The Community Reinvestment Act reconsidered.

• Author: Overby, A. Brooke
• Position: Symposium - Shaping American Communities: Segregation, Housing & the Urban Poor

CRA has been in force for 15 years. Presumably more than enough time to work out any procedural or process problems. Regrettably, that does not appear to have been the case. It seems that we are still struggling with the basics of implementing this law properly.(1)

INTRODUCTION

The next few years will bring significant development in banking law. Ever since its enactment in 1977, the Community Reinvestment Act (the CRA or the Act),(2) a seemingly modest piece of legislation intended to motivate certain financial institutions to meet community credit needs, has been the focus of intense criticism within the financial community. As Senator Cranston's statement indicates, much of the debate has centered upon the very basic issue of how to enforce the Act properly. Regulators' enforcement efforts evoked consternatin from the financial institutions regulated under the Act,(3) the community groups representing the intended beneficiaries of the Act,(4) and even from Congress itself.(5) The regulators' response to these charges was one of frustration. The Act contains little more than the scant directive that agencies "encourage"(6) the institutions they supervise to meet community credit needs, and that they should take the institutions' performances in meeting those needs "into account" when evaluating applications to the agency.(7) Given these bare legislative mandates, the agencies' perceptions of being caught in the maelstrom of the CRA debate(8) with no ability to extract themselves are palpable.

The most recent endeavor to break this deadlock over CRA enforcement has, not surprisingly, come up short in spite of nearly two years of public debate. In July of 1993, President Clinton gave regulators their "marching orders"(9) when he instructed financial institution regulators to develop new regulations to enforce the CRA.(10) After a series of well-publicized public hearings held across the country,(11) in December of 1993 regulators released for comment a proposed CRA enforcement scheme that would have constituted a significant shift in CRA policy.(12) Most significantly, the proposals attempted to respond to industry complaints that the existing enforcement regime provided ambiguous performance standards and excessive paperwork, as well as to activists' and politicians' concerns that the existing CRA regime "overemphasize[d] process and underemphasize[d] performance."(13) The December 1993 proposals set forth quantifiable performance criteria to be used in assessing whether an institution was meeting community credit needs and established an evaluation system that sought to reward results in community lending over an institution's efforts to meet credit needs.(14) While under the old CRA regime a gallant attempt to meet community credit needs might have warranted an outstanding grade under the CRA, under the proposed regulations, an institution would have to demonstrate that its efforts produced quantifiable results--loans actually made to communities.

The December attempt to combine reduced regulatory burden with verifiable results predictably sparked an extreme reaction from all sides.(15) It was not until October of 1994 that regulators published for comment a revised set of CRA enforcement regulations that modified considerably their December proposal, yet retained the emphasis on results rather than efforts.(16) While regulators reviewed the onslaught of comments on that proposal and ultimately, in late April of 1995, approved the final enforcement regulations,(17) Congress began a concerted effort to forestall or undercut the effectiveness of any final rules.(18)

The intensity of the response to the regulator's proposals, and the lengthy as well as highly contentious process that has surrounded the CRA revision efforts, indicates that the CRA is certain to engender continued objection. Some regulators have questioned whether a results-based CRA would lead us dangerously close to credit allocation,(19) a policy that is expressly rejected in the legislative history of the CRA.(20) Larger institutions have objected to the paperwork burden and compliance costs of the CRA, and have questioned whether some of the proposals increased rather than reduced those costs.(21) Yet, less stringent reporting and performance criteria for smaller institutions have evoked objections from community activist groups.(22) On the legislative side, the stream of bills proposing modifications to the CRA shows no sign of abating.(23) Finally, financial service providers not currently subject to the mandates of the CRA have stepped up lobbying efforts to ensure that they too will not become caught in the CRA's often ineluctable grasp.(24)

It accordingly appears that the most recent experience in developing a new CRA enforcement mechanism reinforces the proposition that, with respect to the CRA, only two planes of agreement exist. Certainly everyone shares the vision to which the Act's inspirational name--"community reinvestment"--alludes. That our communities merit investment is a point beyond question. Beyond such lofty truisms lies an agreement to disagree. We know that we care, but controversy arises as to why we do--and how to go about making the vision a reality. With respect to the CRA itself, the precise issue is how far to intervene in the private lending decisions of financial institutions to accomplish the goal.

The debate to date over the scope of such intervention has fallen into two sharply divergent camps. On the one hand, the CRA has been identified by some as a crucial step toward, if not a key to, solving the problems of inadequate housing, urban decay, and violence that have become issues of national importance.(25) In their view, only the lax effort of regulators to enforce the CRA has undercut materialization of this appealing end. Yet, the movement toward more aggressive intervention through heavy-handed enforcement has not by any stretch received universal acclaim. At the other extreme, the Act's interference with the otherwise private market for credit is more controversial as a matter of banking law. That the Act seems to compel suboptimal lending patterns(26) impels some commentators swiftly to the conclusion that the CRA is questionable social policy(27) or "fundamentally flawed ... anachronistic and ultimately self-defeating."(28)

The irreconcilable nature of these extremes in the dialogue over community investment and the CRA indicates that the problems that have arisen with respect to the CRA since its enactment do not devolve from some minor and ultimately resolvable disagreement over "enforcement." Yet, this is how we have talked about the CRA to date. Enforcement of what and why--toward what end? The rhetoric of enforcement unfortunately has concealed the much more fundamental and primary concern of what obligations financial institutions should have to their communities, and to the individuals that constitute those communities. Accordingly, the future of the CRA requires not just learning how to enforce the law properly, but more importantly how to conceptualize and construct the essential ethos of the financial institution.

This Article disengages the CRA from the more superficial debate of enforcement and instead analyzes it within the context of this more fundamental question of the character of financial institutions. The Article argues that, in spite of the Act's name, talk of "community" is the CRA's principal ambiguity, and one that has provided the major obstacle to effectuation of the Act's purpose. The CRA's implication that banks and other institutions regulated under the Act should owe some special duty toward their local communities provides the nexus for the debate over community. The economic soul of such institutions leads some to reject wholesale the CRA and, with it, such duties.(29) In contrast, some suggest that the success of the CRA should be assessed under and critiqued by a communitarian paradigm, if not a communitarian agenda, for financial institution regulation.(30) Implicit in this communitarian position is the proposition that banks and other financial institutions are not--and should not be--merely objective economic actors responding to market forces, but rather should be active, and good, community citizens. Such radically divergent positions on community, financial rationality, and institutional citizenship explain the CRA's lack of success to date. Unfortunately, it appears that the Act will continue to fall short of its potential as long as the dialogue about the CRA is oriented around the concept of "community." Neither side in the battle will be completely satisfied with the changes in CRA enforcement, and the CRA debate can be expected to continue to rage, despite regulators' most recent efforts to enhance enforcement of the Act. The underlying problems that the CRA was intended to address, however, will remain unresolved. That we fiddle about community while the war against poverty is being lost may be just politics, but it is not inevitable, and certainly not ideal.

If talk of community is the CRA's fundamental error, the question becomes what remains of the CRA once the community has been excised from "community reinvestment." While this Article argues that the Act has little, if anything, to do with "community," it does not advocate repeal of the CRA. Rather, this Article posits that individual equality, rather than community, constitutes the best underlying justification for some sort of CRA-type intervention into the affairs of financial institutions. Once the CRA is moved into equality's realm, remodelling the scope of legislative intervention and regulatory enforcement can occur. This Article proposes that equality of access and equality of opportunity should be the guiding justifications for assessing the proper scope of intervention through the CRA. Applying these principles, a limited intervention into the affairs of financial...