79 VALR 349 (Cite as: 79 Va. L. Rev. 349)

Virginia Law Review

March, 1993


Introduction and Conclusion Only

Peter P. Swire [FNa]

Copyright  1993 by the Virginia Law Review Association; Peter P. Swire


 IN "The Community Reinvestment Act: An Economic Analysis," [FN1] Professor Jonathan R. Macey and Professor Geoffrey P. Miller present a powerful and sustained critique of the Community Reinvestment Act ("CRA" or "the Act"). [FN2] Macey and Miller chronicle a long list of disadvantages flowing from the current application of the Act. Perhaps most important of these is that the CRA may actually decrease the level of investment in low-income and moderate- income communities, while imposing enormous compliance burdens on banks.

This Reply to the Macey and Miller article has two aims. The first is to develop a proposal for change in CRA enforcement that answers the authors' criticism. The core of the proposal is to form a "safe harbor" for banks and their holding companies [FN3] within the enforcement provisions of the Act. The second aim of this Reply is to examine the more general question of when safe harbors are appropriate, and develop a theory of safe harbors.

The safe harbor that I propose would allow banks meeting certain criteria to receive favorable treatment automatically when they make applications that are subject to review under the CRA. The price of this safe harbor would be a bank's commitment to substantial investment in community development banks ("CDBs") and other qualifying investments. [FN4]

The safe harbor proposal would go far toward easing the disadvantages noted by Macey and Miller, and likely be superior to the current regime from a public policy perspective. As described by Macey and Miller, the current regime has very high compliance costs, including compliance burdens on banks, risks for banks that good CRA compliance will not be rewarded, and protests accompanying mergers or branch applications. A safe harbor could decrease these compliance costs while increasing the amount actually spent pursuing the CRA goal of investing in low-income and moderate-income neighborhoods.

In political terms, the safe harbor is well-designed to meet the specific and general themes of the new Clinton administration. Among all banking issues, President Clinton singled out community reinvestment for attention during his campaign, [FN5] and the safe harbor offers a way to increase community investment while reducing onerous bank compliance costs.

Further, the safe harbor is an appropriate regulatory measure in this instance. Generally, a safe harbor is defined as a regime that includes a general standard that restricts activity, such as the CRA requirement that banks invest in their local communities. The safe harbor also includes a more specific rule that can make activity per se legal, such as the proposed safe harbor if banks invest enough in qualifying CRA investments. As discussed in detail below, the factors that in general make a safe harbor more attractive are present in the CRA context.

This Reply first describes the safe harbor proposal, noting that it can be implemented by regulation without need for new legislation. Part II shows how the proposal addresses many of the Macey and Miller criticisms of the current CRA regime. Part III explains how the proposal fits with President Clinton's history of involvement with community reinvestment issues, including his discussion of those issues during the 1992 campaign and in his first State of the Union address. Part IV compares the safe harbor to available alternatives. It concludes that the safe harbor is preferable to the current system, and also to other approaches to CRA problems based on taxation, government expenditures, and individual lawsuits. Part V offers thoughts toward a general theory of safe harbors as a regulatory mechanism, and concludes that such a mechanism would be appropriate in the CRA context.


The safe harbor proposal described here seeks to increase CRA investment while reducing the compliance costs that plague the current system. The proposal has the singular virtue of addressing the concerns of CRA critics such as Macey and Miller while advancing the announced goals of President Clinton's new administration. In the short term, the proposal has the advantage of being established by regulation, without the need to clutter the crowded agenda facing Congress. In the longer term, the proposal seems likely to be politically sustainable, and to make the CRA a more effective instrument for channeling investment into low-income and moderate-income neighborhoods while imposing the least possible costs on the banking system.

The CRA proposal advanced here also provides an opportunity to examine the more general question of when safe harbors are an effective regulatory approach. The static analysis highlighted several factors that tend to make a safe harbor more desirable: numerous transactions; great uncertainty regarding how to comply with a standard; high costs ex post to impose sanctions on a transaction; and, high costs to preclear the transaction. Safe harbors also are more appropriate when subgroups exist, under one of three defined scenarios. The dynamic analysis identified a number of plausible ways that desirable safe harbors might be created. A notable example occurs when experience gives regulators the ability to supplement the initial vague standard with more specific rules of per se legality.

As described earlier, all of these general factors supporting a safe harbor exist with respect to the CRA proposal. The theoretical arguments of this Reply bolster its legal and policy arguments. The Clinton administration should give the CRA safe harbor a chance.

Fna. Associate Professor of Law, University of Virginia. Thanks to Chris Dawe for research assistance. Hal Krent, Saul Levmore, and Bob Litan provided helpful comments on earlier drafts. I am grateful to the University of Virginia Law School Foundation and the Bankard Fund for Political Economy for research support. Return to Text

FN1 Jonathan R. Macey & Geoffrey P. Miller, The Community Reinvestment Act: An Economic Analysis, 79 Va. L. Rev. 291 (1993). Return to Text

FN2 12 U.S.C.  2901-2907 (1988 & Supp. III 1991). Return to Text

FN3 Under current law, banks, thrifts, and their holding companies are subject to supervision under the CRA. This response will use the term "banks" to cover all institutions so regulated. Return to Text

FN4 A letter from the Clinton campaign to the American Banker stated: "A community development bank is actually a holding company that encompasses a federal deposit institution offering traditional bank services, a for-profit real estate development company, an SBA-approved small-business development company, and one or more nonprofit corporations that provide consulting services." Robert M. Garsson & Jim McTague, What the Candidates Would Do for Banking: Community Help with a Capital "C," Am. Banker, Oct. 19, 1992, at 13. It is not clear whether the holding company need include all of these entities in order to meet a Clinton administration definition of CDB. Return to Text

FN5 See infra text accompanying notes 21-30 (Clinton's statements on CRA issues). Return to Text


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