The Community Reinvestment Act (CRA) reaffirms the concept that banks are granted charters to help meet the needs and convenience of the communities where they are located, including low- and moderate-income neighborhoods. The CRA requires financial institutions to invest a portion of their deposits in the community from which those deposits come. Credit unions are not subject to the act. People who live and own businesses in economically depressed neighborhoods are often older and greatly benefit from the strong presence of a federally insured financial institution. According to the National Community Reinvestment Coalition, from 1996 to 2014 CRA covered banks made over 551,000 community development loans in low- and moderate-income neighborhoods worth more than $796 billion. During this same time period, the annual amount of community development loans quadrupled from $17.7 billion to $74.6 billion.
Despite the benefits the CRA has delivered to underserved communities, some gaps remain. Several types of financial institutions are not subject to the CRA. In addition, national banks can receive a “satisfactory” rating under the law even if they continue to benefit from high-interest payday loans as a result of forming partnerships with major check-cashing firms.
Recent research also indicates that banks’ evaluations under the CRA are often inconsistent and lack strong performance-driven measurements. Improved data collection and greater involvement of community-based organizations in the development of performance measures would help make CRA evaluations more effective and could help increase the availability of fairly priced financial services in many low-income communities.
Community Reinvestment Act: Policy
Expanding Community Reinvestment Act (CRA) compliance
Bank regulators should ensure that all banks comply with the Community Reinvestment Act (CRA). Small banks should not be exempt from CRA requirements, and each bank should be required to disclose its current CRA compliance rating prominently on its website.
Congress should extend CRA coverage to other industries that offer financial products.
Compliance with state regulations
Regulators, at minimum, should consider an institution’s and its subsidiaries’ compliance with state usury or other statutes regulating check cashing and payday lending, as well as state basic-banking laws, in determining whether the institution should receive a “satisfactory” rating. Assessment areas should coincide with the market for an institution’s products.
Community service test requirements
Every bank should be expected to receive a “satisfactory” score on the lending and community development service portions of the CRA test, and should be given specific credit for offering small loans at reasonable rates with realistic repayment periods to low- and moderate-income people.
Standardized data should be developed for community service test requirements. Banks should be examined to determine whether they effectively market affordable savings products to low-income consumers and to assess the services they provide to attract households without bank accounts.
CRA rules should require that regulators assess the activities of bank affiliates engaged in banking, lending, and investment activities. Incentives for increasing prime lending should be incorporated into the performance standards for financial institutions under CRA regulations.