WASHINGTON -- A U.S. law that requires banks to serve the less affluent has widened access to credit and helped increase home ownership, but needs to evolve to address the rise in nonbank lenders, Federal Reserve Chairman Ben Bernanke said Friday.
"Research on the CRA (Community Reinvestment Act) has tended to find positive net effects, but the results are not uniform," Bernanke said at a Fed-sponsored conference on community development.
Research also shows the law's effect is diminishing as mortgage lending by nonbank institutions expands, Bernanke said.
Non-bank financial institutions include mortgage originators, payday lenders, check cashers and remittance agents, among institutions that perform specialized financial services but do not hold deposits. Such institutions are active in the very communities the CRA was intended to steer banks to.
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Access to credit in lower-income communities is greater now than when the Community Reinvestment Act was launched 30 years ago, the U.S. central bank chief said.
"This greater access has had tangible benefits, such as the increase in homeownership rates," Bernanke said.
At the same time, the recent rise in delinquencies and foreclosures among mortgage markets catering to borrowers with weak credit shows that simply expanding lending does not always lead to positive outcomes in less affluent communities, he said.
"How to try to differentiate 'good' from 'bad' lending in the CRA context is an issue that is likely to challenge us for some time," Bernanke said.
The Fed and other bank regulators have come under harsh scrutiny from lawmakers for failing to anticipate problems in markets for borrowers with weak credit, referred to as subprime mortgages because they carry higher risk.
Bernanke said nonbank institutions have become "important sources of financial services" in low and moderate income communities. However, high fees charged in some instances by those businesses have raised concerns, he said.
Banks might be prodded through the Community Reinvestment Act to compete more actively with nonbank lenders in lower-income neighborhoods, he said.
A 2005 revision of Community Development Act rules has eased some of the regulatory burdens on financial institutions, Bernanke said.
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