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Overview of the Community Reinvestment Act

The year 2002 marked the 25th anniversary of the U.S. Congress’ passage of the Community Reinvestment Act.[2] The CRA was one of the first pieces of fair lending legislation enacted in the U.S. to combat the practice of redlining or refusing to serve particular geographical areas due to race or income of the area’s residents. Known as Title VIII of the Housing and Community Development Act, the CRA is designed to encourage commercial banks and savings and loans to invest in low- and moderate-income communities where they operate.


CRA Goals and Community Development

Since its passage in 1977, the CRA’s primary goal has been to increase access to credit for individuals and businesses in low- and moderate-income communities. Congress’ original intention was to address geographic discrimination on the part of financial institutions that were failing to meet the credit needs of communities where they were chartered. The CRA has enabled groups advocating affordable housing and community development to evaluate the lending performance of CRA-regulated financial institutions.

Small business associations, nonprofit development organizations, local community advocacy groups and public agencies have used the “CRA challenge” or grievance procedure to negotiate CRA agreements with banks and savings institutions on behalf of low-income communities. The Center for Community Change reported that banks and savings institutions have committed an estimated $400 billion to low-income communities through such negotiated agreements.[3]

Financial institutions meet the CRA’s requirements for meeting the credit needs of communities by approving loans to support:

  • construction and rehabilitation of affordable housing and permanent financing for multifamily rental property for low-and moderate-income persons;
  • community facilities in low- and moderate-income areas;
  • community development financial institutions (CDFIs), community development corporations (CDCs) and minority- and women-owned financial institutions;
  • local, state and tribal governments for community development activities;
  • financing for environmental cleanup and redevelopment of industrial sites in low-and moderate-income communities; and
  • community services targeted to low- and moderate-income individuals including school savings programs, credit and homebuyer counseling, technical assistance for economic revitalization programs and other activities.


Evaluations of Financial Institutions

The CRA requires four federal agencies to regularly evaluate the extent to which state or federally chartered savings institutions and banks have met local community credit needs before approving requests to expand through mergers, acquisitions and opening new branches. The four regulatory agencies are the Federal Reserve Board (FRB), the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervision (OTS). (See Appendix A for details on the evaluation process and Appendix B for sample CRA programs at selected banks.)


Small Banks

Regulatory agencies evaluate small banks, defined as institutions with assets of less than $250 million, using a streamlined test consisting of five factors:

  • loan-to-deposit ratio, e.g., total loans relative to total deposits;
  • percentage of loans made within the bank’s lending territory referred to as its assessment area;
  • geographic distribution of loans;
  • distribution of loans among borrowers with different income levels and businesses of different sizes; and
  • the bank’s record of responding to written complaints about its CRA performance.

Lending institutions of any size can choose to develop a strategic plan instead of being examined by regulators. The strategic plan option allows the financial institution to structure its CRA evaluation criteria and objectives to the unique needs of the community it serves based on its own lending capacities, banking strategies and expertise.


Large Banks

Once every two years, regulatory examiners evaluate large banks and grade the lending institution’s activities in low- and moderate-income neighborhoods. On July 1, 1997, examinations of large banks became based on lending, investment and service performance. Large banks must disclose data on their mortgage lending in non-metropolitan areas, community development activities and small businesses. A weak or unsatisfactory CRA record can result in denial of a financial institution’s request to expand.

Regulators customize tests to examine limited purpose and wholesale banks that specialize in large commercial deposits and provide credit cards but do not make home loans or accept small deposits. These tests focus on the number of community development loans and investments, including low-income housing tax credits or investments in small businesses that the bank has made in its service area.

The four federal regulatory agencies publish lists of CRA examination schedules each quarter for CRA-regulated banks and savings institutions. Regulators post the lists on their individual Web sites and make them available directly to the public.


Changes to CRA and the Financial Services Industry

A combination of market forces, banking industry deregulation, competition and technological advances led to significant structural changes in U.S. financial institutions during the past 25 years. While these changes pose challenges for community reinvestment, beneficial collaborations have been generated among public agencies, financial institutions and community development groups.

Since 1977, consolidations and mergers decreased the number of banks and savings and loan associations subject to CRA by nearly 9,200, or 49 percent, with a loss of more than 2,300 institutions since 1995.[4] Large financial institutions now represent only one-quarter of all banks and savings and loans in the competitive financial services market.

