The Community Reinvestment Act (CRA) was passed by Congress in 1977 to encourage financial institutions to make credit available to businesses and individuals in low- and moderate-income neighborhoods.[1]The CRA requires periodic evaluations of financial institutions' records in meeting a community or region's credit needs. Activities encouraged by the CRA include financing small businesses and community-based services such as child care, educational assistance, health and social services, affordable housing and other activities that can help revitalize or stabilize communities. For the work group, investigation of community reinvestment-related activity involved four major policy areas: economic development, banking, housing and insurance.
Financial institutions subject to the CRA are monitored by the Office of Comptroller of Currency (OCC), the Office of Thrift Supervision (OTS), the Federal Reserve System or the Federal Deposit Insurance Corporation (FDIC).
The OCC regulates national banks, federal branches and agencies of foreign banks and their employees, stockholders and agents; the OTS serves as the primary regulator of the thrift industry; the Federal Reserve oversees state-chartered banks that are members of the Federal Reserve System and bank holding companies; and the FDIC regulates state-chartered banks and savings banks that are not members of the Federal Reserve.
Credit unions, finance companies, brokerage firms, mortgage companies, non-bank lenders, venture capitalists and insurance companies are the only financial institutions not subject to the CRA.
CRA goals: The CRA was created to ensure that financial institutions meet the credit needs of the communities they serve. The law allows Congress to prohibit financial institutions from arbitrarily failing to provide credit and access to capital and other financial instruments in these communities.
Financial institutions can meet CRA requirements by making funds available to:
- Community development corporations, minority- and women-owned businesses, community loan funds, low-income or community development credit unions;
- Organizations involved in affordable housing rehabilitation and construction, including multifamily rental housing;
- Facilities that promote community development, such as youth programs, homeless centers, "soup" kitchens, health care facilities, battered women's centers, alcohol and drug recovery centers, and projects eligible for low-income housing tax credits;
- State and municipal revenue bonds that specifically support affordable housing, not-for-profit organizations serving low-and moderate-income housing, counseling for credit, home-ownership, maintenance and other financial services; and
- Organizations supporting day care and job training programs.
Ratings: The CRA rates financial institutions on a series of performance standards for lending, investments and service. Examiners look at the number and amount of loans made in assessment areas to see if they are evenly dispersed among high- moderate- and low-income areas. Investments are evaluated based on the amount of community input allowed in their creation and the dollar amount of investment made.
Assessments also measure the level of service a financial institution provides a community, including the number of bank branches located in low- to moderate-income communities. There is no standard amount of CRA "credit" given for any particular service. Large financial institutions receive ratings of "outstanding," "high satisfactory," "low satisfactory," "needs to improve" or "substantial noncompliance." Smaller institutions cannot be rated high or low satisfactory, only "satisfactory." [2]
The OCC, OTS, FDIC and the Federal Reserve each train their own evaluators. Because the training has not historically been coordinated, there is a degree of subjectivity to each evaluation. Regulating agencies have a great deal of discretion and latitude over an institution's final rating. A federal effort to standardize evaluation training is under way.
Funding sources: One of the most common vehicles for directing federal funds to community reinvestment projects are Community Development Corporations (CDCs). CDCs are neighborhood-based, nonprofit organizations that guide community improvement in economically distressed areas by providing loans that banks consider too small or risky.
CDCs have proven effective for funding housing rehabilitation and development, neighborhood planning, health and support services, creation of community credit unions and job creation and retention.
The CRA does not specifically designate funding for CDCs or any other purpose, but allows financial institutions to receive CRA credit for any such activity supported in low- or moderate-income areas. This flexibility allows community groups, financial institutions and federal regulators to work together to identify mutually beneficial goals for individual communities.
Federal and state regulators have the authority to deny banks permission to buy or merge with other banks, engage in interstate banking, or open and close branches if they do not meet CRA requirements. Between January 1989 and June 1996, fewer than 1% of nearly 60,000 bank applications making any such transactions in the U.S. were protested by area community groups. [3] Only five applications were denied.
Consumer groups do not measure the CRA's success by the number of challenges or denials. More often, a challenge allows communities to present concerns to banks and regulators, or negotiate conditions acceptable to both sides in a public forum.
Impact: When the Community Reinvestment Act became law in 1977, its supporters hoped it would bring much-needed financial capital to the moderate- and low-income Americans who make up about 40% of the population. However, several investigative reports appearing in newspapers in Boston, Chicago and Detroit, including a Pulitzer Prize winning series published in the Atlanta Journal and Atlanta Constitution in 1989, documented a number of the CRA's failings.
The articles detailed numerous cases where low-and moderate-income neighborhoods were ignored by lenders. While 98% of the country's lenders passed their CRA examinations, federal Bureau of the Census documents showed that a broad disparity existed in many banks' service areas. Families and businesses in lower income areas were often forced to borrow from unregulated mortgage and finance companies with higher interest rates.
The potential for the CRA to help communities has been hampered by regulatory compliance efforts focusing more on financial institutions' internal processes than their effects on communities, and a fragmented system of regulations and guidelines. A 1995 overhaul of CRA evaluation standards allowed more effective oversight. [4]
Expansion: The CRA has evolved over time. Initially, the majority of the programs created through the CRA were designed to meet housing needs. Since then, the definition of community redevelopment has expanded to include small business development and activities that stabilize or revitalize low-to moderate-income areas, including child care and health and educational services.
A series of amendments made CRA evaluations more accessible to the public, and increased the investment choices available to financial institutions for CRA credit.
The 1977 law was first amended in 1989 by the Financial Institution Reform, Recovery, and Enforcement Act to require CRA examination ratings and written evaluations made by regulatory agencies to be available to the public. This allowed community groups and regulators to more closely track and assess reinvestment activities.
Another amendment, passed in 1991, requires public discussion of each regulator's assessment of an institution's CRA performance, allowing community groups to publicly discuss evaluation results with regulators.
A third amendment passed in 1992 allows CRA regulators to give financial institutions CRA credit for investments in minority- and women-owned financial institutions and low-income credit unions. A final amendment in 1994 requires institutions with interstate branches to receive a separate rating and evaluation for each state in which they do business. The amendment also requires separate evaluations for branches in two or more states within the same metropolitan area. [5]
These amendments allow Congress and other interested parties to track the level of commitment financial institutions make to the communities they are chartered to serve, while making lending information more readily available to the public.
Benefits for Texas: If an effective statewide strategy for community redevelopment funding is developed for Texas, the state will be able to attract hundreds of millions of dollars in additional federal funding. Existing federal resources are available for both housing programs and small business development, but the state must work with communities, federal regulators and financial institutions to create eligible projects.
One example of a successful community reinvestment effort in Texas is the Southern Dallas Development Corporation (SDDC), a nationally acclaimed nonprofit community development financial institution. The SDDC is dedicated to the economic revitalization of southern Dallas, and the creation of business opportunities and jobs for low-income and minority residents.
The SDDC has helped generate 270 loans totaling more than $20 million, which leveraged an additional $36 million in business capital. About one-third of the loans have gone to minority businesses. The SDDC reports creating about 2,400 jobs in southern Dallas. According to the SDDC, the total annual economic impact is more than $112 million.