DEFINITION of Community Reinvestment Act (CRA)

The Community Reinvestment Act (CRA) is federal legislation enacted in 1977 with the intent of encouraging depository institutions to help meet the credit needs of surrounding communities (particularly low and moderate income neighborhoods). The CRA requires federal regulators to assess the record of each bank or thrift in helping to fulfill its obligations to the community. This record will then be used in evaluating applications for future approval of bank mergers, charters, acquisitions, branch openings and deposit facilities.

BREAKING DOWN Community Reinvestment Act (CRA)

Credit furnished under the auspices of the CRA can include mortgages for homeownership in the community. Applicants who wish to qualify for CRA-based mortgages must have income that is 80% or below the median income for the area. As an alternative the applicant can purchase a home located within census tract designated as low to moderate income. The applicant must own and occupy the residence they wish to finance through the CRA mortgage.

Federal regulators allow members of the public to provide comments on the performance of banks in regards to adhering to the CRA. The input from the public is taken into account when the financial institution next faces a CRA examination by regulators.

The CRA requires the Federal Deposit Insurance Corporation (FDIC) to assess an institution's record of helping to meet the credit needs of the local communities in which the institution is chartered.

Influence of the Community Reinvestment Act on the Mortgage Market

Because the percentage of CRA loansĀ that a mortgage lender originates or purchases in the secondary market is important, such loans tend to trade at a premium price in the secondary market. Generic packages of loans are frequently searched by traders looking to find overlooked individual CRA loans within the package which can be extracted and sold for a premium, independent of the entire package.

Critics of the CRA point to it as a contributing factor in the risky lending practices that led up to the financial crisis of 2008. Banks and other lenders relaxed certain standards for mortgage approvals allegedly in order to satisfy CRA examiners and to meet quotas. There was also a trend of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) buying up CRA mortgages.

Opponents to this criticism assert that the CRA, Fannie Mae, and Freddie Mac were not responsible for causing the crisis. The majority of the large, private subprime lenders involved the crisis were not subject to the CRA or its related regulations.