The Chicago Tribune recently reported on American Union Savings & Loan Association’s objection to receiving a poor rating under Community Reinvestment Act (CRA) from the FDIC, its regulator.   American Union’s claim—that “reckless lenders attract [mortgage] applications and get favorable CRA ratings [and] these applications turned into bad loans”—is one that has been widely discredited by banking regulators and researchers.

 

A recent Woodstock Institute report, Federal Reserve Chairman Ben Bernanke, FDIC Chair Sheila Bair, Office of the Comptroller of the Currency John Dugan, and researchers across the country have repeatedly confirmed that the Community Reinvestment Act (CRA) did not cause the foreclosure crisis. In fact, only about six percent of the high risk loans that led to foreclosures were made by banks subject to CRA review. The CRA requires banks with FDIC insurance to serve the credit needs of persons and communities in which they take deposits and conduct business, including low- and moderate-income communities.

Because American Union provided no evidence that it had served the credit needs of low- and moderate-income people in its community, the FDIC had no choice but to find American Union in substantial noncompliance with the requirements of CRA. A review of the FDIC’s CRA performance evaluation reveals that although the bank is located in a Chicago community with a significant low- and moderate-income population and does 96 percent of its business in mortgage lending, it conducted no marketing efforts and made no mortgage loans to any low- or moderate-income people in its assessment area during the entire period of review. The bank made one mortgage loan due to a customer referral and it was to a middle-income household 13 miles away from its only branch. 

The current crisis demonstrates that we need to modernize and expand the Community Reinvestment Act to cover all financial institutions and enforce it rigorously to ensure economic security and community prosperity for all.