The following comments are excerpted from a presentation to 180
lenders and community developers at a September conference sponsored
by the Federal Home Loan Bank Board of Des Moines and the Federal
Reserve Bank of Minneapolis.
In 1977, following increasing pressure from consumer groups, Congress
passed the Community Reinvestment Act (CRA) to ensure that financial
institutions meet the credit needs of their communities, including
low- to moderate-income neighborhoods. The Act requires the Federal
Reserve System, along with other federal supervisory agencies, "to
encourage such institutions to help meet the credit needs of the
local communities in which they are chartered." At the same time
the supervisors are required to see that those institutions conduct
their business in a safe and sound manner.
In other words: Make riskier loans, but don't risk the bank.
For a bank supervisor with a responsibility to encourage safe
lending practices, the above notion creates the possibility that,
from time to time, the supervisor may be faced with conflicting
responsibilities. The principal issue I want to explore is how this
conflict may get resolved within the CRA framework.
As an economist, my bias is that the marketplace is an effective
means of allocating resources. I believe that countervailing forces
in the marketplace generally lead to the best solution. Consistent
with that I would probably assert that the marketplace is the vehicle
for resolving conflicts such as this. Of course, I would add the
economist's customary caveatsall things being equal and in
the long run. An immediate response might be: "All things ain't
equal, and I'm not going to be around in the long run." I would
have to acknowledge that there are some things that don't get resolved
in the marketplace. Community development may be one of them.
I assume that Congress, in enacting CRA, has determined that indeed
"all things ain't equal" and the natural market forces don't work
to achieve some aspects of community development. I believe what
Congress has done to help me with my conflict is devise a sort of
three-legged stool of regulator, lender and community activist to
create competing tensions that will help bring about a resolution.
As a bank supervisor, the Fed has three responsibilities under
It rates each state member bank's compliance with CRA. The
Banking Supervision Department examines each state member bank
as part of a broad-based community affairs examination to determine
its compliance with a number of consumer laws and regulations,
including the bank's compliance with the objectives of CRA. In
that process the Fed gives the bank an overall consumer compliance
rating, specifically rating the bank's compliance with the CRA.
The Fed is required to take into consideration CRA compliance
when deciding whether to recommend approval or denial of certain
applications. The risk of having such an application being denied
for failure to comply with the CRA is the principal tool to enforce
compliance. In addition, the public has the opportunity to play
a role in enforcing CRA compliance by protesting an application
on the grounds that the applicant does not fulfill its CRA obligations.
The public's role has been enhanced by the recently passed Financial
Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA).
Under FIRREA, supervisors such as the Fed will have to publish
their CRA ratings as well as certain portions of their examination
Finally, the CRA requires that the Fed designate a community
affairs officer to facilitate CRA compliance by providing information
to lenders and the public. The community affairs officer also
acts as the Fed's representative in the application protest process.
That includes determining whether a communication constitutes
a protest and attempting to bring applicant and protestors together
in an effort to settle their differences.
In addition to the safety and soundness provision of the CRA, a number
of other laws mandate that the Fed concern itself with the safety and
soundness of the business of state member banks and bank holding companies.
The Fed implements those mandates through financial examinations of
state member banks and bank holding companies, as well as through the
course of considering whether to approve many of the applications, particularly
bank holding company applications.
Thus, the possibility for conflict between the Fed's CRA safety
and soundness and community development responsibilities is compounded
by other safety and soundness mandates. One way the Fed addresses
that conflict is by having community affairs compliance exams and
financial exams performed by different personnel. That is not to
say that CRA examiners ignore safety and soundness.
Many might argue that a lender should be able to fulfill its CRA
obligations without violating safety and soundness standards. That
may be so, but persuading lenders operating in areas where there
are serious economic problemsthe very areas that often call
for community redevelopmentmay not be easy. That may be even
more difficult in the face of the hundreds of bank and thrift failures
that have occurred in the 1980s and the existence of hundreds of
thrifts that would have been closed but for the absence of FSLIC
resources. I think no one would dispute that many, if not most,
of the failures in the past nine years, in large measure, resulted
from a disregard of traditional safety and soundness standards.
Given the apparent conflicts in the supervisors' responsibilities
and the sometime conflict between the concerns of lender and community
developers, how does the Fed resolve these conflicts and get on
about the business of CRA? For one thing, the legal rights and duties
of each of the participants under CRAregulator, lender and
community developershould help.
Each player in community development lending probably would like
to be able to influence the attitude of others to achieve what they
regard to be important in community development. Many lenders and
community developers probably believe attitudes are critical. For
example, many would assert that the objectives of CRA cannot be
fully achieved unless the attitude of lenders is one of commitment
to CRA objectives.
I'm of a different view. For one thing, I wouldn't delude myself
into thinking I could change anyone's attitude. Nor do I believe
I should spend my resources with the hope of doing that. Although
in some respects vague, Congress has imposed legal obligations upon
supervisors and lenders that are intended to achieve the CRA community
development objectives. Congress has also put in place measures
to enforce those obligations, including ones that may be taken by
those interested in community development.
I believe my job as a supervisor is to make sure that lenders
fully understand their CRA responsibilities and behave accordingly.
It is also the job of the supervisor to be certain the rights of
those whom CRA is intended to benefit are protected. If, in carrying
out my job, I revealed an attitude that favors community development
interests over those of the lender or vice versa, I believe my credibility,
and in turn my effectiveness, would be undermined.
All of that is not to say that the Fed, community developers and
lenders should not be communicating ideas, information and even
biases to one another. To the contrary, the CRA contemplates that
the exchange of information will contribute to the success of CRA.
As a facilitator of CRA, an important role of the Fed is to provide
information that will contribute to the CRA objectives. In fact,
that may be the Fed's most important function and the best way to
deal with the safety and soundness conflict.
The Minneapolis Fed provides information in a number of ways.
For example, the bank publishes a newsletter to provide lenders
and community groups current information on community development
issues. Also, this bank and First Bank System recently prepared
and published a handbook called "Principles
and Practices of Community Lending" that is distributed to lenders
and interested community development groups.
That book provides important information to facilitate community
development by helping lenders work through the process of community
development lending. It also provides information on the various
local, state and federal programs that are available to enhance
safety and soundness in a community development loan. In addition,
the Minneapolis Fed conducts educational forums throughout the Ninth
Those educational forums are perhaps the Fed's single most important
information tool. I believe that what is learned in the course of discussion
between lenders and community developers is most rewarding and contributes
substantially to the interest we all have in the purposes of the CRA.
Both lenders and community developers benefit from a mutual interaction.
And who knows, it may even be possible to change someone's attitude.