Student Corner: Update on the Community Reinvestment Act

The Community Reinvestment Act (CRA) was enacted in 1977 and charged federal bank regulators with the task of monitoring the banking industry’s lending practices and community development investments in low- and moderate-income communities. The CRA was created to address banking industry practices known as “redlining”, whereby some lenders would not issue loans in certain low-income, often predominantly minority communities, regardless of an applicant’s creditworthiness. This blog post will discuss some of the functional elements of the CRA, its history, and the Treasury’s recent recommendations for an update to the CRA. Since its inception 42 years ago, the CRA has seen few updates, with the most recent overhaul in 1995. Following a 2017 report to the President, the Treasury Department issued recommendations for updates to the CRA in spring of 2018. Much of the recommendations center around finding ways to make CRA evaluations less subjective and more quantitative. Other recommended changes focus on the changing nature of the banking industry, and new contexts in which CRA assessments might be applied. Photo source: marketwatch.com CRA Background Three federal banking agencies – the Federal Reserve Board (FRB), the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) – work to monitor and rate banking compliance to the CRA. Though there are no direct penalties for poor CRA examinations, banks are incentivized to score highly on evaluations. Receiving ratings lower than “Outstanding” or “Satisfactory” can affect a bank’s ability to open new locations as well as participate in mergers and acquisitions. Additionally, a bank’s CRA evaluation is made available [...]