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Updated December 30, 2008
In 1977, Congress passed the Community Reinvestment Act (CRA) to address concerns that the banking industry was not meeting the credit and financial services needs of their communities. Specifically, CRA was passed in order to address two major concerns. First, there was evidence that banks were redlining certain low income and minority communities. Second, Congress was also concerned about disinvestment; a practice whereby banks would take funds, usually in the form of deposits, from the local community and then send them to major money markets in order to maximize interest rates. Disinvestment effectively robbed those communities of capital and thus, the ability to borrow.
Recently, there have been calls to expand the reach of CRA, including suggestions by some that CRA should be extended to credit unions. CRA, however, was adopted as a punitive measure in the face of clear evidence of redlining and disinvestment. There is no evidence credit unions have ever engaged in such tactics.
Additionally, it is practically impossible for credit unions to participate in disinvestment, one of the driving factors behind CRA. Every credit union has a defined field of membership (FOM), and credit unions can only serve those within the FOM. While a credit union has some flexibility in where it invests it assets, it must still operate within its FOM, which must share a common bond or constitute a well-defined local community with interaction and/or shared common interests.
Further, credit unions with one or only a handful of select occupational groups (SEGs) may find that they have very few low and moderate-income individuals who fall within their respective FOMs.
More importantly, as discussed above, CRA was a punitive measure for banks’ bad actions. Conversely, there is ample evidence to demonstrate that credit unions are an important part of the solution, not the problem. Under CRA, activities that may warrant favorable consideration as responsive to the credit needs of an institution’s community include, but are not limited to:
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providing financial education;
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providing small unsecured loans;
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providing borrowers to transition from loans with higher interest rates and fees to lower-cost loans; and
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allowing borrowers access to reporting agencies and the opportunity to improve borrower credit histories.
Credit unions already participate in all of these activities in a significant manner without being required to comply with CRA. Imposing CRA on credit unions would merely create an additional costly regulatory burden on an industry which has always been a leader in providing low cost services to people of modest means.
Many credit union members come from the low income and minority populations of our society. Although banks and thrifts are subject to CRA, HMDA data clearly indicates that credit unions are outperforming banks and thrifts in terms of loan and price spreads as well as service to these particular segments of the population.
An analysis of the recently released 2007 HMDA Data shows that credit unions are making smaller mortgage loans than banks and thrifts and have a higher percentage of their mortgage loans going to low- and moderate- income borrowers. The HMDA data shows that credit unions have higher loan approval rates for low- and moderate- income households and for minority households across the board than banks and thrifts do. Furthermore, given recent abuses in the sub-prime mortgage market, credit unions are much more likely to put low- and moderate- income and minority borrowers into lower interest loans than banks and thrifts.
As the HMDA data shows, 14.7% of loans from banks and 24.8% of mortgage loans from thrifts to households making under $40,000 in income were at least 3% higher than an applicable Treasury yield of a product with a comparable maturity, while only 3.7% of credit union loans were outside of the 3% range. That difference is even more pronounced when you look at mortgage loans to minority households with income under $40,000. Banks charged at least 3% higher than the Treasury yield on 20.8% of those loans, while thrifts did on 34.7% of them. Credit unions, on the other hand, were only outside of the yield spread on 4.4% of their loans. So while the banks and thrifts claim that they are making mortgage loans to low- and moderate-income and minority households, what they don’t tell you is that they are happy to charge those populations more as well. Some might call this the equivalent of redlining these populations in the 21st century.
House Financial Services Committee Chairman Barney Frank has suggested expanding CRA to other entities including credit unions. His home state of Massachusetts is one of two states (with Connecticut) to have a CRA program on state chartered credit unions.
The Committee has not taken up any CRA legislation in the 110th Congress, but did hold a hearing on the 30th Anniversary of CRA on February 13, 2008. NAFCU submitted comments for the hearing record noting the track record of credit unions outperforming banks and thrifts, despite those institutions already having CRA requirements. NAFCU continues to believe CRA is not necessary for credit unions and would only be a new regulatory burden, and, thus, NAFCU opposes any extension of CRA to credit unions. It is expected that the House Financial Services Committee will revisit the CRA issue in the 111th Congress.
Related Documents
Mortgage Lending Chart. This chart illustrates how credit unions are outperforming other financial institutions when it comes to home loans to low-income and minority applicants.
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