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For release on delivery
10:00 a.m., EST
February 18, 1993

Statement by
Lawrence B. Lindsey
Board of Governors of the Federal Reserve System
before the
Subcommittee on Consumer Credit and Insurance
of the
Committee on Banking, Finance, and Urban Affairs
of the
U.S. House of Representatives

February 18, 1993

FEB 1? 1993

Mr. Chairman, I appreciate the opportunity to provide
the Federal Reserve's perspectives on the current status of the
Community Reinvestment Act (CRA).

I will include a few comments

on the Home Mortgage Disclosure Act and Fair lending laws, but
they are extensive subjects in their own right.
It is no secret that the CRA continues to be the source
of concern and frustration.

Many in the banking community see

CRA as unnecessary, vague, burdensome and unfair.

Community and

consumer groups often view enforcement as weak and have suggested
a number of changes, including new disclosure provisions, to help
ensure that banks and supervisory agencies approach their CRA
responsibilities effectively.
We as regulators are often caught in the middle.
Despite a dramatic increase in resources and efforts devoted to
CRA, we continue to receive brickbats from all sides.


think we grade too harshly and that we focus on process and
paperwork instead of assessing "real" community lending.
Community groups say our grades are too high, and our effort is
Over the years, critics have made many other charges
about bank and supervisory agency performance, some of which have
little foundation in CRA's intent, actual provisions, or

For example, some believe that an institution's

record of making mortgage loans in minority areas should be the
only CRA criteria, while others think if a bank has a community
development corporation (CDC), it should automatically get a
"pass" on CRA.

We take both home lending and CDCs into account,



but CRA is more complex than this.
Hearing this cacophony of divergent critiques, ideas
and proposals over the past few years, it wouldn't be surprising
to me if you have concerns that CRA may not be working as

In considering this, I would like to cover several

related areas in my testimony today.

First, as a basis for my

comments, I want to provide an overview of the Act and its
implementing regulation.

Second, I would like to bring the

subcommittee up to date on recent activities undertaken by the
supervisory agencies to strengthen our CRA assessment programs.
Third, I would like to touch on some of the recurring issues
affecting CRA that are of concern to bankers, community
representatives, and the supervisory agencies.

Finally, I want

to share with you some thoughts on CRA's impact—which we believe
has been quite considerable.
I want to make it clear, however, that agencies other
than the Federal Reserve are also deeply involved with CRA.


fact, from an examination perspective we have by far the smallest
number of supervised institutions—less than 10 percent of the

I caution the subcommittee, therefore, that a serious

exploration of CRA would require testimony from others.

This, of

course, would also be true with regard to HMDA and Fair lending.
What CRA Savs and Requires

Let me begin by reviewing the Act and its implementing

Given what seems like a blizzard of recent

proposals to change the CRA, increase its scope, provide safe
harbors, or reduce its burden, it is especially important that
the discussion be grounded in a clear understanding about the
objectives of the Act, and its current requirements.
On its face, the CRA is a short, rather simple law, as
banking laws go.

It's only a few pages.

It reminds financial

institutions that they have a continuing obligation to help meet
the credit needs of their entire community, including those of
low- and moderate-income neighborhoods.

These obligations stem

from bank charters which say that banks should meet the
convenience and needs of the communities they serve.
But CRA also emphasizes that the obligation to help
meet community credit needs, including those of low- and
moderate-income areas, is an affirmative one.

CRA's fundamental

message is simply that each financial institution should, as part
of its day-to-day business functions, be as attentive to the
credit needs of low- and moderate-income areas of its community
as it is to other areas.
When considering CRA's overall message, I think it's
important to recognize that the actual legislative language
contains few directives and virtually no requirements that fall
directly on financial institutions.
The CRA does not require an institution to make any
specific types of loans, to make any quantity of loans to
particular types of persons or businesses, or to make any

specific number of loans in any targeted geographic area.
Congress has wisely avoided mandating credit allocation.


does not require institutions to make housing loans, nor does it
require them to make loans with below-market interest rates, or
loans with other terms and conditions that would be inconsistent
with safe and sound lending.

None of these things are required,

or in my view, even implied by the CRA.
CRA's actual requirements are really directives to the
financial institution supervisory agencies.

