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For release on delivery
9:00 am, EDT
September 17, 1993

Statement by
Lawrence B. Lindsey
Member, Board of Governors of the Federal Reserve System
before the
Subcommittee on General Oversight, Investigations and the
Resolution of Failed Financial Institutions
of the
Committee on Banking, Finance and Urban Affairs

U.S. House of Representatives
September 17, 1993

SEP. ? 4

I appreciate the opportunity to appear before this
subcommittee to discuss the Community Reinvestment Act and the
current efforts of the agencies to strengthen and improve its

This statute has become an extremely important

part of the landscape of financial institution supervision in
recent years.

Across our nation it has affected the relationship

of thousands of banks and thrift institutions with their
communities—particularly low- and moderate-income neighborhoods.
Institutions both large and small have struggled with the law's

Local groups have aggressively used it—particularly in

the applications process—to prompt commitments for increased
lending to those who may have been overlooked before.


regulators have sought to enforce the law fairly and fully in the
face of the enormous diversity which exists among America's
communities and its financial institutions.
Our CRA efforts have seldom been to the satisfaction of
either the covered institutions or community groups, and the
President has directed the agencies to conduct a thorough
reexamination of our supervisory approach.

This is a zero based

review which will take into account the views of all affected

In doing so, it is important to start from a common

understanding of where we've come since the statute was enacted
in 1977.
While the total impact of the CRA is very hard to
measure, I believe a fair assessment would have to conclude that
it has generally made depository institutions more responsive to


the needs of their communities.

Of course, the level of effort

has varied widely among institutions.

Certainly it has not

totally cured the ills and decline that plague many of our

That would be an unrealistic expectation.

But CRA has,

in my view, been very instrumental in opening channels of
communication between banks and thrifts and segments of their
communities that were previously underserved.

New relationships

have been established with community groups and individuals, new
products have been designed and marketed, and many thousands of
credit applications taken from those who previously had no
banking relationship.

Most importantly, I am convinced that

thousands of loans have been made throughout the country that
would not have been made but for the CRA.

I have personally

traveled to many communities and toured numerous projects that
are now helping to stabilize and revitalize communities as a
result of CRA.

In addition, numerous witnesses from consumer and

community organizations at hearings we have held recently have
testified to the valuable contributions CRA has made.
But exactly what is the overall level of that lending?
I do not know, and I suspect no one does.

The community groups

who track lending agreements with institutions point to over $3 0
billion in commitments for new credit.

Many of these commitments

cover several years and therefore extend into the future.
Moreover, I know of no overall assessment of the extent to which
the commitments have been realized.

While formal commitments to

community groups get considerable media attention, I suspect that

most CRA related activity goes on outside the high profile
negotiated agreements that receive so much attention.

My own

belief is that the true impact of CRA has far exceeded any number
derived strictly from the formal commitments.

If the figure is,

for example, double the committed amount, it is a formidable
amount indeed, and this fact should not be overlooked as we
evaluate CRA's effectiveness.
Whatever the degree of new lending attributable to CRA,
it has not been accomplished without numerous problems, which I
will refer to later.

But before doing that, there is an

important point about CRA that's often lost in the debate about
its flaws.

If this Federal statute has, in fact, had the

considerable impact I have described, it's important to note that
this has been accomplished without a huge appropriation of
government dollars, and without thousands of bureaucrats to
administer the program.

These, of course, are very significant

and topical matters—as current as last week's announcement of a
major campaign to "reinvent" government in ways that emphasize
these very characteristics.
CRA established a national goal and put considerable
power in both supervisory agencies and the public to enforce it,
but left the details of how this goal would be accomplished to
local communities and the depository institutions in them.


counted on the unique economic needs, and the give and take in
the local social and political scene, to define the specifics of
the CRA program for each community.

No one in Washington has yet

been employed to decide how much or what type of CRA lending
should be made in the individual communities you represent.


my way of thinking, that has been a considerable strength of the

In any review of CRA I believe we must acknowledge the

value of this approach, at the same time that we search for
But all is not perfect as you well know.


flexibility that I've referred to has come with a price.


and many community groups alike complain that the standards are
too vague.

Our own examiners' would be more comfortable as they

go about their very difficult job of assessing compliance if the
rules of the game were more precise.

Despite the ever increasing

efforts of the agencies over the years to define more
specifically the various levels of performance used in our rating
system, we are constantly faced with questions about "how much is
enough," what loans get CRA credit, and exactly what "weight"
different categories of loans will receive.

