WASHINGTON — Requirements of the Community Reinvestment Act have changed with time and experience and, going forward, that must continue for it to remain relevant, according to recent remarks by Federal Reserve Board Chairman Ben Bernanke.
"The CRA is clearly far from perfect. Although its objectives are broad and ambitious, its net effects on lower-income neighborhoods are difficult to measure with precision," he told a recent Community Affairs Research Conference in Washington, D.C. "Addressing CRA responsibilities also imposes costs on financial institutions. It appears that, at least in some instances, the CRA has served as a catalyst, inducing banks to enter underserved markets that they might otherwise have ignored. At its most successful, the CRA may have had a multiplier effect, supplementing its direct impact by stimulating new market-based, profit-driven economic activity in lower-income neighborhoods."
The idea of a local community in the context of today's national or large regional service areas and high-tech world be revisited in updating CRA. Bernanke predicted that defining local community will become even more difficult in the future.
Additionally, the prevalence of non-regulated entities should be accounted for, including nearly two-thirds of mortgages. Some have said CRA should be applied to these entities, but that contrasts with the original intent of the institutions giving back to where they are taking deposits–that are federally insured–from, given the non-banks are not depository institutions.
The greater access to credit in lower-income communities "has had tangible benefits," he said. However, current mortgage market issues demonstrate that more lending is not necessarily good, and lawmakers should look at whether CRA should differentiate between good and bad lending, Bernanke said. "One possible strategy is to place more weight in CRA examinations on factors such as whether an institution provides services complementary to lending–for example, counseling and financial education," he said.
Bernanke concluded that in the fast-paced environment, "Considerable creativity and flexibility will thus be necessary to ensure that the CRA continues to assist community economic development without placing an undue burden on financial institutions." –scooke@cutimes.com
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