First, CRA requires

these agencies to encourage each financial institution they
supervise to help meet the credit needs of its entire community,
including the credit needs of low- and moderate-income
neighborhoods, in a way that is consistent with safe and sound
banking practices.

Second, the CRA requires the supervisory

agencies to assess the performance of financial institutions in
meeting community credit needs.

We do that primarily through CRA

examinations which use 12 assessment factors outlined in the CRA

Third, as a result of 1989 and 1991 amendments to

the CRA, the supervisory agencies are required to prepare for
each institution examined, a public written CRA Evaluation that
includes the CRA rating and provides supporting facts and data.
Finally, the CRA requires the agencies to consider the CRA
performance of each financial institution when reviewing its
applications for expansion of depository facilities through
branching, mergers, or acquisitions.



In performing their responsibilities, the agencies have
issued regulations which do impose a few specific requirements on
banks and thrifts, but these are essentially technical and
procedural in nature.

For example, each bank must develop and

update a CRA Statement which delineates its community with a map
and describes services offered within that community.


tions also must 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 agencies.
Nature of the Law
I believe that virtually everyone affected by CRA
senses that this is clearly an unusual law.

It encourages, but

does not require action by financial institutions.

It reminds

banks and thrifts about their charter obligations, but does not
mandate any particular activities.

It says banks should be

encouraged to "help" to meet community credit needs, but does not
specify how such encouragement is to be provided, or how much
help in meeting credit needs is expected.
Further, the CRA directs the supervisory agencies to
assess bank performance in helping meet community credit needs,
but it does not define good CRA performance.

The Act also

implies potential punishment for institutions with poor
performance—in the form of denials of applications to e x p a n d —
but provides no particular incentives to encourage institutions
to seek outstanding performance,

with the exception of

requirements for such things as CRA statements or CRA Notices,
lack of action by institutions does not constitute a "violation"
of the law.
And most importantly, the fundamental approach of the
Act, and perhaps the primary source of most concerns and issues,
is that CRA's focus is on assessments of performance.
CRA at its very heart, is "valuative."

That is,

It requires judgements

based on a set of facts and circumstances that vary greatly among
communities and institutions.
Supervisory Agency Roles and Actions
Under CRA, the supervisory agencies are charged with
encouraging financial institutions to help meet community credit
needs, and with evaluating their performance.

At the Federal

Reserve, we provide "encouragement" in two primary ways: by
conducting CRA examinations; and by carrying out a comprehensive
set of educational, technical assistance and informational
programs, primarily through our Community Affairs program.
Over the years, the Federal Reserve System has
strengthened its CRA-related activities on a number of fronts.
My impression is that in all the talk about the problems with
CRA, not enough information has been conveyed about the many
positive things that are happening.
examination side.

Let me first talk about the




examination I m p r o v w n t s

First, examiner training has been expanded and
significantly enhanced.

Our consumer compliance schools for

examiners devote considerable time to CRA, and related
regulations, such as those covering Fair Lending, and Home
Mortgage Disclosure.

A more advanced compliance school also

includes segments on community development.

In addition, we

regularly conduct a unique, one-week, intensive course for
examiners, called "CRA Advanced Examination Techniques."


the past three years, virtually all of our consumer compliance
examiners have completed this course.

We are also taking steps

to help our safety and soundness examiners understand the
essentials of the community development market so they can fairly
assess the quality of a bank's reinvestment loans.
Second, in addition to enhanced training for our
examiners, we have been concerned about providing them with
better tools to help them get the job done.

To this end, on

behalf of the Federal Financial Institutions Examination Council
("FFIEC") the Federal Reserve has developed a computerized system
for analyzing the expanded data collected under the Home Mortgage
Disclosure Act ("HMDA").

The system is extremely versatile,

allowing the data to be segmented by demographic characteristics
such as race, gender and income levels, or by geographic

Examiners can now sort through vast quantities of

data to focus attention on specific lending markets, and draw

comparisons between an individual HMDA reporter's performance and
that of all lenders in the area.

With these capabilities,

examiners can more readily determine whether a bank is
effectively serving all segments of its market, including lowand moderate-income and minority neighborhoods.
Third, in June of 1992, the FFIEC issued revised,
uniform CRA examination procedures that clarify CRA examination

For example, they emphasize the importance of using

numerical data in the public CRA Evaluation, to the extent they
are used in the assessment process and support the conclusions

Our examiners now routinely factor into their CRA

assessments "hard data" derived from HMDA tables, the supervisory
"call reports," bank lending records and other sources.
Fourth, we have been mindful of the widely shared
perception, often vocalized by bankers, that the CRA entails an
undue amount of paperwork.

