Understanding the Community Reinvestment Act

Passed in 1977, the Community Reinvestment Act (CRA) is one of the most important pieces of banking legislation passed in the last century.

The practice of redlining in majority-minority communities and how it affected cities across the country has been well-documented. The CRA was passed to stop this injustice.

At its core, the CRA mandates that banks must meet the needs of moderate and low-income communities where they do business. To determine whether banks are reaching this goal, banks designate an assessment area based on the locations of their branches. Banking regulators then conduct exams that evaluate banks in the following areas:

  • A lending test that includes home mortgages, small-business loans, small farm loans, and community development loans. This is the most important part of the exam and makes up half the score.
  • An investment test that evaluates investments made by banks in community development, most notably in how they meet the needs of moderate and low-income communities. Investments qualifying for CRA credit include low-income housing tax credits and grants to nonprofits that promote lending to small businesses and low and moderate-income individuals.
  • A service test that looks at where banks locate their branches and whether there have been any bank closings in low to moderate income communities. The exam also looks at any services the bank has provided in support of community development. Qualifying services include bank officers serving on the boards of community development organizations as well as provisions of technical assistance.

Examiners also review whether a bank has been sanctioned for discriminatory or illegal credit practices. In 2017, Wells Fargo failed its CRA exam due to the fake account scandal and a number of fair lending violations.

Depending on the size and type of each bank the CRA exams are done by either the Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, or the Federal Reserve. Those interested in a particular bank’s CRA rating but who are unsure of which agency regulates it can visit the Federal Financial Institutions Examinations Council CRA rating website.  Each bank then receives one of four grades. If the bank gets an Outstanding or Satisfactory grade, it has passed the exam. Needs to Improve and Substantial Noncompliance are considered failing grades. When a bank fails an exam, it is subject to more frequent reviews and faces significant hurdles when it wants to open new branches or merge with another bank.

When it comes to the CRA, community development organizations play an important role. In determining whether or not a bank is meeting its CRA commitments, regulators will speak to heads of organizations working in community development to learn about the needs of the community and what a bank is or is not doing to meet them.

In addition, banks and community development organizations often find it advantageous to maintain open lines of communication with one another. Many times, large banks have employees dedicated to ensuring they fulfill their CRA obligations. These employees often are devoted to economic and social justice and are working to change the system from within. Through working with community development organizations, they seek out opportunities for their banks to make financially sustainable investments that benefit low and moderate income communities.

The CRA also encourages banks to engage in Community Benefits Agreements. After Santander Bank failed its CRA exam, it entered into an $11 billion agreement with community organizations across the eight states it operates, in order to increase it. The agreement includes commitments to open new bank branches in low to moderate income communities, increases in lending to underserved populations, along with additional charitable donations and community service work from its employees.

According to the National Community Reinvestment Coalition, between 1996 and 2014, banks made more than 551,000 community development loans worth $796 billion. Much of this investment would not have occurred without the CRA.

The CRA is a critically important financial law for economic fairness, but it does have some flaws. First and foremost, the exams are too easy to pass. More than 98 percent of all banks receive a satisfactory or outstanding grade. A quick drive around Baltimore reveals there is plenty of unmet need for investment in underserved communities. Examiners need to develop better criteria that hold banks accountable.

Things have also changed a lot since the CRA was passed. More and more bank activity occurs online, yet CRA assessment areas are only based in areas where banks have a physical presence. For example, Ally Bank is an online-only financial institution with over $140 billion in assets. Ally receives deposits and makes loans across the entire country, but their assessment area only includes the Salt Lake City metropolitan area where their headquarters are located. Ally Bank themselves have acknowledged this shortcoming in the law.

Also, the marketplace for mortgages has changed significantly. According to the National Community Reinvestment Coalition, credit unions, mortgage companies, and fintechs issue the majority of mortgages. They should also be subject to regulation ensuring they equitably serve everyone.

Recognizing the need for a modernized CRA, the Treasury Department recently issued guidelines for updating the law. It includes both good and bad recommendations. Positives include updating assessment areas to include not only where banks locate branches, but also where they accept deposits, giving credit for community benefits agreements, and giving more consideration to rural areas when conducting assessments.

However, there are also some very worrisome recommendations. One of them would deemphasize branch locations in CRA exams. This could lead to massive bank closures in moderate and low-income communities. Another problematic proposal would allow banks who fail CRA exams to merge or open up new branches. Removing this penalty from the law would significantly reduce incentives for banks to comply with the CRA.

Recognizing that changes to the CRA are coming, the National Community Reinvestment Coalition created the “Treasure CRA” campaign to raise awareness about the CRA and advocate for changes to the law that are beneficial to low and moderate-income communities.

Here in Baltimore, the Maryland Consumer Rights Coalition works to monitor banks and ensure they are fulfilling their commitments under the CRA.

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Gregory Friedman

Gregory Friedman

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