Community Reinvestment Act

Congress enacted the Community Reinvestment Act (CRA) in 1977 after years of grassroots pressure to encourage banks to help meet the credit needs of the communities in which they are chartered. Previously, individuals and businesses in low-income areas were often denied credit because of the perceived high-risk nature of such loans.

Underthe CRA, federal bank regulators evaluate most banks every two years on their community reinvestment performance. If a bank’s CRA record is poor, its request to open a new branch or expand through mergers and acquisitions can be denied. Community groups can make written comments on a bank’s performance at any time and have the comments put into the bank’s CRA file so that regulators consider them as part of the evaluation.

As a result of CRA, lenders have made what some estimate to be over $1 trillion in loans to residents and businesses in low-income areas. Critics often say the law forces banks to make risky loans, but banks have found that CRA is good business.[1] A survey of 600 lending institutions by the Federal Reserve Bank of Kansas City found that 98 percent found CRA lending is profitable.[2] Indeed, the nation’s leading scoring company, Fair Isaac and Company, studied the default performance of a spectrum of incomes and concluded that income is negatively correlated with loan repayment behavior. That is, the higher the income, the higher the probability of default.

Forseveral years after it was passed, CRA was not regularly complied with. In 1989, Congress amended the law. One adjustment required that regulators make public their evaluation of an institution’s CRA performance. This change, along with increased Congressional attention to the law’s enforcement, has made a difference. Banks are concerned about what their evaluations will say, and federal agencies are concerned with the public’s perception of the evaluation process.

Unfortunately,several trends threaten to weaken the CRA. More of the money we save in this country is not going to banks, but to mutual funds, pension plans, insurance companies, independent mortgage brokers and other non-bank lenders. These non-depository institutions are not covered by the CRA. In 1977, banks held 60 percent of the assets in the financial industry. In 1997, banks controlled only 27 percent of the total assets in the financial industry. Thus, the CRA increasingly applies to fewer of these assets. Some organizations, like the National Community Reinvestment Coalition, are trying to extend the CRA to non-depository institutions. Congress, regrettably, is going in the other direction, debating several bills that would restrict CRA requirements for depository institutions.

In 1999 Congress passed the Financial Modernization Act, commonly called the Gramm-Leach-Bliley Act. Contained in its 360 pages of changes in financial regulation are two provisions that affect CRA. First, the review cycle for small banks (those with less than $250 million in assets) is extended from two years to five years. Second, banks and community groups are required to report their CRA agreements on an annual basis, but federal agencies are prohibited from following up on disclosures to see if banks are fulfilling their promises.

In January 2004, the four federal agencies that oversee CRA proposed to raise the asset level for what is considered a small bank from $250 million to $1 billion. Two of these agencies – the Federal Reserve and the Office of the Comptroller of the Currency – withdrew the proposed rule change in July. “On balance,” said the Fed, “the board does not believe that the cost savings clearly justify the potential adverse effects on certain rural communities.”

The Federal Office of Thrift Supervision approved the rule for savings and loans institutions effective October 1, 2004. This raises the percentage of OTS supervised thrifts that receive the small bank exemption from 66 percent to 87 percent.

The Federal Deposit Insurance Corporation is considering a rule change that would not only expand the small bank category to those with up to $1 billion in assets but also change the community development criterion on which small banks are evaluated. They will be allowed to choose among community-based lending, investment and service activities instead of being evaluated on all three standards. Also, the definition of community development will be expanded to cover a broader range of activities in rural areas.

[1] The investment firm Charles Schwab has a mutual fund that invests in CRA-qualified securities, called CRA Qualified Investment Fund, which is marketed to “socially responsible investors”.

[2] Larry Meeker and Forest Myers, “Community Reinvestment Act Lending:  Is it Profitable?” Financial Industry Perspectives , Federal Reserve Bank of Kansas City, 1996, pp. 13-45.  See also, “Credit Risk, Credit-Scoring, and the Performance of Home Mortgages,” Federal Reserve Bulletin , July 1996, pp. 621-48. Cited in a speech by Federal Reserve Board Governor Edward M. Gramlich, University of Wisconsin Madison, June 16, 1999.

More Information:

  • View the Updated CRA as it currently appears in the U.S. Code