In developing the new examination

procedures, we endeavored to help reduce the amount of paperwork
and documentation by emphasizing that institutions should retain
for examiners' review only such information as is useful to the
institution's own management needs.

We have emphasized to our

examiners that CRA documentation will generally be less formal
and less extensive in small and rural banks than in larger, urban

We want to reduce as much as possible the paperwork

burden on bankers so that they can focus on the lending side.
Fifth, there's been a significant increase since 1989

in personnel resources allocated to' CRA examinations.


examiners and Reserve Bank staff also spend considerable time in
follow-up to the examinations through correspondence, advisory
visits, and educational activities directed to the industry as a

The frequency of CRA examinations by the Federal Reserve

System has been maintained, despite the fact that CRA
examinations have become more demanding and time-consuming job
for examiners.

For over a decade, we have examined state member

banks with a satisfactory or better record of past CRA
performance every 18 to 24 months.

"Problem banks," or those

with demonstrated weaknesses, are examined every 6 to 12 months.
Sixth, the agencies have successfully implemented the
public disclosure of CRA Evaluations and ratings.


public evaluations of CRA performance have been a reality for
well over two years.

We and the other supervisory agencies have

devoted substantial time and effort to developing the system and
training examiners for what was, in fact, an unprecedented change
in the way they do their jobs.
Since the disclosure provisions became effective, the
Federal Reserve has examined for CRA purposes every bank it
supervises at least once, and many twice, and has presented its
findings to the public.

We believe that this process has

proceeded relatively smoothly and has had a positive impact on
financial institutions and their responses to their CRA




Expanded Information. Education and Technical Assistance

In addition, to examinations, a second key way the
supervisory agencies fulfill our CRA "encouragement"
responsibilities, is through educational, information and
technical assistance activities.

These activities are conducted

both by the agencies jointly and through programs administered in
each agency.

At the Federal Reserve, we provide these

educational and information services primarily through our
Community Affairs program at each of the twelve Federal Reserve
To help educate both the public and the banking
community about CRA and community development lending, the
Reserve Banks sponsor Community Affairs conferences, seminars and

Over the last four years, we sponsored or cosponsored

over 400 conferences, seminars and workshops for bankers and
others focusing on such topics as CRA and HMDA compliance,
options for bank participation in low- and moderate-income
housing development, downtown and neighborhood revitalization,
small and minority business lending, the formation of community
development corporations, and housing finance in rural areas.
During this past year, several Reserve Banks put on workshops on
CRA targeted for members of bank boards of directors and bank
senior executives.

Community Affairs staff developed community

development lending curricula and have conducted numerous
community development workshops for bankers.




In addition, during this same four-year period,
Community Affairs staff of both the Board and the Reserve Banks
made over 1,000 formal presentations at conferences, seminars and
meetings of banking, community and other organizations on
community development, CRA and other related topics.

They have

responded to thousands of inquiries and requests for information
about CRA.
Community Affairs staff also provide CRA-related
technical assistance and advice to individual banks, and some are
conducting special visitations to bank holding companies to
discuss directly with senior management, CRA issues and

Community Affairs staff have helped a number of

banks and banking groups structure lending consortia or community
development corporations.

They have helped mediate disputes

between banks and community organizations.

They produce a

variety of publications, from Community Profiles that outline
CRA-related opportunities for banks—such as one recently
prepared on South Central Los Angeles—to compendiums of programs
that banks can use to complement their CRA programs.

