This Is A Member-Only Page

What is the CRA?
Why did Congress pass the Act?
Does it cause banks to lose money?
How much money does it generate?
Who runs the show?
Does it help neighborhoods?
Haven't requirements been eased?
Should the law be continued?

What is CRA?

      The federal Community Reinvestment Act (CRA) is a 1977 law that spells out the responsibilities of banking institutions to their local communities. CRA directs the four federal banking agencies with supervisory authority over depository lenders. It requires that banks and savings institutions take affirmative steps to help meet the credit needs of the entire community they are chartered to serve, including low and moderate income areas. Banks that fail to do so can be denied permission by federal regulators to buy other banks, engage in interstate banking, and open or close branches.
      CRA does not direct banks to make specific loans. Instead, it gives them a broad, affirmative obligation to serve the needs of the community in which they're located.  It's up to the bank to figure out how it can best do this. CRA has encouraged lenders to invest in low Income Housing Tax Credit developments, make loans on affordable multifamily housing development, offer small business lending, and support community development corporations.
      Proponents argue that CRA has never required that banks make unsound loans, which would constitute an irresponsible use of their depositors' money.

Why did Congress pass CRA?

Access to credit, including home mortgages, residential and commercial lending. and small business financing, is as essential for low-income neighborhoods as for any other community. Liberals in government believe that banks have an obligation to serve diverse neighborhoods as an essential building block their community development strategy.
      Prior to the passage of CRA in 1977 some banks refused to make loans in low-income communities Many bankers feared that loans for homes or businesses in these communities were risky and unlikely to be money-makers for the institution. As a result, low-income and inter-city advocates were able to project an image of a fat-cat banker with a map of the city on his wall, drawing a red line around low-income neighborhoods, representing where the institution would not do business.
That perception helped persuade Congress to require banks to invest in poor, as well as more affluent communities. The advocates believed that it would be helpful to the stability and development of those communities,  while not being overly risky for the banks.

Do banks lose money when they invest in poor communities?

"Generally no," according to the government. They contend that many banks who do business in low income communities say their experience has proven that these loans and services are no riskier than those offered to higher-income borrowers, and in fact may be less so. However, they admit, "banks have found that more preparation and counseling may be needed with some new borrowers to ensure reliable repayment and full understanding of the loan or investment terms."

How much investment does CRA generate?

According to some estimates, CRA has "encouraged" the investment of some $80 billion in low and moderate-income neighborhoods since it was enacted in 1977.

How is CRA administered and monitored?

CRA is not a government program. While federal agencies monitor banks compliance with the law, the Community Reinvestment Act does not involve the provision of federal dollars for community development, but rather encourages private investment for this purpose. Banks are required to collect data on their lending activities, which is reviewed periodically by their regulators. At each review regulators assign the bank a CRA rating ranging from "outstanding" to "substantial noncompliance." A poor CRA rating may result in a bank being denied permission to merge with other institutions and carry out other transactions.

Does CRA spur neighborhood revitalization?

The government says, yes. In many communities, bank's willingness to offer financing for housing development, invest in Low Income Housing Tax Credits, and provide home mortgages to nontraditional borrowers, has resulted in improved housing stock and increased homeownership, which helps to stabilize neighborhoods.
       When local lenders offer flexible small business and commercial development loans, business and retail services become more available to communities that have gone without those services for years. A new supermarket becomes not only a source of a better selection and more reasonably priced food, but also a source of new jobs for area residents and a commercial anchor for other businesses.

Haven't CRA requirements for small banks been eased?

Yes. Regulations issued in April 1995 reduced considerably the amount of paperwork that all banks, but especially small ones, must produce for a CRA examination. The new regulations emphasize lending, investment, and service over process and documentation, and they no longer require the periodic reporting of new data that small institutions find burdensome.
      Besides traditional lending, CRA examiners will look at loans or investments in affordable housing, community services, economic development promotion, and revitalization activities in low-income areas to assess a bank's CRA record.

Should the Community Reinvestment Act be preserved?

Liberals tell Congress that many banks have discovered that community lending is good business. And that these banks would continue to meet their obligations regardless of federal requirements. But they believe that others need to be forced, and CRA has proven effective at doing that. They also believe that CRA has encouraged banks to discover new markets and profit opportunities that they otherwise might have over looked.
      In the past, banks and community groups complained about the paperwork generated by  CRA. Now the regulations governing CRA have been completely rewritten to address this concern. The revised CRA regulations that began to take effect in April 1995 were in part a response to banks' request that the CRA reporting burden be eased. Proponents believe the regulations, which were fully implemented as of July 1997, should be given a chance to succeed, before substantial changes to CRA are considered.

Return to top