Tuesday, December 6, 2011

Municipal Deposits and Community Reinvestment Act

Several cities in the U.S. Northwest -- Seattle, Portland, and Eugene -- are considering plans to shift funds from large banks to locally-owned financial institutions, including credit unions.

The proposed changes in their financial arrangements arose from the Bank Transfer Day movement.

But before transferring city funds, these cities should analyze the commitment of financial institutions to serve their local communities.

All banks currently are subject to the Community Reinvestment Act and must document how they are serving their local markets or communities. Banks are examined with regard to their compliance with the Community Reinvestment Act.

On the other hand, credit unions (with the limited exception of state chartered credit unions in Massachusetts and community chartered credit unions in Connecticut) are not covered by the Community Reinvestment Act. Therefore, credit unions are not required to document how they are serving their local communities.

As Preeti Vissa, Community Reinvestment Director of The Greenlining Institute, wrote in the American Banker's Bank Think Blog, "the awkward truth is that we don't know nearly enough about the extent to which credit unions overall serve low- and moderate-income consumers. They aren't required to collect and report details on the incomes or other characteristics of members, and because they aren't covered by the Community Reinvestment Act, they do not have to report much of the information that is required from banks."

Because of this lack of transparency, city governments should only deposit taxpayer funds into financial institutions that are covered by the Community Reinvestment Act.

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