Opening Remarks
CRA at 40 – Application, Spirit and Letter of the Law Today

Julie Stackhouse, Executive Vice President, Supervision - Federal Reserve Bank, St. Louis

Interagency – Community Reinvestment Act (CRA) Community Development Training and Listening Forum

By Julie Stackhouse, Executive Vice President, Supervision – Federal Reserve Bank, St. Louis
May 10, 2017

This year marks the 40th anniversary of the Community Reinvestment Act (CRA). Enacted in 1977, the CRA affirmed the obligation of federally insured depository institutions to help meet the credit needs of communities in which they were chartered. This obligation is consistent with safe and sound banking practices and is in return for the privilege of deposit insurance protection and access to the Federal Reserve’s discount window.1

At the time of its enactment, redlining was rampant, initially stemming from what is thought to have been “residential security maps” created by the now-defunct Home Owners’ Loan Corporation. The maps designated four categories of lending and investment risk for each of 239 cities (private lenders created similar maps).2 Besides overt discrimination, a variety of factors added to the unavailability of credit to low-to-moderate income communities, including an immature secondary market for mortgages, non-scaled credit scoring options, and underdeveloped credit reporting mechanisms.


With the enactment of the CRA and expectations for banks, the Federal Reserve and other regulators likewise invested resources in the support of the CRA. The individuals presenting here today provide clear examples.

For purposes of the Federal Reserve Bank of St. Louis, our community development function operates with a mission to promote strong communities and households through the work of three small-but-mighty groups:

CRA: This group, led by Yvonne Sparks, promotes a broad understanding of how the CRA serves as a tool for investment to spur economic development and access to financial services in underserved and low- and moderate-income communities. The team builds strategic alliances and provides forums, such as this one, for financial institutions, community economic development practitioners, and government and policymakers. It works closely with our consumer compliance examination staff to develop performance contexts, community contacts and consultation for CRA examinations.

Policy and Analysis: This group, led by Daniel Davis, identifies challenges confronting low- and moderate-income households and communities, and shares evidence-based solutions in five policy areas:

o Community Development Finance
o Financial Access and Capability
o Workforce Development
o Housing and Neighborhood Stabilization
o Small Business

The group presents many useful webinars and publications that you can readily access. I specifically want to mention the innovative portal, which was created by the St. Louis Fed. It serves as a portal to community development resources for all 12 Federal Reserve Banks and the Board of Governors. Included in the portal is information on the Connecting Communities webinar program, which provides insights into current community development issues.

Center for Household Financial Stability: The Center for Household Financial Stability, led by Ray Boshara and Bill Emmons, is the specialized research arm of our operation. The Center provides timely research and information on the state of U.S. family balance sheets. They focus on strengthening families, the macro economy, and promoting new ideas for improving household balance sheets.

As I mentioned earlier, October 12 will mark the 40th anniversary of the CRA. The CRA has not been a static piece of legislation. Indeed, it was only one of a series of laws passed during the 1970s intended to expand access to credit. Although the CRA itself is focused on the provision of credit to low- and moderate-income communities, discrimination in lending was also addressed through the Equal Credit Opportunity Act and the Fair Housing Act; these pieces of legislation are often referred to as “fair lending.” Moreover, the Home Mortgage Disclosure Act (HMDA) was enacted to increase transparency in mortgage lending. Next, the Financial Institution Reform and Recovery Act of 1989 required public disclosure of institutions’ CRA ratings and performance evaluations, creating transparency and providing an opportunity for input by the public. And finally, there is the opportunity for the public to comment on CRA performance when a banking organization submits a merger or acquisition application to its regulator.

There are many things that have worked well with the CRA. As evidenced by our event today, the incentives provided by the CRA and requirements for compliance with other laws and regulations has prompted partnerships between banks and community groups to promote access to credit for low- and moderate-income communities and foster development in these areas. You will hear about some of these efforts in St. Louis as part of our forum today. Other policy developments over time, such as the CDFI Fund at the Department of Treasury, low income housing tax credits, and the new markets tax credit programs have provided important underwriting support.

However, we also acknowledge the many challenges of aligning the requirements of CRA in today’s rapidly changing environment. Given the preference of consumers and even small businesses to use the Internet, we have seen rapid growth in Internet technology for financial services, making the long-term use of bank branches less than clear. We have also seen significant consolidation in bank charters. Just 20 years ago, there were more than 10,000 charters; today, that number totals roughly 5,900 charters. The number continues to decline at a rate of about three percent per year. Small banks, in particular, are struggling with the cost of regulation (especially regulations that are in place to protect the consumer, such as mortgage regulations), declining populations and weak economies in some rural communities, and oftentimes, the inability to attract qualified new talent to provide succession for existing management. We fully expect to see continued consolidation in the banking industry as the years progress.

At the same time, and as I mentioned previously, the use of financial technology, or fintech, is rapidly growing. Fintech provides both promise and practicality. Let me provide an example. You may be familiar with the payments service called Square, a start-up that was initially housed in St. Louis but has since moved its headquarters. Just two weeks ago, I had a conversation with Jim McKelvey, co-founder of Square and entrepreneur extraordinaire. Jim faced a practical business problem: While a student at Washington University here in St. Louis, he started a small business known as Third Degree Glass Factory. As with many entrepreneurial businesses, Third Degree accepted only checks and cash because credit card processing was simply too expensive.

One day, Jim lost a significant sale because he was unable to take a credit card payment. Jim met with a friend named Jack Dorsey (co-founder of Twitter), and in three weeks, Square was the result. Square provides a lower cost alternative to payments processing for small businesses. Moreover, the payments data gathered by Square provides a unique source of information that has been parlayed into Square capital. Today, small businesses that may not be able to put together a “bankable” proposal might find access to capital through Square, simply because Square has proprietary information on the business’s payments.

These innovations have raised challenges for implementation of the CRA and other regulations such as fair lending. For example:

• How does one properly define a bank’s assessment area when services are offered through the internet?

• What expectations should be set for CRA requirements for nonbank lenders? These institutions do not enjoy the same privileges of deposit insurance and access to the discount window, which was an original premise of the CRA. Yet, nonbank providers are growing in influence.

• What are the implications for new mechanisms that are emerging to evaluate and price credit, including payments patterns? Innovation is on the horizon, potentially including Internet usage patterns. While these options open access to credit for some, model-based credit tends to limit access for those with weak performance.

Solving the issues associated with low- and moderate-income communities, including access to credit, is no small task. We know from our research that many
balance sheet or wealth building issues are generational. They will not be overcome in the short time.

Nonetheless, these issues should not stop us from what we CAN accomplish, especially here in St. Louis. Frequently, change occurs because of many small efforts over a long period of time, facilitated by strong, passionate leaders. The true strength of the CRA is that it acts as a catalyst for community partners and financial institutions to work together to build stronger communities. I welcome you to this conference and applaud your involvement.

1. Bernanke, Ben. “The Community Reinvestment Act: Its Evolution and New Challenges; Community Affairs Research Conference, Washington, DC; March 30, 2007
2. Ibid