Living with the

current uncertainty makes bankers nervous, community groups
dissatisfied with their ability to hold institutions accountable,
and everyone concerned about assuring fair and consistent
evaluations by the agencies.

And believe me, no one would be

happier than those in my agency, who are charged with the day-today enforcement of the law, if we were "going by the book."
There also appears to be common agreement that too much
emphasis has been placed on paperwork and process as opposed to

There is undoubtedly some truth to this despite the

agencies' efforts to assure otherwise.

But, it is important to

keep in mind that, in some sense, the focus on process is a
natural outgrowth of leaving the definition of an appropriate
level of performance up to the needs of the community and the
capacity of its institutions.

Nevertheless, the concern about

focusing on paperwork rather than results is widespread enough to
require careful evaluation.
And, of course, there are other criticisms as w e l l —
that CRA is "too much stick and too little carrot" and that we
must search for more incentives to encourage good performance,
that too many institutions receive satisfactory or better
ratings, and that either too much or too little emphasis is given
to CRA in the context of application processing.

Suffice it to

say that there are numerous areas of controversy where
improvements may be desirable.
Thus, we have what to me is a rather confusing scene.
On the one hand, we have an important national program that
appears to have stimulated considerable lending and
revitalization in low-income and minority communities.

And it

has done so in a period of great shortage of federal dollars, and
without the rules and red tape that bedevil so many government

On the other hand, I do not know of any regulatory area

in which there is such common agreement that all is not right and
that some "reform" is necessary.

My overall sense, however, is

that in focusing so much on the imperfections of CRA, we may have
lost sight of its considerable benefits.

But surely we can do better.

And, it was in response

to widespread concern that the CRA can be improved that the
President issued his charge tc the agencies to rethink their
administration of this law.

In the President's CRA reform

request, he asked the agencies to address several specific areas.
These include:

developing new regulations and procedures that replace
paperwork and uncertainty with greater performance,
clarity, and objectivity;


developing a core of well-trained CRA examiners;


working together to promote consistency, and evenhandedness, to improve public CRA performance
evaluations, to institute more effective sanctions
against financial institutions with consistently poor
performance, and to develop more objective,
performance-based CRA assessment standards that
minimize the compliance burden on financial
institutions, while stimulating CRA performance.

As you are aware, WP are presently working with the
other agencx. 3 to carry out the President's initiative.
together, however, is nothing new to us in this area.

To promote

uniformity in the approach to CRA, the Board, along with the
other banking and thrift regulatory agencies have worked through
the Federal Financial Institutions Examination Council, or FFIEC,
for some time.

For example, through the FFIEC the agencies

developed a common approach to the regulation, interagency CRA
examination procedures, a uniform format for CRA public
disclosures, and other regulatory material.

We have a common

commitment to cooperation and uniformity, and I am confident that
together we can meet the President's goals.
Initially, our focus is on assuring wide public input.
The Federal Reserve System, along with the FDIC, the OCC and the
OTS, are presently holding public CRA meetings across the country
to solicit comments on how to improve the CRA process.

To date,

we have heard the views of several hundred bankers, community
groups, small business owners, as well as members of the general

From these meetings, we have been told what is working

with CRA, what is not working, and what we need to consider to
"fix" it.

I can tell you that many of the stories I have h e a r d —

from bankers, small business owners and community groups—have
been compelling.

The stories, however, point up as many

differences in perspective between the various groups, as they do
common concerns.
For example, while many may agree that it's important
to find new incentives to encourage better CRA performance, there
is great disagreement about what they might be.. Very
understandably, banks who have sought and achieved an
"outstanding" rating would like to see this rewarded with a "safe
harbor" from protests.
not favor the idea.

Community groups, to put it mildly, do

While thiere is common concern about

paperwork, there is a growing recognition that any movement


toward more quantifiable standards may require more, not less,
data, and this is not a happy thought for many.


concern about the disproportionate burden on small institutions
has caused some to suggest a small institution exemption,
find this untenable.


The idea of more precision in the

requirements has widespread support, but there are difficult and
controversial issues when it comes to what the specific numbers
might be or even the process by which they might be set.
Moreover, there is widespread concern that in attempting to be
precise we may fall into the credit allocation trap.

In short,

although there may be widespread agreement that CRA requires some
major repairs, there is very little agreement about the
appropriate fix.
At this point, we are still gathering information and
it would be premature for us to offer any proposals.

The Board

along with the other agencies will continue this process of
assessing the various arguments and concerns in an important
public meeting in Chicago next week.

