American International Group (AIG) would probably be alive and well if all of its businesses had been covered by the Community Reinvestment Act (CRA).  Enacted by Congress in 1977, CRA requires banks to serve community credit needs consistent with safety and soundness.  Federal regulatory agencies conduct CRA exams and give banks a rating based on how many loans, investments, and services banks make in low- and moderate-income communities.  A bank will fail its CRA exam if it engages in problematic and unsafe lending that runs afoul of laws preventing unfair and deceptive practices.

Interestingly, in AIG’s case, the company operates a savings and loan that undergoes CRA exams.  In July of 2007, the Office of Thrift Supervision fined the thrift $128 million for unsound lending practices, including not adequately evaluating borrowers’ creditworthiness.  AIG’s savings and loan subsequently failed its CRA exam.  Now, it is true that these actions occurred too late; the thrift had been making bad loans between 2003 and 2006.  A more vigorous regulatory agency would have clamped down sooner. Last month, for example, another regulatory agency, the FDIC, failed five lenders on their CRA exams.  One of these banks, CIT group, failed because it financed predatory loans made by other lending institutions.

Despite the torpid pace of OTS oversight of AIG’s thrift, notice that it was not the thrift that threatened the wellbeing of AIG and the United States’ economy.  The calamitous AIG unit that was not covered by CRA is called AIG Financial Products, and it specialized in the unregulated business of credit default swaps.

AIG is a vast company that could benefit communities if it becomes properly regulated.  Its retail operations include offering the general public insurance, home loans, money market accounts, deposit accounts.   CRA, if it had been applied to all parts of AIG, could have ensured that low- and moderate-income communities received safe and sound loans, insurance, and money market accounts.  AIG’s investment entities could have been required by CRA to create funds and provide investment in businesses owned by low- and moderate-income borrowers as suggested by Liz Cohen and Rosalia Agresti in an article of a recent Federal Reserve publication assessing CRA’s future role (NCRC, by the way also has an article in this publication available!).

We are all outraged by unearned bonuses received by certain AIG employees.  Yet, a productive way to channel this outrage is to ensure that the AIG’s of the world serve communities, particularly historically disenfranchised communities.  Join NCRC in advocating for applying CRA broadly throughout the financial industry and in supporting the CRA Modernization Act of 2009, HR. 1479, introduced by Representative Eddie Bernice Johnson of Texas.

Contact jsilver@ncrc.org for any questions regarding this article.