The Purpose and History of the CRA

The Community Reinvestment Act was passed in 1977 to combat discriminatory lending practices like “redlining.” Before the CRA, some financial institutions would refuse to provide mortgages, business loans, and other services to residents of specific, often minority-populated and low-income, neighborhoods. This practice limited economic growth and created financial deserts in underserved communities.

The CRA established a framework to hold banks accountable, requiring them to demonstrate that they are serving the needs of their entire community, including low- and moderate-income (LMI) neighborhoods. Its goal is to ensure fair and equal access to credit and promote local economic development.

How Banks Are Evaluated Under the CRA

Federal regulatory agencies—the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve Board—regularly examine banks to assess their CRA performance. These evaluations typically focus on three main tests:

  • Lending Test: This is the most critical component. It measures how well a bank is providing mortgage loans, small business loans, and community development financing to borrowers of all income levels within its assessment area.
  • Investment Test: Regulators review a bank’s qualified investments that support community development, such as purchasing municipal bonds or investing in funds that finance affordable housing projects.
  • Service Test: This test evaluates the availability and accessibility of a bank’s retail services. It looks at branch locations, ATMs, and the offering of financial literacy programs in LMI communities.

Based on this examination, a bank receives one of four public ratings: Outstanding, Satisfactory, Needs to Improve, or Substantial Noncompliance. This rating can significantly impact a bank’s ability to open new branches or merge with other institutions.

Common Misconceptions About the CRA

Two primary misunderstandings about the CRA persist:

  1. It forces risky lending: The CRA requires banks to meet community credit needs only in a manner that is “consistent with safe and sound operations.” It promotes fair access for creditworthy borrowers, not reckless lending.
  2. It is an outdated law: The CRA has been updated to address changes in the banking industry, including the rise of online and mobile banking. The most recent final rule, issued in 2023, modernizes the regulation to ensure it remains effective in the digital age.

External Resources:

For more detailed information, you can visit the FDIC’s official Community Reinvestment Act page.