Many of the issues which

will be under consideration are dealt with in the several bills
that you asked us to review in preparation for this testimony.
Thus, I am not now in a very good position to express any views
on the details of these legislative proposals.
Given the fact that the agency review of CRA is so
comprehensive, and is only in midstream, I would counsel against
proceeding with legislation until the results of the agency
review can be evaluated.

There may or may not be a constructive

role for legislation at some point, but it seems premature to
make that judgment now.

It is also clear that some of the

proposals for change in the bills are already within the
authority of the agencies.

Some provisions that do not affect

CRA directly, for example, dealing with the Bank Enterprise
concept, may nevertheless be affected by how the agencies
ultimately decide to recast CRA.

Thus, we will be in a much

better position to provide meaningful thoughts on the various
legislative proposals at a later date.
Finally, you have asked for information on the present
status of the Federal Reserve System's CRA examination and

In general, the Board's involvement in CRA

encompasses consumer compliance examinations, community affairs
efforts, and consideration of applications for bank expansion.
would like to tell you a little about these areas.

Compliance Examinations
The Board supervises approximately 1000 state member
banks for compliance with CRA.

The Board first established a

specialized consumer compliance examination program in 1977.
Through this program, the twelve Reserve Banks conduct on-site
examinations of state member banks to determine compliance with
consumer protection legislation, including CRA, by using a cadre
of specially trained examiners, as the President has suggested.
Examiners review twelve CRA assessment factors during
the CRA examination.

A bank's compliance with these factors,


which are grouped into five rating categories, form the basis of
the CRA rating assigned.

Some of these factors require an

evaluation of the bank's lending and investment within its

Others require an evaluation of how the bank has

decided to meet its community's credit needs—its CRA program.
In addition, examiners weigh the bank's fair lending efforts and
its capacity to help meet community credit needs.

Examination Improvements
Our consumer compliance schools for examiners devote
considerable time to the CRA and related regulations, such as
those covering fair lending and home mortgage disclosure.


compliance examiners currently receive CRA training from three
separate schools.

One of these, a more advanced compliance

school, includes segments on community development lending.
Another school, called CRA Advanced Examination Techniques,
provides examiners with a week long intensive course in CRA.
Over 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
that they can fairly assess the quality of a bank's reinvestment
In addition to these schools, we have been concerned
about providing examiners with better tools to help them get the
job done.

To this end, on behalf of the FFIEC, the Federal

Reserve has developed a computerized system for analyzing the
expanded data collected under the Home Mortgage Disclosure Act

The system is extremely versatile and allows the data to

be segmented by demographic characteristics such as race, gender,
and income levels, or geographic boundaries.

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 of all lenders in the

With these capabilities, examiners can more readily

determine whether a bank is effectively serving all segments of
its market, including low- and moderate-income and minority

We have been holding HMDA training sessions on

how to use this system around the country for our examiners, as
well as those from other agencies.
System examiners also use HMDA data on a more "micro"
level, as well.

Recently, the Federal Reserve System developed a

computerized model for using HMDA data in connection with the
fair lending portion of the examination.

This model allows

examiners to match minority and nonminority pairs of applicants
with similar credit characteristics, but different loan outcomes,
for a more extensive fair lending review.

Once the pairs are

selected, examiners pull the credit files for the applicants to
determine if discrimination played a part in the credit granting

While a comparison of minority and majority applicants

has always been a part of the Federal Reserve's fair lending
examination, we believe that this computerized selection process

will enable examiners to focus their efforts and spend more time
on the actual fair lending review of loan files.
The Federal Reserve has also developed the capability
to map by computer the geographic location of a bank's lending
products, including mortgage loans.

This mapping includes

demographic information for the bank's local community.


believe that this type of analysis and presentation will enhance
our ability to assess a bank's CRA performance in meeting the
credit needs of its local community, including minority areas.
It should also be helpful in evaluating a bank's geographic
delineation of its local CRA service area to ensure that it does
not exclude low- and moderate-income neighborhoods.
Finally, I believe it is important to note that, in
response to community concerns heard about CRA and its
enforcement, the agencies through the FFIEC, have taken steps to
try to improve CRA over the last several years.

For example, in

June 1992, the FFIEC issued revised, uniform CRA examination
procedures that clarify CRA examination policies.

For example,

they emphasize the importance of using numerical data in the
public CRA evaluation to ths extent that they are used in the
assessment process to support the conclusions reached.

When it

is available, 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.
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 in

1992, we endeavored to help reduce the amount of paper work and
documentation by emphasizing that institutions should retain for
examiners' review, only information that leaves an audit trail
for CRA activities and related lending, and that 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 it is in larger,
urban banks.

