How increased enforcement can offset statutory deregulation. The case of the Community Reinvestment Act
| Date | 31 July 2007 |
| Published date | 31 July 2007 |
| DOI | https://doi.org/10.1108/13581980710762273 |
| Pages | 262-274 |
| Author | Donald F. Vitaliano,Gregory P. Stella |
| Subject Matter | Accounting & finance |
How increased enforcement can
offset statutory deregulation
The case of the Community Reinvestment Act
Donald F. Vitaliano
Department of Economics, Rensselaer Polytechnic Institute, Troy,
New York, USA, and
Gregory P. Stella
New York State Department of Public Service, Albany, New York, USA
Abstract
Purpose – This paper aims to estimate the cost to US savings banks and savings and loan
institutions with assets under $250 million of complying with the anti-redlining Community
Reinvestment Act (CRA).
Design/methodology/approach – Compliance cost is modeled as a type of inefficiency because the
lending institution is required to favor higher cost borrowers whom it might otherwise choose to avoid.
Inefficiency is estimated using a special form of regression with a two-part error term that contains an
inefficiency parameter.
Findings – The 1995 statutory changes designed to lessen the cost of CRA compliance are
apparently more than offset by the increased enforcement efforts of the Clinton Administration, which
was hostile to deregulation enacted by Congress. For the vast majority of small thrifts, annual
compliance costs grew by $251,000 following “deregulation,” and for a small number of “Outstanding”
(in meeting the goals of the Act) institutions, CRA-related costs grew by $539,000. These increases
represent a rise of about 3.5 and 6 percent of operating expenses, respectively.
Practical implications – Given the wide latitude afforded financial regulators in the USA
legislative changes regarded as “de regulation” also require a sympath etic and supportive
administration to be realized.
Originality/value – The paper offers insights into how increased enforcement can offset statutory
deregulation, focusing on the case of the Community Reinvestment Act.
Keywords Compliance cost,Legislation, United States of America
Paper type Research paper
Introduction
The US Community Reinvestment Act (CRA) of 1977 came into effect in response to
charges that mortgage lenders were systematically restricting the amount of credi t
available to low income neighborhoods (so-called “redlining”). It remains a landmark
piece of social legislation, designed to require lending institutions to behave in a
socially responsible manner. Banking institutions in the US subject to the CRA
undergo periodic examination by regulators in order to assess their compliance with
the laws stated objective of taking affirmative action to meet the legitimate need for
credit and deposit facilities within the geographic area where they conduct busine ss,
consistent with sound banking practices[1].
In response to industry complaints about over-regulation, congress enacted changes
to the CRA in 1995 designed to lessen the compliance cost burden on small institutions
by introducing a streamlined bank examination process that focuses on mortgage
The current issue and full text archive of this journal is available at
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JFRC
15,3
262
Journal of Financial Regulation and
Compliance
Vol. 15 No. 3, 2007
pp. 262-274
qEmerald Group Publishing Limited
1358-1988
DOI 10.1108/13581980710762273
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