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What Is the Community Reinvestment Act (CRA)?
Let me explain the Community Reinvestment Act, or CRA, directly to you. It's a federal law passed in 1977 that pushes banks and other depository institutions to address the credit needs of the communities they serve, especially those low- and moderate-income areas.
Under this law, federal banking agencies must assess how effectively each institution is meeting these needs. They factor these evaluations into decisions on applications for things like mergers, new charters, acquisitions, branch openings, and deposit facilities.
Key Takeaways
You should know that the CRA ensures federally insured banks fulfill community credit needs while maintaining safe banking practices. It was part of a wave of laws in the late 1960s and 1970s aimed at broadening credit access. Banks face evaluations on lending and data, but there are no strict quotas to hit. You can find CRA performance ratings online or request them at bank branches. The 2023 update brings in a metrics-based evaluation, adjusts for digital banking, and emphasizes expanding credit and services in underserved areas. Most changes kick in on January 1, 2026, with data reporting starting January 1, 2027.
Understanding the Community Reinvestment Act (CRA)
Before the CRA and other fair housing laws, banks in the U.S. routinely denied mortgages to Black Americans and other people of color in specific areas marked as 'redlined' by the Home Owners' Loan Corporation (HOLC). This agency made maps rating neighborhoods by perceived lending risk, drawing from sources like appraisers, loan officers, city officials, and real estate agents.
These maps used colors to indicate risk levels, with red marking 'hazardous' areas described as having detrimental influences, undesirable populations, or infiltrations. Predominantly racial and ethnic minority neighborhoods got the red label, leading to the term 'redlining'.
This practice fueled widespread racial discrimination. Right away, it blocked residents from getting credit for buying or improving homes. The effects linger: 74% of those red neighborhoods from over 80 years ago are still low- to moderate-income today, 64% remain minority neighborhoods, while 91% of the 'best' green areas are middle- to upper-income now, and 85% are predominantly White.
Warning on Discrimination
Remember, housing and lending discrimination are illegal. If you believe you've faced discrimination based on race, religion, sex, marital status, public assistance use, national origin, disability, or age, file a complaint with the Consumer Financial Protection Bureau (CFPB) or the U.S. Department of Housing and Urban Development (HUD).
Objectives and Oversight of the CRA
The CRA aimed to bolster laws that require banks to meet the banking needs of all community members adequately. Three regulators handle oversight: the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve Board, with the latter mainly assessing state member banks.
CRA Performance Ranking
The Federal Reserve ranks banks using one of five methods based on size and mission. A 1995 update mandates considering lending and investment data, but it's subjective without quotas. Banks get rated as Outstanding, Satisfactory, Needs to Improve, or Substantial Noncompliance. You can check scores in the FDIC's online database or request evaluations from banks.
Important Note on Applicability
The CRA covers FDIC-insured institutions like national banks, state-chartered banks, and savings associations, but exempts credit unions backed by the National Credit Union Share Insurance Fund and non-bank entities.
Criticisms of the CRA
Critics, often conservative politicians and commentators, say the CRA led to risky lending that fueled the 2008 financial crisis by pushing banks to loosen standards for subprime mortgages. However, economists like Neil Bhutta and Daniel Ringo from the Federal Reserve found in 2015 that CRA-related mortgages were a small fraction of subprime loans, so the law wasn't a major cause of the downturn.
Others criticize its effectiveness, noting that after the CRA, low- and moderate-income areas got more loans, but non-CRA entities like credit unions matched that share, per Federal Reserve research by Jeffrey Gunther.
Modernizing the CRA
Economists and policymakers argue the law needs updates for industry changes and to ease bank burdens. For instance, branch locations still factor into scoring despite online banking's rise. In a 2018 op-ed, former Comptroller Joseph Otting called out 'investment deserts' where the outdated approach limits banks from getting credit for needed investments.
The OCC proposed a 2020 rule to modernize, drawing over 7,500 comments. Critics like the National Community Reinvestment Coalition said it weakened accountability, but Otting claimed it boosted credit and affordable mortgages. In 2021, the OCC rescinded it for a joint rule with the Federal Reserve and FDIC. A 2022 proposal addressed online banking and broader reinvestment.
In 2023, the OCC, Federal Reserve, and FDIC finalized a rule focusing on eight objectives: strengthening the CRA's purpose, adapting to banking changes, promoting transparency, and ensuring regulatory consistency.
Related Topics
U.S. fair lending laws ban discrimination in credit based on protected classes, including the Fair Housing Act of 1968, Equal Credit Opportunity Act of 1974, Home Mortgage Disclosure Act of 1975, and CRA of 1977.
Redlining was the illegal denial of credit to areas based on race or ethnicity, stemming from HOLC maps that colored minority neighborhoods as risky.
Lenders can only consider creditworthiness factors like ability to pay; it's illegal to factor in race, color, religion, national origin, sex, marital status, age, or public assistance.
Redlining widened the wealth gap by denying minorities homeownership opportunities, leading to disinvestment and persistent disparities compared to White communities.
The Bottom Line
In summary, the CRA makes sure federally insured banks serve all communities' credit needs, particularly low- and moderate-income ones. It started to fight redlining and promote fair credit access, evolving with the banking world. Despite criticisms linking it to the 2008 crisis or doubting its impact, many see it as essential for equity. Recent updates modernize it for transparency and current practices, ensuring fair services for everyone.
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