The Community Reinvestment Act's History and Future

This post is part of a series titled “Supervising Our Nation’s Financial Institutions.”

On Jan. 10, a Wall Street Journal headline announced “Trump Administration Seeks to Change Rules on Bank Lending to the Poor.”Ensign, Rachel Louise; and Tracy, Ryan. “Trump Administration Seeks to Change Rules on Bank Lending to the Poor.” The Wall Street Journal, Jan. 10, 2018. The headline was in reference to potential changes to the Community Reinvestment Act (CRA) or its supporting regulations.

CRA Defined

©Thinkstock/c-George

Enacted in 1977, the CRA affirms the obligation of federally insured depository institutions to help meet the credit needs of communities in which they are located. The obligations of the CRA are expected to be carried out within safe and sound banking practices. Banks are subject to laws and regulations like the CRA in return for the privilege of deposit insurance protection and access to the Federal Reserve’s discount window.

Countering Redlining

Prior to the passage of the CRA, “redlining”—or limiting or refusing to make loans in certain areas—was rampant. History suggests that this practice of drawing “red lines” around geographic areas initially stemmed from “residential security maps” created by the now-defunct Home Owners’ Loan Corp.

The maps designated four categories of lending and investment risk for each of 239 cities. Private lenders, in turn, created similar maps.

Some argue that redlining was simply the best mechanism available at the time to estimate credit risk. However, it also resulted in discrimination against those with the same credit risk relative to others in a non-redlined area.

Addressing Lending Discrimination

The CRA was only one of a series of laws passed during the late 1960s and 1970s intended to expand access to credit. Fair lending practices were also addressed through the Fair Housing Act and the Equal Credit Opportunity Act.

In 1975, the Home Mortgage Disclosure Act was enacted to increase transparency in mortgage lending. Public accountability for lending practices was heightened in 1989 when legislation required public disclosure of institutions’ CRA ratings and performance evaluations.

Prompting Partnerships

The CRA has been successful in many respects. The incentives provided by the CRA and requirements for compliance with other laws and regulations have prompted partnerships between banks and community groups to promote access to credit for low- and moderate-income communities and foster development in these areas.

Other policy developments over time—such as the low income housing tax credits and the Department of the Treasury’s Community Development Financial Institutions Fund and New Markets Tax Credit Program—have provided important underwriting support, given the limited credit risk that banks can take.See the U.S. Treasury’s Community Development Financial Institutions Fund page for information on these and other related Treasury programs.

A CRA for Tomorrow

Nevertheless, there are real issues in aligning the requirements of the CRA with today’s rapidly changing financial environment. Consumers and businesses are quickly adopting internet technology—commonly called fintech—for the delivery of financial services, making the long-term need for bank branches less clear. Yet, the number and location of bank branches is an important metric of performance under the CRA.

Banks themselves are becoming fewer in number. Just 20 years ago, there were more than 10,000 U.S. banks and thrifts; today, that number totals roughly 5,600. We fully expect to see continued consolidation in the banking industry and strong competition from nonbank financial services providers that are not subject to the CRA.

“Modernizing” the CRA or its supporting regulations will require a balance of interests. Banks will cite the evolving landscape of financial services and competition from nonbank providers as drivers to change CRA requirements, especially with respect to branches. Advocates for those with limited or no access to banking services and credit may well have other ideas.

Inevitably, the pressures of technology will force change. Working together, stakeholders can make adjustments to the CRA appropriate for the banking landscape of today and tomorrow.

Additional Resources on the Community Reinvestment Act

• Banking Agencies Seek Public Comment on CRA Proposal
• Community Development: About the Community Reinvestment Act
• FRASER: Community Reinvestment Act of 1977

Notes and References

1. Ensign, Rachel Louise; and Tracy, Ryan. “Trump Administration Seeks to Change Rules on Bank Lending to the Poor.” The Wall Street Journal, Jan. 10, 2018.
2. See the U.S. Treasury’s Community Development Financial Institutions Fund page for information on these and other related Treasury programs.