What Is the Community Reinvestment Act (CRA)?

The Community Reinvestment Act (CRA) is a federal law enacted in 1977 to encourage depository institutions to meet the credit needs of low- and moderate-income neighborhoods. The CRA requires federal regulators to assess how well each bank fulfills its obligations to these communities. This score is used to evaluate 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 and upon request at local bank branches.
  • Critics have charged that the CRA created an incentive for banks to provide risky loans leading up to the housing crisis of 2008, though subsequent research suggests that CRA-related loans were a small part of the subprime market.

Understanding the Community Reinvestment Act (CRA)

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

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 to rank a bank’s performance based on its size and mission. While a 1995 update to the CRA requires regulators to consider lending and investment data, the evaluation process is somewhat subjective 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 evaluations 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 CRA, 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 to satisfy CRA examiners.

However, some economists, including Neil Bhutta and Daniel Ringo of the Federal Reserve Bank, argued in 2015 that CRA-based mortgages represented a small percentage of the subprime loans during the financial crisis. As a result, Bhutta and Ringo concluded that the law was not a major factor in the market’s subsequent downturn.

The CRA has also received criticism that it has not been particularly effective. While low- and moderate-income communities saw an influx of loans after the CRA’s passage, research by the Federal Reserve’s Jeffery Gunther concluded that lenders not subject to the law—that is, credit unions and other non-banks—represented an equal share of those 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 to keep up with changes in the industry. For example, the physical location of bank branches remains a component in the scoring process, even though an increasing number of consumers are conducting their banking online.

Fast Fact

Many critics of the CRA allege that it was a contributing factor to the 2008 financial crisis because lenders relaxed standards for mortgage approvals to comply with the Act.

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

In the summer of 2018, the Office of the Comptroller of the Currency (OCC) opened a comment period during which stakeholders were invited to submit feedback on the modernization of the legislation. By the time that window closed, on Nov. 19, 2018, the office had received more than 1,300 comments. The final rule was released on May 20, 2020.