy burden on banks
large and small.

On June 17th the regulatory agencies issued

revised examination procedures designed to relieve some of the
burden —

particularly by lessening record keeping for smaller
It is our job to make examiners understand and comply on

their part as well.

There have been other proposals to relieve

smaller banks from CRA formalities and to relieve top-rated banks
from application protests.

But neither of these initiatives, in

my opinion, will fly very far in Congress.

The odds are 10-1 that if we were to conduct a survey of
bankers asking what federal statute and regulations they found
most distasteful and burdensome, the answer would overwhelmingly
be that CRA is unwanted, unneeded, and staggeringly burdensome in
terms of record keeping.

It would also be pointed out that

applications are routinely protested by community groups, even
though the bank may have a satisfactory rating, in the hope of
gaining additional commitments in return for a withdrawal of the

This prolongs the application process, increases costs,

and in the end accomplishes very little.

I am sympathetic to much of the bankers' reaction.

But I

would argue that it is the mandatory nature of the requirement
which makes bankers contentious.

I would also argue strongly

that, conducted properly, CRA lending can be damn good business
and, once the systems are established, the record keeping
requirements are essentially routine.

In any case, CRA is here to stay.

Compliance is a major

public benefit and can be a profitable business for banks.


Federal Reserve System stands ready to help banks understand what
is required and how to meet those requirements.

We appreciate

your interest and your attendance at this conference and I
appreciate your courtesy in listening to my views on this
important subject.

Thank you.