Community Reinvestment Act (CRA)
The Community Reinvestment Act (CRA) is a federal law that encourages businesses to contribute in their communities.
The Community Reinvestment Act (CRA) was implemented in 1977 to encourage financial institutions to satisfy the credit needs of low- and moderate-income communities. The Community Reinvestment Act (CRA) compels federal regulators to evaluate how effectively each bank complies with its responsibilities to these neighbourhoods. This score is used to analyse bank mergers, charters, acquisitions, branch openings, and deposit facilities for future approval.
TAKEAWAYS IMPORTANT
While regulators include loan activity and other data in their assessments, banks are not required to fulfil any set criteria.
CRA ratings are available online and at local bank locations upon request.
Although subsequent research suggests that CRA-related loans were a small part of the subprime market, critics have charged that the CRA created an incentive for banks to provide risky loans leading up to the housing crisis of 2008, critics have claimed that the CRA created an incentive for banks to provide risky loans.
The Community Reinvestment Act: An Overview (CRA)
The CRA was enacted to combat urban blight, which had become a problem in many American communities by the 1970s. One of the goals was to undo the effects of redlining, a decades-long practice in which the federal government and banks intentionally discouraged and avoided lending to low-income and minority communities. 1 The act's goal was to reinforce existing regulations requiring banks to adequately service the financial requirements of all citizens of the communities they served.
The CRA is overseen by three federal regulators: the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation (FDIC), and the Board of Governors of the Federal Reserve System. The latter, on the other hand, is primarily responsible for determining whether state member banks are complying with the law's requirements.
IMPORTANT The CRA's goal was to counteract the effects of redlining, a long-standing practice in which the federal government and banks prohibited financing in particular districts they judged too hazardous based mostly on people' colour and ethnicity.
The Federal Reserve ranks a bank's performance using one of five ways based on its size and goal. While a 1995 amendment to the CRA compels regulators to analyse loan and investment data, the review process is largely subjective, and banks are not required to meet any set quotas.
The following ratings are assigned to each bank:
Outstanding \sSatisfactory
Needs to be better
Significant noncompliance
The Federal Reserve maintains an online database where members of the public may look up a bank's rating. On request, banks must also present consumers with their performance reviews.
FDIC-insured depository institutions, including national banks, state-chartered banks, and savings organisations, are subject to the CRA. The Act exempts credit unions and other non-bank businesses that are backed by the National Credit Union Share Insurance Fund.
The CRA has been criticised.
Critics of the CRA, including a number of conservative lawmakers and commentators, claimed that it had a role in the hazardous lending practices that contributed to the 2008 financial crisis. They claimed that banks and other lenders lowered some mortgage approval requirements to appease CRA investigators.
However, other economists, notably Federal Reserve Bank researchers Neil Bhutta and Daniel Ringo, suggested in 2015 that CRA-based mortgages accounted for a modest fraction of subprime loans granted during the financial crisis. As a consequence, Bhutta and Ringo found that the law played no role in the ensuing housing market slump.
The CRA has also been chastised for not being especially effective. While the CRA resulted in an increase in loans to low- and moderate-income neighbourhoods, research by the Federal Reserve's Jeffrey Gunther found that non-bank lenders, such as credit unions and other non-banks, accounted for an equal percentage of those loans.
CRA modernization
Some economists and officials have lately urged that the legislation be updated to make the review process easier for banks and to keep up with industry changes. Even if a growing percentage of people perform their banking online, the physical location of bank branches remains a factor in the scoring process.
Quick Facts
In May 2020, the Office of the Comptroller of the Currency announced a final rule aimed at "strengthening and modernising" current Community Reinvestment Act standards. According to a news release, the proposed modifications garnered more than 7,500 comments from stakeholders in response to the notice of proposed rulemaking issued on December 12, 2019.
Comptroller of the Currency Joseph Otting said in a 2018 op-ed that the CRA's antiquated strategy has resulted in "investment deserts," where lending is discouraged due to a lack of local bank branches. On May 20, 2020, the final regulation was published.
Critics such as the National Community Reinvestment Coalition claim that the new regulation limits the CRA's evaluation of bank branches and bank deposit accounts in communities2, reducing major banks' accountability to communities. It "strengthened and updated" the statute, according to Otting. According to him, the final rule increases credit for mortgage origination in order to promote affordable mortgage availability in low- and moderate-income areas, and it revises the approach to deposit-based assessment by focusing on the growing number of internet banks and banks that do not have physical locations. 3
