Investment Tests Take 'Community' Out Of CRA

Kenneth H. Thomas, a lecturer in finance at the University of Pennsylvania's Wharton School, offers a perspective on the debate over the renewal of the Community Reinvestment Act of 1977. "One of the most controversial issues in the current CRA reform process is the fate of the investment and service tests tacked on between 1993 and 1995...Banks generally supported these tests, which became optional in 1996 and mandatory in 1997, since it meant they could get Community Reinvestment Act credit -- as much as 50% of their rating -- for nonlending services. Community activists feared a weakening of the CRA's basic lending function but were more focused on other reforms that promised to improve that law.Now the tables have turned -- banks generally oppose the tests (especially the investment one) and community groups and investment-test profiteers strongly defend them. My independent review of the roughly 400 comments submitted to regulators as part of the current reform process found that much of the support for these tests is being driven by goals inconsistent with good public policy."

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