Community Reinvestment Act exemptions?

[Arnie Rundel]

A friend from church is trying to raise money for a small local charity and is making the rounds of area businesses looking for contributions. He is under the impression that banks are good candidates to request donations from because they have mandatory standards for charitable donations in order to comply with the Community Reinvestment act. However, his branch manager is claiming that her bank is not subject to the CRA rules and that she is not familiar with the details of the program because it doesn’t apply.

Does anyone know if banks are required to make a minimum amount of contributions? If so, are some banks able to obtain exemptions? If not, should the bank be reported to whatever government agency oversees the program?

[Saticon3]

No expert here, but I don't think community reinvestment has anything to do with requiring chartitable donations, but, rather, prohibits banks from discriminating against people from low-income areas in the making of their loan decisions. The applicant still must meet the loan credit- worthiness criteria, but they cannot use as a factor that the applicant may live in a low income area.

"The Community Reinvestment Act (CRA, Pub.L. 95-128, title VIII of the Housing and Community Development Act of 1977, 91 Stat. 1147, 12 U.S.C. § 2901 et seq.) is a United States federal law designed to encourage commercial banks and savings associations to help meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods.[1][2][3] Congress passed the Act in 1977 to reduce discriminatory credit practices against low-income neighborhoods, a practice known as redlining.[4][5]

The Act instructs the appropriate federal financial supervisory agencies to encourage regulated financial institutions to help meet the credit needs of the local communities in which they are chartered, consistent with safe and sound operation (Section 802.) To enforce the statute, federal regulatory agencies examine banking institutions for CRA compliance, and take this information into consideration when approving applications for new bank branches or for mergers or acquisitions (Section 804.)[6]

'

[Not Ambivalent]

I’m not an expert either but I believe banks can meet their CRA requirements in a number of ways including 1) extending credit to disadvantaged individuals or to selected groups (such as a minority churches) using relaxed credit standards, 2) bank employee involvement with certain local community groups such as volunteer work or serving on boards, and/or 3) outright cash donations to minority community groups and charities. I understand many conservative banks prefer to make outright cash contributions rather than deal with the larger proportion of problem loans.

I also think that banks in financial distress can get temporary CRA exemptions while they are under increased regulatory supervision. Do you know the name of the bank?

As an aside, isn't:

"mandatory ... donations"

an oxymoron?

[Arnie Rundel]

Do you know the name of the bank?

Tower Federal

[sigmalady]

Tower Federal

Tower Federal is a credit union, not a bank.

[Not Ambivalent]

Tower Federal is a credit union, not a bank.

sigmalady is correct.

Although credit unions and banks are indistinguishable to the general public, they are not subject to the same regulations.

Among the differences is that congress explicitly excluded Credit Unions from the CRA. There have been numerous attempts since the act was adopted to end the Credit Union exemption. However, the credit unions have some powerful friends in Congress who have blocked the legislation each time it has been proposed. Our own Barbara Mikulski is one of them. Subjecting CU’s to the CRA would add considerably to their costs which would be passed on to their customers.

[Not Ambivalent]

I should have been clearer when I said "Barbara Mikulski is one of them." I meant that she is one of the powereful friends and advocates of CU's. I don't know whether or not she specifically is one of senators who have blocked efforts to subjecti CU's to the CRA regulations.

[Arnie Rundel]

So it’s the same ol’ s$%#. Another example of elected officials playing favorites. Industries, subsets of industries, individual companies that support them get favorable treatment and those that don’t play along get punished. And us taxpayers pay for it all.

[Not Ambivalent]

So it’s the same ol’ s$%#. Another example of elected officials playing favorites. Industries, subsets of industries, individual companies that support them get favorable treatment and those that don’t play along get punished. And us taxpayers pay for it all.

Arnie, While your blood pressure is already up, I can think of two more goodies that congress has bestowed on CU’s that aren't available to their competitors:

1. Credit Union profits are entirely tax free. They pay absolutely NO taxes on their earnings. Other banks pay up to 35% of net income. Many CU’s are huge so this is potentially big bucks. For example, Navy Federal has nearly $50 billion in assets.
2. Unlike other banks, Credit Unions are exempted from requirements to disclose compensation paid to executive officers and directors.

[sigmalady]

Leave the credit unions alone. They don't gouge their members the way that banks gouge their customers.

[Not Ambivalent]

Leave the credit unions alone. They don't gouge their members the way that banks gouge their customers.

I’m not picking on credit unions. I am simply noting that congress has bestowed competitive advantages on them. If one business operates tax free with a significantly lower regulatory burden, it is only logical that its competitor’s prices will be higher given the cost disadvantage (leading to a perception of “gouging”).

Our government loves to pick winners and losers. This is true in EVERY industry and is not unique to banking. The preferred groups get tax breaks, tax credits, regulatory breaks, legal controls, subsidies, market preferences and on and on. Think of energy, defense, agriculture, transportation and pretty much any other industry. That is why many people describe our economic system as “crony capitalism.”

I have a credit union account myself simply because I can get better rates and lower fees. One doesn’t look a gift horse in the mouth. Self interest says go with the best deal whether or not it is due, in whole or in part, to government manipulation of the free market.

[Not Ambivalent]

I know that this may sound cynical but I am also realistic enough to accept that this will never change. Two reasons are:

1. It is great for politicians. Favored groups will naturally shower those politicians who advocate on the group's behalf with campaign contributions, public support, manpower and even bribes because the favored groups seek to protect their existing advantages and lobby for more. Groups that are out-of-favor will do the same in order to gain political access as a matter of self-protection.
2. The process is self-perpetuating. Favored groups are able to capitalize on their advantages and offer the public (i.e., voters) cheaper products and services. Naturally, the politicians hear this and believe that this proves the favored groups are the good guys. So, they reward their good behavior with MORE breaks and punish the bad out-of-favor groups by subjecting them to more taxes, regulation, tariffs, etc. This leads to an even greater disparity and the politicians respond with more rewards and punishments. The disparity just keeps ratcheting up. After all, the politicians are simply “looking out for the little guy.”

Again, political favoritism is a systemic problem and not is unique to banking.

It is also not unique to either political party. The only difference between Democrats and Republicans is WHICH groups they favor.

[Saticon3]

aren't credit unions theoretically non-profit and member owned? Wouldn't that justify some of their advantages over banks?

[Not Ambivalent]

aren't credit unions theoretically non-profit and member owned? Wouldn't that justify some of their advantages over banks?

Simply being member-owned does not automatically entitle a company to tax-free status. A good example is Mutual Savings Banks. Like Credit Unions, MSB's are owned by the bank's customers (hence the name "mutual"). Unlike credit unions, MSB's are also subject to the same taxes, rules and regulations as any other bank. An MSB's net income flows to its members via interest on checking and savings AFTER the taxes have been paid. A credit union functions the same way except that its net income flows to its customers untaxed.

Also, credit unions are not non-profit in the sense that a charity is non-profit. The difference is simply that net income for a CU is distributed to its own customers (like a Mutual Savings Bank) rather than to outside investors. To qualify as charities, a CU's primary purpose would have to be granting loans to the economically disadvantaged and offering checking account services to the poor. Obviously, their reason to exist is not to help the needy.