Competition in the financial industry has grown as banks and other financial institutions cross state lines to engage in interstate banking and provide financial services including check-cashing, credit card services and sales of securities and insurance products. The mortgage banking industry has also evolved with many lenders, such as finance companies and insurance companies, providing loans independent of banking organizations and traditional banking regulatory oversight.

Several amendments to CRA regulations have made CRA examination schedules, results and related data more accessible to the public and have increased the options for investment by financial institutions to count as credit toward their rating of compliance with the CRA:

  • in 1989, Congress passed the Financial Institution Reform, Recovery and Enforcement Act (FIRREA) that created four composite CRA ratings to reflect a supervised bank’s compliance with the CRA: 1 for outstanding, 2 for satisfactory, 3 for needs to improve and 4 for substantial noncompliance. This act also required public disclosure of CRA examination ratings and written evaluations by regulatory agencies;

  • in 1991, the U.S. Congress enacted a second amendment that required public discussion of a regulator’s evaluation of financial institutions’ CRA performance to allow community groups to discuss results with regulators;

  • a 1992 amendment allows CRA regulators to provide their supervised banks credit under the CRA for investing in minority- and women-owned financial institutions and low-income credit unions;

  • in 1994, an amendment was enacted to require institutions with interstate branches to receive a separate examination and rating for each state in which they conduct business. This amendment also requires separate evaluations for banks with branches in two or more states in the same metropolitan area;[5]

  • revised regulations passed in 1995 implemented three tests—a lending, investment and service test with the lending test carrying most of the weight in calculating total CRA credit;[6] and

  • in 2002, an amendment of Section E of the CRA prohibits any bank or branch of a bank controlled by an out-of-state bank holding company from establishing or requiring a branch or branches out of its home state under the Riegle-Neal Act primarily for the purpose of deposit production.

In the mid- and late-1990s, increasing numbers of lenders sought liquidity by selling primary mortgages to obtain funds to originate new loans. This fueled growth of a secondary mortgage market and increased the total number of home mortgage loans by financial institutions. Banks continued consolidating, technological advances introduced through the Internet encouraged consumers to seek loans and pay bills online and statistical credit scoring programs became the dominant method used by banks to evaluate a borrower’s ability to repay loans.

CRA and financial services industry researchers continue to debate whether the banking industry consolidation in the 1980s and 1990s combined with transaction-based lending practices of large banks have reduced access to capital and credit for small businesses and low- and moderate-income borrowers. CRA advocates argue that large banks, which offer loan funds based on approval of a firm’s readily available financial statements called a transaction-based lending approach, reduce the subjective flexibility in loan evaluations for small businesses that may not have a credit score which qualifies them for a loan at large financial institutions.

Bank consolidations and merger activity that fed the growth of large, multi-state banks like JP Morgan Chase, Nations Bank, Norwest, Bank One and Wells Fargo also led to a decline in the number of local neighborhood branch bank operations that catered to the needs of small businesses and borrowers of limited means. These businesses and borrowers, that previously secured credit at local branch banks which relied on subjective relationship-based loan approval processes in which the borrower’s character carries weight with the bank, must increasingly seek loans from the growing number of large banks that often provide loans based on credit scores.[7] Other sources, however, explain that credit-scoring and the use of business credit cards have made it easier for large banks to issue loans to small businesses at lower cost resulting in more non-bank competition in small firm lending.[8]

A report issued in October 2002 by Texas Senator Eliot Shapleigh, Lending Practices and Access to Capital and Credit, noted “information about smaller banks in Texas suggests that a significant number of loans to small businesses are made by the community banks—those having less than $250 million in assets.”[9]


CRA and the Gramm-Leach-Bliley (GLB) Act

Known as the Financial Services Modernization Act of 1999, the Gramm-Leach-Bliley Act repealed section 20 of the Glass-Steagall Act of 1933 to allow new forms of financial institutions, including holding companies, to be formed through affiliation of banking insurance and securities firms.[10] Congress passed the Glass-Steagall Act after the Great Depression to eliminate high-risk financial behavior such as uninsured deposits in questionable securities. The GLB Act requires that no financial holding company, insured depository institution affiliated with a financial holding company or stand-alone insured depository institution may be approved for expanded activities or acquisitions if its latest CRA examination rating is less than satisfactory.

The GLB Act eliminated legal barriers among the banking, insurance and securities industries to combine more easily and provide a range of services and products. It also established a system to comply with federal and state financial regulations.

