The Community Reinvestment Act, or CRA, is an important law that encourages banks to make
loans and investments in low-and moderate-income communities across the country.
Every year, the CRA helps bring over 100 billion dollars in capital to these communities. Today,
we’re going to talk about how the CRA came to be and what it looks like in action.
Let’s start with a little history. During the 1970s, many communities throughout
the country experienced urban decay and disinvestment . In response to this, Congress passed a series
of laws designed to eliminate discrimination by financial institutions. Some laws were
enacted to deal with discrimination by race, ethnicity and gender.
The Community Reinvestment Act, on the other hand, addressed redlining, a practice
that was prevalent at the time, where banks would deny credit to individuals based on where they lived. Enacted in 1977, CRA encourages
financial institutions to help meet the credit needs of their communities, including the
low- and moderate-income neighborhoods they serve, consistent with safe and sound operations.
CRA was designed to be broad, flexible, and responsive to changes within communities.
The law directs bank regulatory agencies to evaluate the extent to which each bank helps
to meet the credit needs of its community. To do this, the agencies developed regulations
that set performance criteria for banks of different sizes and business models. The lending,
investment and service tests for large banks are the analytical basis for all the other
evaluation methods, so let’s discuss the performance criteria in those three tests
first. The lending test evaluates the amount of home
mortgage, small business, and small farm loans the bank has made in its community or, as
the regulation defines it, the bank’s assessment area. It also evaluates the income-level of
the area where those loans were made and to whom they were made. The lending test also
evaluates a bank’s community development loans and the extent to which it used flexible
or innovative lending practices to help meet the needs of its assessment area.
The investment test evaluates the dollar amount of a bank’s investments that have a community
development purpose. It also gauges the complexity of those investments, how innovative they
are, their responsiveness to credit and community development needs, and the extent to which
those investments are, or are not, provided by private investors.
Finally, the service test evaluates both the retail and community development services
provided by banks to people and in areas of different income levels. For example, the
service test evaluates the distribution of a bank’s branches among census tracts of
different incomes, its record of opening and closing branches in those areas, the availability
and effectiveness of alternative systems for delivering retail banking services , and the
range of services provided
Taken together, these three large bank performance tests provide the analytical foundation for
all other examination methods. Although the exam method will vary depending on the size
of the bank, no matter which examination method is used, the CRA directs one of three regulators
to assign a rating to every bank’s performance. These are the same agencies that write the
regulations and provide guidance on how the CRA rule is applied. The ratings are taken
into account when a bank applies to merge with or acquire another institution or to
open new branches. The agencies are also required to make the written CRA performance evaluations
public. This transparency supports the participation of community organizations, local governments,
and other interested parties in identifying credit needs and opportunities that banks
can help meet. So, now that we’ve talked about the CRA
generally, let’s see how it works in practice. This is Sarah. She’s the CRA officer for
California Allegiance Bank, a 1.6 billion dollar state-chartered institution based in
Southern California that is regulated by the Federal Reserve.
Over the past two years, Sarah and her team have been working to ensure that her institution’s
loans, investments, and services are meeting the needs of the bank’s entire community.
To do this, Sarah not only analyzes demographic information about the community, but she also
attends meetings with local non-profits, the chamber of commerce, and other stakeholders
to find out what her bank can do to help meet the credit needs of the community. Sarah has
also been documenting the numerous loans, investments, and services the bank has provided
over the past two years since her last examination to show how her bank has helped borrowers
buy a home, build their credit, or open a small business. Thanks to all this preparation,
Sarah feels ready for her bank to be examined. This is Paul. He’s a bank examiner with
the Federal Reserve and will be conducting the CRA exam on California Allegiance Bank.
Based on the bank’s asset size, he will be using the Large Institution examination
method. In preparation for the exam, Paul researches the demographics, economic conditions,
credit needs, and community development needs of the bank’s assessment areas. He reviews
economic changes in the assessment areas since the institution’s last examination; including
the unemployment rate, industry growth, and the condition of local housing and rental
markets. Paul also looks at credit and community development needs; including affordable housing,
and the local poverty rate. To complement this quantitative assessment, Paul contacts
community stakeholders and asks them to describe the on-the-ground conditions they see on a
daily basis. Over the course of about two-weeks, he works with Sarah to determine which of
California Allegiance’s loans, investments, and services qualify for CRA consideration
by identifying those activities that benefited predominately low- and moderate- income areas
or distressed or underserved communities. He also reviews any comments or complaints,
submitted by the community, regarding California Allegiance Bank’s perceived CRA performance.
Once his evaluation is complete, he meets with Sarah to discuss his findings and preliminary
rating. Paul also talks with Sarah about community needs and, if necessary, California Allegiance
Bank’s plans for improving performance going forward.
After the exam is complete, Paul writes up his evaluation of California Allegiance Bank.
The written evaluation gives details on the performance context and the loans, investments
and services that support the ratings he assigned. This evaluation is made available to the public
after completion. Non-profits and other community stakeholders working in California Allegiance
Bank’s assessment areas can then download this performance evaluation in order to identify
potential opportunities to partner with the institution on projects going forward.
Whether you’re a banker, a non-profit, or a community member, the CRA can play an important
role in ensuring fair access to credit and other financial services. After watching this
video, we hope you have developed a better understanding of the Community Reinvestment
Act.. To learn more, we encourage you to check out FedCommunities.org. And if you have any
questions or comments, feel free to reach out to us. We’re always listening.