New legislation would strengthen all financial institutions’ investments in communities, help avert another financial crisis

Woodstock Institute President Dory Rand applauded the introduction of the American Community Investment Reform Act of 2010 today by Rep. Luis Gutierrez (D-IL), Rep. Al Green (D-TX), Rep. Eddie Bernice Johnson (D-TX), and Rep. Maxine Waters (D-CA).

“The Community Reinvestment Act has created jobs, supported responsible homeownership, and expanded opportunities for saving by investing trillions of dollars in low- and moderate-income communities,” said Rand. “Nonetheless, the rapidly-changing and complex financial landscape of today bears little resemblance to the world of 1977, when the original CRA was passed. The American Community Investment Reform Act of 2010 will make sure this crucial tool continues to be effective at creating opportunity by updating it to reflect today’s realities.”

The Community Reinvestment Act creates an affirmative obligation for banks to meet the credit and basic banking service needs of all communities where they have branches, including low- and moderate-income communities, consistent with safe and sound operations. That requirement to lend to creditworthy individuals regardless of income or geography has resulted in trillions of dollars of sound investment where it’s most needed—investment that stopped the foreclosure crisis from being worse than it was. The Federal Reserve found that only 6 percent of the risky subprime loans that drove the subprime mortgage crisis were made by lenders covered by CRA in their assessment areas, and loans from CRA-regulated institutions are half as likely to go into foreclosure. If all lenders—not just banks—were subject to CRA’s community obligations, the foreclosure crisis likely would have been much less severe.

The American Community Investment Reform Act of 2010 will ensure that all financial institutions are playing fair by expanding the scope of CRA to cover nondepository mortgage lenders, insurance companies, and securities companies. More and more mortgages are being made by non-CRA regulated institutions—in 1990, only 17 percent of mortgages were originated by non-CRA regulated institutions, but that figure has been about 30 percent in recent years. Additionally, more and more household assets are held in institutions not covered by CRA: 25 percent of assets were in CRA-regulated institutions when the law was passed in 1977, compared to 15 percent in 2007. The American Community Investment Reform Act of 2010 would ensure that financial institutions with such a large market share of America’s assets would compete on the same level playing field as banks.