Financial institutions have a continuing and affirmative obligation to help local communities meet their credit needs. The Community Reinvestment Act (CRA) passed in 1977 requires financial institutions to reinvest deposit funds back into the communities in which they are located and encourages institutions to meet the credit needs of the local communities consistent with safe and sound operation of the institution. When evaluating an application for a deposit facility such as the opening of a branch, relocation of a home office, a merger, or acquisition, the authorities take the institutions’ CRA record into account.
A study by the Federal Reserve Bank of Boston in 1992 found that overt discrimination, whereby minorities with unblemished records are denied credit, is not pervasive. Ninety seven percent of such applicants are approved, but there was a statistically significant gap associated with race.
A 1993 article in Fordham Urban Law Journal by Allen J. Fishbein claimed that the CRA resulted in new credit commitments of $30 billion. The government was quick to take a note of this and began citing this to show that CRA was indeed a success. This led to a demand that credit unions, insurance companies, and other non-bank and thrift companies such as mortgage banks should be included under the CRA.
However the more recent studies including those identified by the U.S. Department of Housing and Urban Development paint a slightly different picture. The study by the Joint Center for Housing Studies at Harvard University – The 25th Anniversary of the Community Reinvestment Act: Access to Capital in an Evolving Financial Services System – concluded that while the CRA has helped expand access to credit even with the increasing number of bank mergers and acquisitions, decreasing numbers of bank branches in low-income communities has limited its value. The study found that banks struggled to determine how to meet the CRA standards and do not always meet the expectations of the community.
Bigger, Faster…But Better? How Changes in the Financial Services Industry Affect Small Business Lending in Urban Areas, a report by the Woodstock Institute, concluded that while CRA encourages small business lending, its traditional focus on home lending and banking consolidations reduces low-income borrowers’ access to credit.
CRA prevents lending in low income and minority areas. Small financial institutions are more likely to open in such neighborhoods, and the act discourages the chartering of those institutions. This limits regulated institutions’ ability to compete with non-regulated institutions such as credit unions, pension funds, and mortgage banks. Minority-owned institutions that target low income or minority groups have been criticized by authorities over the past few years because they have not been aggressive enough in lending to low-income borrowers within their communities and for focusing on too narrow a segment of the community.
Recent changes to the CRA such as strengthening disclosure requirements of loan and recipient characteristics, publicly disclosing CRA ratings, and refining how regulators assign CRA ratings have increased bank activity in low-income communities, but the continued consolidation in the banking industry poses a threat to the effectiveness of the act.
[...] did sign legislation that required retail banks to make an effort to make loans to minority groups. The Community Reinvestment Act or CRA was passed in 1977 under Carter’s watch and was a bipartisan attempt to address the [...]