We want to reduce as much as possible the paperwork

burden on bankers so that they can focus on the lending side.
Personnel resources allocated to CRA examination have
increased significantly since 1989.

In addition to conducting

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

The frequency of CRA

examinations by the Federal Reserve System has been maintained,
despite the fact that CRA examinations have become a more
demanding and time-consuming job for examiners.
For more than a decade, we have examined state member
banks with a satisfactory or better record of past CRA
performance every eighteen to twenty-four months.


banks," or those with demonstrated weaknesses, are examined every
six to twelve months.

Since the public disclosure provisions

became effective in 1991, the Federal Reserve has examined every
bank it supervises at least once for CRA purposes, 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 obligations.
The Board has authorized its Division of Consumer and
Community Affairs to hire an individual whose primary job
responsibility will be to work in the area of fair lending

This person will help to coordinate our efforts in

this area and assist our examiners in analyzing the complex
issues associated with detection of credit discrimination.


hope to have this person on board shortly.

Fair Lending Initiatives
In May of this year, the agencies sent a letter to the
chief executive officer of each federally regulated bank and
thrift in the country.

In this letter, the heads of the four

agencies said they expect all financial institutions to do their
part to design programs to ensure access to credit on a nondiscriminatory basis.

The letter urged special attention to

eleven specific fair lending activities, including enhanced
employee training, internal second review programs for loan
applications that might otherwise be denied, participation in
multi-lender mortgage review boards, and affirmative marketing
and call programs.
Then, in June, the agencies undertook a number of fair
lending initiatives to enhance our ability to detect lending

discrimination at each of our institutions.

In particular, these

efforts include:
• providing additional fair lending training to examiners;
• developing a fair lending seminar for industry executives;
• developing alternative discrimination detection methods;
• implementing referral procedures to the Department of
Justice for violations of the Equal Credit Opportunity Act;
• improving the agencies' consumer complaint programs.

Community Affairs Program
The Board believes that ensuring fair access to credit
can also be advanced by focussing on positive actions that a
lender may take to address such concerns.

Consequently, through

its Community Affairs program, the Federal Reserve conducts
outreach, education, and technical assistance activities to help
financial institutions and the public understand and address
community development and reinvestment issues.

During 1992,

resources devoted to Community Affairs activities at the Reserve
Banks were increased to enable the Federal Reserve System to
respond to the growing number of requests for information and
assistance from banks and others on the Community Reinvestment
Act, fair lending, and community development topics.


were expanded to work with financial institutions, banking
associations, governmental entities, businesses, and community
groups to develop community lending programs that help finance

affordable housing, small and minority business, and other
revitalization projects.

For example, the Federal Reserve Bank

of Kansas City sponsored a conference for bankers on "Credit and
the Economically Disadvantaged," focusing on barriers faced by
minority borrowers and steps banks can institute to ensure that
credit is offered on an equitable basis.

The Boston and New York

Reserve Banks cosponsored a conference on credit issues affecting
economic development programs for Native Americans, especially
those living on reservations.

And, here at the Board, we

recently held a meeting for Washington area bankers which focused
on successful programs in other parts of the country.

In this

meeting, which was co-sponsored by the Federal Reserve Bank of
Richmond, bankers discussed the Delaware Valley Mortgage Plan and
other successful models for multi-bank efforts to combat mortgage
lending disparities in low-income and minority areas.

These are

but an example of a comprehensive community affairs program at
work throughout the Federal Reserve System.

Applications Process
Applications for bank expansion that present CRA
issues, such as those affected by poor CRA ratings or CRA
protests, have grown more numerous in recent years,

since 1989,

the Board has denied five applications in whole or in part based
on CRA concerns.

Although the Federal Reserve Board has denied

few applications on CRA grounds, it should be kept in mind that
it denies relatively few applications generally.

In 1992, only

six applications were turned down, one of them because of CRA

This record does not, however, fully reflect the

influence that the CRA has had.

Institutions with poor CRA

records often do not file an application with their supervisory

Others take concrete steps to address weaknesses in

their CRA performance before filing an application.

Still other

applications are withdrawn if applicants anticipate an adverse
finding after the agency's preliminary review.

Through the

applications process, just as through our examinations and
community affairs program, we have sought to maintain a strong
approach to CRA enforcement.
In conclusion, I appreciate the opportunity to appear
before you today to testify on the important and complex issues
regarding the Community Reinvestment Act.

The Board shares your

concerns about these issues and looks forward to working with the
Congress and others to address this important topic.