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The Community Reinvestment Act: Good Goals, Flawed Concept


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  • White, Lawrence J.


Fundamentally, the Community Reinvestment Act (CRA)is a regulatory effort to "lean on" banks and savings institutions, in vague and subjective ways, to make loans and investments that (the CRA's proponents believe) those depository institutions would otherwise not make. It is a continued effort to preserve old structures in the face of a modernizing financial economy. At base, the CRA is an anachronistic and protectionist effort to force artificially a local focus for finance in an increasingly competitive, increasingly electronic, and ever-widening realm of financial services. Further, ironically, the burdens of the CRA may well discourage banks from setting up new locations in low-income neighborhoods and thus providing local residents with better-priced alternatives to high-cost check-cashing and payday lending establishments. There is a better way. First, to the extent that lending problems can be traced to discrimination against racial or ethnic groups or involving other categories of personal discrimination, the right tool is more vigorous enforcement of anti-discrimination laws -- notably, the Equal Credit Opportunity Act of 1974. Second, vigorous enforcement of the antitrust laws, especially with respect to mergers, is necessary to keep financial markets competitive, so that banks and other lenders are constantly under competitive pressure to provide attractive services offerings to their customers. Third, to the extent that there are socially worthwhile lending opportunities that somehow are not being satisfied by existing lending institutions, these projects should be funded through the public fisc, in an on-budget and transparent process. Finally, if public policy persists with something that resembles the CRA, the annual local lending obligations of banks should be explicitly quantified. This essay will expand on these ideas.

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Paper provided by Regulation2point0 in its series Working paper with number 349.

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Date of creation: Jan 2009
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Handle: RePEc:reg:wpaper:349

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  1. Lawrence J. White, 1993. "The Community Reinvestment Act: Good Intentions Headed in the Wrong Direction," Working Papers 93-01, New York University, Leonard N. Stern School of Business, Department of Economics.
  2. repec:fip:fedgsq:y:2007:i:mar30 is not listed on IDEAS
  3. Ben S. Bernanke, 2007. "The Community Reinvestment Act: its evolution and new challenges," Speech 272, Board of Governors of the Federal Reserve System (U.S.).
  4. William C. Apgar & Mark Duda, 2003. "The twenty-fifth anniversary of the Community Reinvestment Act: past accomplishments and future regulatory challenges," Economic Policy Review, Federal Reserve Bank of New York, issue Jun, pages 169-191.
  5. Lawrence J. White, 2002. "Financial Modernization after Gramm-Leach-Bliley: What About Communities?," Working Papers 02-02, New York University, Leonard N. Stern School of Business, Department of Economics.
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