CRA’s Merry-Go-Round
A contentious issue on the forefront of lending today is the revision to Community Reinvestment Act (CRA) rules, defining the responsibility of banks to provide credit to local communities, including low and moderate income neighborhoods. Enacted in 1977, the rules were in response to ‘redlining’ – where lenders refused to offer home loans in certain communities based on income, racial or ethnic composition.
Regulators contended that banks were subject to laws like CRA because they have deposit insurance protection and access to the Federal Reserve’s discount window. For context, there were over 14,000 FDIC-insured US commercial banks in 1977; by 2023 there were only 4,470.
Besides fewer banks and branch locations, the lending environment has changed significantly since CRA’s last revision in 1995. Broader consumer adoption of online financial services and the explosion of fintech’s and other ‘nonbank’ entities (not subject to CRA rules) has altered the financial landscape.
The latest CRA rules are intended to achieve these goals:
– Encourage banks to expand access to credit, investment, and banking services in Low and Moderate Income (LMI) communities. Bank performance will be evaluated across the varied activities they conduct and communities in which they operate.
– Adapt to changes in the banking industry, including internet and mobile banking. Lending will be evaluated outside traditional assessment areas generated by the growth of online and mobile banking, branchless banking, and hybrid models.
– Provide greater clarity and consistency in the application of the CRA regulations. Evaluating bank retail lending and community development financing, using benchmarks based on peer and demographic data.
– Tailor CRA evaluations and data collection to bank size and type. Acknowledge differences in bank size and business models.
The broader scope of these goals prompted a Texas Federal judge to side with banking associations in a lawsuit that has paused implementation. According to Reuters, the Federal judge who ruled in favor of banks said: “the rules went too far by allowing banks to be assessed not just in the geographic areas they maintain physical branches but also in other areas which they conduct retail lending and by allowing the regulators to assess the availability of a bank’s deposit products, not just credit in a community.”
What hasn’t changed? Individuals and families with low credit scores who reside in low and moderate income neighborhoods (or rural communities where there are few, if any, bank branches) continue to have limited access to credit. Studies have indicated that fintech’s have done a better job providing access to credit in these communities, but at what cost to the consumer?
While the new rules are not perfect, we agree with the National Community Reinvestment Coalition’s (NCRC) assessment of what’s lacking. The NCRC said: “the new rules perpetuate CRA’s troublesome racial blind spot. Though CRA’s intent is to address racist policies and business practices, banks will still not be evaluated on the demographic mix of their borrowers.” NCRC also said that rules do not incorporate a racial analysis into CRA lending examinations.
This issue highlights a broader challenge – the lack of achieving a better balance between profit and purpose. Banks are not alone, but have a real opportunity to make a difference in lower-wealth communities whether there is a physical branch there, or not. It’s time for corporate social responsibility efforts to move beyond an excuse to deflect public criticism, to enacting real change in extending fair credit to those who can demonstrate an ability to pay, regardless of the community or branch locations.
CFR believes everyone should have access to fair products to achieve financial stability, protect their assets, and establish a foundation to build wealth.