The GLB Act required the Federal Reserve Board to supervise financial holding companies and designated state insurance departments as the functional regulators of the insurance business activities of banks and all financial firms involved in the business of insurance.

The act reduced the frequency of examinations for small banks with passing CRA ratings. Small banks with outstanding ratings are now evaluated once every five years and once every four years if they pass with a satisfactory rating. If regulatory agencies believe a compelling reason exists, they can examine the banks more frequently. According to a report by the National Training and Information Center (NTIC) of Chicago, studies show that about 97 percent of banks evaluated receive satisfactory ratings from regulatory agencies on their community reinvestment examinations.[11]

The FFIEC approved new interagency examination procedures in December 2000 to help examiners assess financial institutions' compliance with the provisions in the CRA “Sunshine Requirements” of the GLB Act. Effective April 1, 2001, these requirements apply to:

  • written agreements that are either made in fulfillment of the CRA of 1977 or involve funds or other resources of an insured depository institution or affiliate with an aggregate value of more than $10,000 in a year, or loans with an aggregate principal value of more than $50,000 in a year, and are entered into by an insured depository institution or affiliate of an insured depository institution and a nongovernmental entity or person;

  • however, the requirements do not cover any agreement with a nongovernmental entity or person that has not had a CRA contact with an insured depository institution or affiliate or a banking agency, such as agreements entered into by entities or persons that solicit charitable contributions or other funds without regard to the CRA;

  • parties to covered agreements must disclose the agreement to the public and to the appropriate agency. All parties must also file a report with the appropriate regulatory agency each year;[12] and

  • when management determines that a financial institution is a party to one or more covered agreements, the regulation requires examiners to investigate and describe the institution’s covered agreement disclosure practices.

In January 2001, the U.S. Treasury Department released a report required by the GLB Act that assesses its effects on the delivery of services under the CRA.[13] The report, “Study Finds That CRA Is and Will Continue to be an Important Tool for Community Lending Under the Gramm-Leach-Bliley Act” showed that:

  • the reporting provisions in the GLB Act are expected to lead to modestly higher compliance costs;

  • the CRA has had a favorable impact on home purchase and refinance lending to low- and moderate-income communities and individuals;

  • the GLB Act requirement that firms have at least a satisfactory CRA rating before pursuing new financial opportunities has increased the number of firms performing at the “outstanding” CRA level; and

  • CRA lenders and their affiliates increased their home purchase lending to low- and moderate-income individuals and communities faster than independent non-bank lenders such as mortgage companies and finance companies.

Civic leaders, lenders and public officials across the country believe that the CRA has had a positive impact on the behavior of lending institutions and has helped to generate an increased credit flow to low- and moderate-income communities.[14] In 2002, the National Community Reinvestment Coalition (NCRC) reported in its Beginner CRA Manual that in the last several years the CRA performance of depository institutions has improved significantly. The NCRC found that:

  • CRA dollar commitments increased dramatically in the U.S. since 1977 as banks and community organizations entered into more than 390 reinvestment agreements worth more than $1.09 trillion for underserved populations;

  • the number of conventional home loans to low-income and minority households increased to 803,625 from 407,059, or by 97 percent, between 1993 and 2000. During this time, the number of home loans to African-Americans increased by 122 percent and to Hispanics by 147 percent. However, while low- and moderate-income populations comprise more than 40 percent of the U.S. population, low- and moderate-income borrowers received only 24.6 percent of the conventional mortgage loans in 2000; and

  • federal agencies’ CRA ratings of supervised financial institutions on their performance in reaching low- and moderate-income individuals and communities have become inflated. As recently as 2000, 98 percent of lenders examined under CRA received the top two ratings of either outstanding or satisfactory.


CRA and Home Mortgage Disclosure Act (HMDA) Reform

National community development groups have encouraged reform of the Home Mortgage Disclosure Act to increase the amount of disclosed information required under the act. Appendix C of this document describes the latest reforms to become effective January 1, 2004. The reforms will require lenders to disclose selected data on loan pricing, loans covered by the Home Ownership and Equity Protection Act (HOEPA) and if an application or loan involves a manufactured home. However, community development groups continue to ask that HMDA data include the race, gender and revenue of applicants as well as the actual census track in which business is located.