Nine of the

Reserve Banks publish their own community affairs newsletters,
which reach a combined total of over 40,000 bankers, community
representatives and others.
Increasingly, the Community Affairs program is
providing direct support to our examination staff, helping them
identify community contacts to meet with during examinations, or


12 -

helping examiners identify community programs in which banks
could be involved.
Overall, we believe that the Federal Reserve's
Community Affairs program has greatly strengthened our efforts to
"encourage" and help institutions to meet their CRA obligations.
Effects on Applications

The number of applications that present CRA issues,
which include both those affected by poor CRA ratings, as well as
by CRA protests, have grown in recent years. During 1992,
adverse CRA ratings were an issue in forty-four applications
received by the Federal Reserve from banks and bank holding
companies. This compares with thirty-one such applications in
1991. Protested applications also increased to thirty in 1992
from twenty-four in 1991.
Although there have been relatively few outright
denials of applications on CRA grounds, we would urge caution in
using this as a significant measure of CRA's impact. We have
found that institutions are taking this aspect of CRA quite
seriously. They do not want poor CRA examination results, which
are afforded great weight in our consideration of applications,
to reduce their expansion options or impede the timing of their
applications. This gives them added incentive to have good
programs in place. Some undoubtedly avoid filing applications,
or decide to withdraw them, when faced with potentially adverse
findings. Through the years, many institutions have made

- 13 -

substantial commitments to the agencies or to protestants during
the application process.
Coupled with our examination and educational efforts, I
think that the application procedures have also contributed to
overall CRA performance.
Recurrent Issues
As should be apparent from this summary of recent
agency activities, CRA continues to consume an increasing amount
of our time and resources.

Despite our belief that things are

much better than many realize, we also recognize that there
continue to be a number of controversies related to the structure
and administration of the CRA.

Let me touch on a few.

One of the recurring issues involves the consistency
or, lack thereof, in the way CRA Evaluations are written and
ratings are assigned.

Both community groups and bankers have

alleged that the Evaluations of the agencies are not equally
comprehensive, and that in some cases, the CRA ratings assigned
are not always the same for banks that appear to have similar
Let me say that the supervisory agencies have spent an
awful lot of time and energy, both on an interagency basis, and
within each agency, to deal with inconsistencies in Evaluation

We have an extensive program within the Federal

Reserve to review reports across Federal Reserve Districts to

- 14 -

promote uniformity.

In May 1991, the FFIEC convened a working

group of field examiners and senior staff from each of the
agencies to review Evaluations across agencies to help insure a
common approach.

We have also received input from the Federal

Reserve's Consumer Advisory Council, national community
organizations and many others on how we can enhance the quality
and consistency of the information we make public.

We believe

that these issues are being resolved.
It should be recognized, however, that it will probably
always be somewhat difficult to make all ratings read
consistently, simply because we are rarely comparing "apples to

Each financial institution is unique with respect to

its business strategy, size, geographical market reach, product
mix and organizational structure.

Even banks of the same size in

the same communities may offer very different products and

Each community also is different with respect to its

economic condition, credit needs, organizations and resources.
Process vs. Product
Both bankers and community groups continue to charge
that the agencies appear more interested in ensuring that
institutions have the appropriate CRA procedures and
documentation, than actual lending programs in their communities.
I believe, however, that if that were the case at one point, it
most certainly is not the case now.

However, as I will indicate,

this is not as simple an issue as it may first appear.

15 -

In conducting CRA examinations, we do not focus on
process to the exclusion of lending.

We have cautioned our

examiners about just this issue in our revised examination
procedures, and discuss this regularly in examiner training and
other meetings.

This does not mean however, that we consider

certain basic business processes to be irrelevant to CRA.


successful institutions understand that if they do not have a
well-thought-out CRA program, they may be less effective when it
comes to finding good lending opportunities in their communities,
or being able to take credit for their lending activities at
examination time.
We do not believe that most larger institutions,
especially those with large branch networks, can reasonably claim
that they know what the credit needs are in their diverse
communities, unless they have an effective program in place to
find out.

Similarly, they probably cannot truly know whether

they are meeting the credit needs with loans unless they have a
process in place that would provide them with this information.
But this involves, after all, basic types of information that
most bank managements regularly want to see for all products and

For smaller institutions, the process is much, much

simpler, and usually should involve use of day-to-day information
that bank management collects in any case.
However, this nprocess versus product" debate is not an
easy one for one fundamental reason—the agencies were not given


the task, nor have they assumed the role, of providing rules that
allocate credit.

Certainly, it would make everything much easier

if we had lists of "blessed" loans and customers and mathematical
ratios of loans by category that would match various ratings
under C R A — t h e n we would simply count the product and be done
with it.

