Community Reinvestment Act Evolves.

• Author: KANE, ROGER

The Community Reinvestment Act was enacted in 1977 to encourage financial institutions to help meet the credit needs of the communities they serve. To ensure compliance with the CRA, banks are evaluated and rated by federal agencies. CRA now covers all insured depository institutions. Regulators examine lending to low-and moderate-income individuals and lending in low-and moderate-income areas at regular intervals, approximately two years for large institutions and approximately three years for smaller institutions.

Since enactment, about 20 percent of institutions have received "Outstanding" ratings, 75 percent received "Satisfactory" ratings, and the rest received either "Needs to Improve" ratings or the even worse rating of "Substantial Noncompliance."

The Federal Reserve Board considers ratings when approving mergers. Historically, mergers are disapproved on CRA grounds only in a small minority of cases-approximately one denial for every 1,100 cases, according to the board's Web site.

After the CRA was enacted in 1977, bankers and community groups criticized the act for being vague and paperwork intensive.

Community groups also complained that the CRA did not have the power to force banks to serve their communities and they said regulators were ineffective, giving most lenders above-average CRA ratings.

Bankers complained too, saying the act imposed a regulatory burden and would force them to make loans to people based solely on economic status. They criticized the act's only sanction: poor CRA evaluations. Because evaluations are considered when banks seek regulatory approval for mergers, bankers said CRA protests gave citizen groups the power to blackmail lenders.

Effective Jan. 1,1996, the law underwent a metamorphosis and on July 1, 1997, the new performance-based rating system was implemented, which includes the lending test, investment test and service test.

"It is a shame that there had to be an act to require banks to take care of their communities. It should never have been put on the congressional record," said Ron Kukes, president and CEO of First Interstate Bank of Alaska. "I think it creates more record keeping for banks, but I am not sure it creates more community involvement. The bottom line is, banks do it (involve themselves in community affairs) because it needs to be done."

Lending Test

Banks are evaluated and graded on the number and amount of loans they write in specific assessment areas, the geographic distribution...