While CRA data serves as a valuable tool for different analyses, interpretation of CRA data poses challenges. For example, lending institutions are asked to report the geographic location of a small business or small farm receiving a loan. The borrower, however, may have used those funds to support business activities in other locations. Analysis of the data may categorize a loan by the characteristics of the reported geography (typically a census tract) even though the funds are used to support the activities of a firm's offices in a location with different characteristics. While CRA data provides information on credit extended in a geographic area, the information does not indicate the amount or nature of the overall demand for credit in a specific location.


Impact of the CRA

Since 2001, three separate studies identified by the U.S. Department of Housing and Urban Development (HUD) examined the CRA and its impact on low- and moderate-income communities:

  • The Community Reinvestment Act: Its Impact on Lending in Low-Income Communities in the U.S. concluded that the act “has played an important role in expanding access to credit to help re-build housing, create jobs and restore the economic health of communities;”

  • The 25th Anniversary of the Community Reinvestment Act: Access to Capital in an Evolving Financial Services System by the Joint Center for Housing Studies at Harvard University similarly concluded that the CRA has helped expand access to credit while the increasing number of bank mergers and acquisitions and decreasing numbers of bank branches in low-income communities has limited the act’s value. The study found that while banks make investment pledges, they have struggled to determine how to meet the CRA standards and do not always meet the expectations of community advocates; and

  • the Woodstock Institute’s report, Bigger, Faster...But Better? How Changes in the Financial Services Industry Affect Small Business Lending in Urban Areas showed that while CRA encourages small business lending, its traditional focus on home lending and banking consolidations reduces low-income borrowers’ access to credit.[15]

Recent changes to the CRA such as strengthening disclosure requirements of loan and recipient characteristics, publicly disclosing CRA ratings and refining how regulators assign CRA ratings have increased bank activity in low-income communities. Continued banking industry consolidation, however, poses a threat to the effectiveness of the act.

Determining the impact of the CRA on small business lending and community development projects is complex due to the unavailability of data before 1995. CRA-regulated banks made $159 billion more in small business loans in low-income areas than they did in 1996, while community development investments went up by $1.1 billion to a total of $18.6 billion in loans during the same year, according to a report submitted to the U.S. Department of Housing and Urban Development. A Brookings Institution study of five metropolitan areas—Chicago, Des Moines, Detroit, Indianapolis and Milwaukee—indicated that small business loans in low-income communities were declining. CRA-regulated lenders were 45 percent less likely to extend a loan in low-income suburban census tracts than in upper income tracts.[16]

A study released in October of 2002 by the Association of Community Organizations for Reform Now (ACORN), The Great Divide: Home Purchase Mortgage Lending Nationally and in 68 Metropolitan Areas used 2001 FFIEC lending activity data of more than 7,600 institutions and found that 74.3 percent of Whites owned their homes compared to 47.7 percent of African-Americans and 47.3 percent of Hispanics. While low- and moderate-income neighborhoods represented 26 percent of the U.S., these areas received only 12 percent of the conventional mortgage loans.

Low- and Moderate-Income Neighborhoods’
Percentage Share of Conventional Mortgage Loans in
Selected Texas Metropolitan Statistical Areas (MSAs) 2001

MSA Percentage Share of Population Percentage Share of Conventional Loans
Dallas 38.1 10.5
Ft.Worth-Arlington 33.2 12.1
Houston 40.3 11.6
San Antonio 33.9 10.1
Source: Association of Community Organizations for Reform Now

The study identified Ft.Worth-Arlington as one of seven U.S. cities to double its number of conventional loan originations for African-Americans. San Antonio was one of eight U.S. cities that showed a decrease in conventional loan originations for Hispanics while Dallas was one of 10 cities with the greatest disparity between the percent of the population comprised of Hispanics and their share of conventional loans. Hispanics comprised 23.3 percent of the Dallas population but received only 6.6 percent of the area’s conventional loans in 2001.[17]


Future of the CRA

CRA advocates and opponents continue to debate the relevance of CRA. Advocates argue that regulators should pay more attention to small business lending and the impact of financial institution mergers because small business lending is not repeating the gains made in homeownership lending in low-income areas. Opponents declare that CRA is unnecessary because of the documented increases in home loans in the 1990s for low- and moderate-income populations. Its opponents also believe the act limits CRA-regulated institutions’ ability to compete with non-regulated institutions such as credit unions, pension funds and mortgage banks.