In fact, CRA—wisely in my view—provides flexibility

for institutions to meet their obligation in many different ways,
depending on their strengths and the specialized needs of their

This means that there will always be considerable

focus on having an adequate process in place which, in fact,
delivers product.
Easy Grading
Another recurring issue is the distribution of ratings.
Community groups say the CRA grades are much too high and they
contend that the banking agencies are much too lenient.


roughly 90 percent of the institutions do get a satisfactory or
better rating.

Some bankers, of course, argue that because an

institution would be out of business if it did not meet the needs
of its community, all should pass.
When haggling over the grade distribution, we should
remember that CRA ultimately involves performance evaluations.
There will always be disagreements over such assessments,
whether it involves a teacher or professor grading a paper, a
music critic judging a recital, or an employer evaluating an

No matter how Well the criteria are understood,

- 17

different people--reasonable people—often can make different
judgments based on the same information.
But clearly few institutions fail.

I think there are

several good reasons for the current distribution.

First, all

banks pledge to meet the "convenience and needs" of their
communities when they are chartered.
came on the scene.

This was long before CRA

Second, we've been examining them for

compliance since 1977 and one would expect this to have had a
positive effect.

Third, it should be recognized that the

"satisfactory" category in which about 80 percent fall—is a very
broad one—and it includes some with good performance and some
with more marginal records.
Discrimination and Home Mortgage Lending
Finally, a highly sensitive and recurring issue
involves the relationship of CRA to both the Home Mortgage
Disclosure Act (HMDA) and Fair Lending laws, such as the Equal
Credit Opportunity Act.

Although CRA assessments incorporate the

objectives of these civil rights laws, CRA also is much broader
in scope.
It is well known that regulators have faced
considerable difficulties in identifying instances of

It is extremely difficult to find conclusive

evidence of discrimination through inspection of individual loan
files during examinations.

Lenders usually can demonstrate that

the applicant was denied because certain credit standards,




involving such elements as debt ratios or credit history, were
not met.
But we have learned much from the intensive study on
mortgage denials conducted by the Federal Reserve Bank of Boston
and from the Justice Department's recent case involving Decatur
Federal Savings and Loan.

We are very concerned about the

results of the Boston Study and have taken a number of steps that
we hope will help strengthen the capacity of our examiners to
detect and deter discriminatory treatment of applicants.
Fortunately, we are seeing a significant growth in affirmative
marketing of mortgage and other loan products in minority areas,
as well as development of special mortgage products that meet the
needs of low- and moderate-income persons.

Institutions that are

making positive efforts to offer and extend credit in minority
communities are helping fulfil CRA's aims.
CRA'B Impact
How well is CRA working?
than is often recognized.

Frankly, I think a lot better

By any measure it's had a major impact

on reinvestment activity by financial institutions throughout the

In recent years, we've seen real momentum in financial

institution responses to the needs of their communities,
especially in lower-income areas.

I believe that a good part of

that momentum is due to CRA.
CRA has helped stimulate loans for home mortgages,
housing construction and rehabilitation, and small and minority

- 19 -

business development in low- and moderate-income communities.
More banks and thrifts are seeking and participating in
public/private partnerships, in both urban and rural communities,
than ever before.

A growing number of bank-led community

development corporations or multi-bank lending consortia are
supporting projects benefitting low- and moderate-income areas.
Included with my testimony is a sample of such activities
gathered from across the nation by our community affairs
Although there are sometimes adversarial beginnings,
banks and community groups in many cities have proven that they
can work together to promote the goals of the CRA process.


think bankers generally are viewing the world a little
differently because of CRA, and the world views bankers a little
differently as well.

For many institutions, CRA is becoming

increasingly important.

Good CRA performance enhances their

ability to take advantage of opportunities afforded by mergers
and interstate banking.

Many bankers also are discovering that

good CRA performance also helps them compete for customers.
Finally, a growing number of bankers are seeing that CRA-related
activities can lead to just good, profitable business.
Mr. Chairman, I would conclude from all of this that
despite its weaknesses, CRA is indeed working, and working quite

The supervisory agencies have stepped up their activities.




We continue to strengthen our CRA examination, education and
technical assistance programs.

The banking community is

responding positively, though certainly more can be done.
is a simple and unusual law.


Its lack of specificity—the source

of many of its frustrations—may be its strength.

In view of

this I would counsel that radical changes to CRA be approached