What Is the Community Reinvestment Act (CRA)?

The Community Reinvestment Act (CRA) is a federal law enacted in 1977 with the intent of encouraging depository institutions to help meet the credit needs of low- and moderate-income neighborhoods. The CRA requires federal regulators to assess how well each bank or thrift fulfills its obligations to these communities. This score is used in evaluating applications for future approval of bank mergers, charters, acquisitions, branch openings, and deposit facilities.

Key Takeaways

● While regulators look at lending activity and other data in their evaluation, there are no specific benchmarks that banks have to meet.

● CRA ratings are available online, as well as upon request at local bank branches.

● Critics have charged that the CRA created an incentive for banks to make risky loans, leading up to the housing crisis of 2008, although subsequent research suggests that CRA-related loans were a small part of the subprime market.

Understanding the CRA

The CRA was passed in an effort to reverse the urban blight that had become evident in many American cities by the 1970s. In particular, it aimed to reverse the effects of redlining, a decades-long practice in which banks actively avoided making loans to lower-income neighborhoods. The objective of the act was to strengthen existing chartering laws that required banks to sufficiently address the banking needs of all the members of the communities they served. 

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—share an oversight role with respect to the CRA. However, the last is chiefly responsible for assessing whether state member banks are fulfilling their obligations under the law. are fulfilling their obligations under the law.

One of the aims of the CRA was to reverse the effects of redlining, a controversial practice in which banks restricted lending in certain neighborhoods that were deemed too risky.

The Federal Reserve uses one of five methods for ranking a bank’s performance, based on its size and mission. While a 1995 update to the CRA requires regulators to look at lending and investment data, the evaluation process is a somewhat subjective one, with no specific quotas that banks have to satisfy.

Each bank is given one of the following ratings:

  • Outstanding
  • Satisfactory
  • Needs to Improve
  • Substantial Noncompliance

The Fed publishes an online database that members of the public can use to see a particular bank’s score. Banks are also obliged to provide consumers with their performance evaluation upon request.

The CRA applies to FDIC-insured depository institutions, including national banks, state-chartered banks, and savings associations. However, credit unions backed by the National Credit Union Share Insurance Fund and other “non-bank” entities are exempt from the legislation.

Criticisms of the CRA

Critics of the Community Reinvestment Act, including a number of conservative politicians and pundits, point to the law as a contributing factor in the risky lending practices that led up to the financial crisis of 2008. They allege that banks and other lenders relaxed certain standards for mortgage approvals in order to satisfy CRA examiners.

However, some economists, including Neil Bhutta and Daniel Ringo of the Federal Reserve Bank, argue that CRA-based mortgages represented a very small percentage of the subprime loans during this period. As a result, they conclude that the law was not a major factor in the market’s subsequent downturn.

The CRA has also received criticism that it hasn’t been particularly effective in producing its intended aims. While low- and moderate-income communities saw an influx of loans after the CRA’s passage, research by the Federal Reserve’s Jeffery Gunther concludes that lenders not subject to the law—that is, credit unions and other non-banks—represented an equal share of such loans.

Modernizing the CRA

More recently, some economists and policymakers have suggested that the law needs to be revised to make the evaluation process less onerous for banks and keep up with changes in the industry. For example, the physical location of bank branches remains a component in the scoring process, even though more consumers are doing their banking online.

In a 2018 op-ed piece, Comptroller of the Currency Joseph Otting asserted that the CRA’s outdated approach had led to “investment deserts,” where lending isn’t encouraged because of the lack of nearby bank branches.

In the summer of 2018 the OCC opened a comment period in which stakeholders were invited to submit feedback on a modernization of the legislation. By the time that window closed, on Nov. 19, 2018, the office had received more than 1,300 comments. To date it has not yet released a new set of rules with respect to the CRA.