Community Reinvestment Act

The Community Reinvestment Act (CRA) is a driving force in the housing and community development field. For more info/background on CRA, see www.ffiec.gov.

Once the economic stimulus bill is passed, CRA is expected to come back to the forefront of the legislative agenda in the House. In part this is because it is important to housing and community development investment, in part it is because the banks want it changed, in part it is because the federal government now has a financial stake in institutions through more than just deposit insurance, in part it is because Rep. Barney Frank chairs the House Financial Services Committee, etc.

Here are 4 suggestions for regulatory change to make the program better:

1. greater transparancy of what geographic areas/customers qualify for CRA activities, how banks are evaluated, etc. Talk to most loan officers and they have no idea how/why/where their bank is evaluated, let alone members of the community. If loan officers don't know, it is a given that most members of the community don't understand it either. With today's technology, there is no reason this type of information can't be provided on-line using maps, images, charts, etc.

2. evaluations based on customer (i.e. both depositors and borrowers) addresses rather than based on deposit dollars. As it is, deposits can be skewed by all types of things but the current subprime debacle shows us that both the deposit base and the customer base matter to a bank's involvement in communities.

3. use some sort of peer-based relative measure of performance for ratings/evaluations rather than an absolute measure. This change will introduce market forces and competition to the process.

4. consider the requirements that should come with federal aid and whether CRA should be expanded to other consumer-oriented companies that use financial assistance. Taxpayer money isn't without strings - to avoid a free-for-all, takers should feel as though they are facing either the gallows or the taxpayer's requirements with the gallows looking like a viable choice.