Financial Industry Perspectives
1996

Other Issues of Financial Industry Perspectives

• New Community Reinvestment Act regulation: What have been the effects?
  By Terri Johnsen and Forest Myers

Effective January 1, 1996, the federal financial supervisory agencies (agencies) implemented their new Community Reinvestment Act (CRA) regulations. The new regulations currently apply to small institutions; they will apply to large institutions in 1997.

In adopting their new regulations, the agencies sought to address complaints voiced by banks and the public about burden, relevancy, and consistency of CRA regulation under the agencies' old supervisory approach. To judge the new regulation's success in addressing these complaints, we surveyed 38 small Tenth District member banks examined during the first half of 1996. We found that for the most part the agencies accomplished what they set out to do. However, final judgement on the agencies' ultimate success in addressing earlier complaints with CRA regulation must wait until experience is gained with large banks in 1997.

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• Community Reinvestment Act lending: Is it profitable?
  By Larry Meeker and Forest Myers

In 1977, Congress passed the Community Reinvestment Act (CRA) to encourage federally insured depository institutions to lend in low- to moderate-income neighborhoods and to low- to moderate-income people. Since then, the profitability of the many special lending programs designed to achieve these goals has been questioned on both theoretical and practical grounds.

The study examines the CRA loan profitability issue in the context of home mortgage lending. We surveyed 97 large institutions to explore profitability differences between their CRA and conventional home mortgage lending.

Twenty-four percent of those answering the survey said their CRA lending was as profitable as their conventional lending. We found these lenders were more likely to treat their CRA lending like they did their conventional lending. Further, they managed to keep origination and servicing costs for their CRA loans similar to those for their conventional loans. These findings have important implications for lenders, community groups, government enhancement providers, and banking regulators as they seek wider markets for CRA loans.

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