In 2001, the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Office of Thrift Supervision began reviewing the CRA regulations. They jointly issued a public advance notice of proposed rulemaking seeking public comments to help assess the effectiveness of the regulations. Regulators focused on determining whether and how the regulations should be changed to better evaluate financial institutions’ compliance with the CRA.[18] Evaluation of the regulations was not completed or made available to the public as of December 2002.[19]

Endnotes

[2] The Joint Center for Housing Studies, Harvard University, “The 25th Anniversary of the Community Reinvestment Act: Access to Capital in an Evolving Financial Services System,” Cambridge, MA, March 2002, p. 1.

[3] Center for Community Change, “Community Reinvestment and Fair Lending,” p. 3, http://www.communitychange.org/cra.htm. (Last visited December 10, 2002.)

[4] Governor Edward Gramlich, Federal Reserve Board, Remarks at the Consumer Bankers’ Association Community Reinvestment Act Conference, Arlington, Virginia, April 8, 2002.

[5] U.S. General Accounting Office, Community Reinvestment Act: Challenges Remain to Successfully Implement CRA (Washington, D.C., November 28, 1995), Table 1.1.

[6] Jeffrey W. Gunther, Economic and Financial Review, 1999, issue Q II, pp. 32-41.

[7] The Federal Reserve Board, “Remarks by Governor Edward M. Gramlich,” Arlington, Virginia, April 8, 2002, http://www.federalreserve.gov/boarddocs/speeches/2002/20020408/default.htm. (Last visited October 29, 2002.)

[8] Small Business Administration, Office of Advocacy, “The Changing Banking Structure and Its Impact on Small Business: A Conference Report,” (Washington D.C.,) September 2000.

[9] Senator Eliot Shapleigh, E-News Extra Special Report: Borderland of the Americas, Chapter Eight, Lending Practices and Access to Capital and Credit, October 2002, p. 6, http://www.shapleigh.org/enewsxtra.html. (Last visited December 9, 2002.)

[10] U.S. Senate Banking Committee, “Gramm’s Statement at Signing Ceremony for Gramm– Leach–Bliley Act,” (Washington, D.C., November 12, 1999,) http://www.senate.gov/~banking/pre199/1112gbl.htm.; and “Senate Approves Gramm – Leach – Bliley Act,” (Washington, D.C., November 2, 1999,) http://www.senate.gov/~banking/pre199/1104grm.htm. (Last visited December 5, 2002.)

[11] National Training and Information Center, “NTIC’s Proposed Changes to the Community Reinvestment Act,” http://www.ntic-us.org/issues/cra/cra-proposed-changes.htm. (Last visited October 28, 2002.)

[12] Office of the Comptroller of the Currency 2001-50, “Disclosure and Reporting of CRA-Related Agreements,” http://www.occ.treas.gov/ftp/bulletin/2001-11a.pdf. p. 1. (Last visited February 24, 2003.)

[13] U.S. Treasury Department, “Study Finds That CRA is and Will Continue to be an Important Tool for Community Lending Under the Gramm Leach Bliley Act,” January 2001, (Washington, D.C., pp. 1-2,) http://www.ustreas.gov/press/releases/docs/summary.pdf. (Last visited February 27, 2003.)

[14] U.S. Treasury Department, “Final Report on the Community Reinvestment Act,” (January 2001.) http://www.ustreas.gov/press/releases/docs/summary.pdf. (Last visited January 3, 2002.)

[15] U.S. Department of Housing and Urban Development, “CRA’s Impact in a Changing Financial Market,” Urban Research Monitor (Washington, D.C., May/June 2002,) p. 1, http://www.huduser.org/periodicals/urm/urm_06_2002/urm1.html. (Last visited December 4, 2002.)

[16] U.S. Department of Housing and Urban Development, Homes and Communities, (Washington, D.C., June 2002,) p. 1, http://www.huduser.org/periodicals/urm/urm_06_2002/urml.html. (Last visited December 4, 2002.)

[17] Association of Community Organizations for Reform Now (ACORN), “The Great Divide: Home Purchase Mortgage Lending Nationally and in 68 Metropolitan Areas,” October 2, 2002, p. 5, http://www.acorn.org/reporter_pub/main.htm. (Last visited January 3, 2003.)

[18] Federal Register, Proposed Rules, Vol. 66, No. 139, (July 19, 2001) p. 37602.

[19] Telephone Interview with Nancy Vickrey, Community Affairs Officer, Federal Reserve Bank, Dallas, Texas, November 27, 2002.