A Closer Look at Modernizing the Community Reinvestment Act

February 16, 2021

The Community Reinvestment Act (CRA) is a piece of legislation that combats “redlining”, which is the systematic denial of credit and services to communities of color. It authorizes the banking regulators—the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency—to evaluate banks on how well they meet the credit and banking needs in the communities they serve, including low- and moderate-income neighborhoods (LMI). Last fall, the Federal Reserve released an Advance Notice of Proposed Rulemaking (ANPR) on modernizing the CRA.

The goal is to better meet community needs, so the Federal Reserve needs to hear from members of the community. Anyone can comment on the ANPR to help shape the CRA. Today—February 16—is the last day.

During a recent webinar, San Francisco Fed bank examiners provided an overview of the Federal Reserve’s ANPR on CRA regulations and answered questions from attendees. Here are some takeaways from the event.

A brief overview of the ANPR public comment process

The Federal Reserve seeks community feedback on a varying range of topics. It could be as simple as whether assessment areas should be drawn around deposit-taking ATM’s or how big a bank can be to still be considered a small bank. They also ask more in-depth questions, like “How should banks demonstrate they have had meaningful engagement with their community…” and what changes to the CRA would help “in addressing ongoing systemic inequity in credit access for minority individuals and communities?” Public comment will be considered to help ensure the CRA is meeting its goal: to make sure that the needs of LMI communities are more effectively met and that credit inequities are addressed.

How can the CRA become more effective?

The proposal focuses on strengthening the CRA to better meet its statutory purpose, which is to prevent redlining and ensure equitable access to credit and banking services, especially in the COVID-19 pandemic environment. Although the CRA has had positive impacts for the underserved since its enactment in 1977, the fallout from decades of discriminatory lending and unfair credit access still exist. The CRA needs to continue to adapt since inequities in credit access are still evident, and LMI communities continue to be underserved.

How is the evaluation process addressed?

Large retail banks would have two different tests, a Retail Test and a Community Development Test, that make up their evaluations. And both of those tests have two subtests each. The Retail Test is comprised of a Retail Lending Subtest that looks at to whom and where small business, small farm, and home mortgage loans are made, and a Retail Service Subtest that looks at a bank’s branch, online, and mobile delivery services as well as retail products like deposit accounts. The Community Development Test is comprised of a Community Development Financing Subtest that evaluates a bank’s community development loans and qualified investments, and a Community Development Services Subtest that looks at a bank’s community volunteer activity. Wholesale and limited purpose banks would be evaluated under the Community Development Test and small banks could opt to be evaluated under the current rules or opt for the Retail Lending Subtest. In addition, any bank can opt to be evaluated under a CRA Strategic Plan.

The ANPR proposes a metric approach to evaluate performance and clarifies what counts as well as where CRA activity counts, which would provide banks with more clarity and certainty. And to make it easier for banks to track how they are doing in each of their assessment areas, the proposal includes an online dashboard to track lending distributions, which could also be available to the public to increase transparency.

How would loans to minority-owned businesses be updated?

The ANPR would shift the importance from dollar amounts to the number of loans to small businesses. This reduces the incentive for banks to focus on larger loans to larger businesses, and instead reward them for giving out numerous loans to small businesses.

The ANPR also proposes incentives for investments in Minority Depository Institutions (MDIs), women-owned financial institutions, and low-income credit unions. One example is making activities with MDIs a factor in receiving an outstanding rating. MDIs are depository institutions—like banks or credit unions—that (1) serve a predominantly minority area, and (2) have over 51% of their voting stock owned by minority individuals or have a majority membership of minorities on its board of directors.

How are rural areas factored in?

Given that rural areas often see less community and economic development due to more limited opportunities, the proposal includes adjusted benchmarks in the community development financing subtest for rural areas. The Federal Reserve Board is also encouraging bank activities that recognize the unique needs in rural communities. For example, banks could give back to their respective local rural communities by volunteering to help build affordable housing, serving on the boards of impactful civic organizations, and serving and providing resources to nonprofit organizations.

What would be done to protect low-income communities from extractive and exploitative lending as opposed to alternative sources?

The proposal continues to enforce financial inclusion laws and consider fair lending and illegal credit violations to determine overall CRA ratings for all financial institutions. It also retains the practice that if examiners find a bank has engaged in discriminatory or illegal credit practices; their rating could be lowered at the institutional level. 

How would affordable housing be protected under the proposed rules?

It would remain one of the four categories of community development (including affordable housing, community service, economic development, and revitalization and stabilization activities in LMI communities). The ANPR would maintain CRA credit for subsidized affordable housing and comparable considerations for bank investments in mixed-income housing developments.  

Ready to make your voice heard?

Submit a comment directly to the Board using its online form, or share your thoughts by email, fax, or mail—the ANPR provides guidance on how. All comments received become part of the public record and are posted on the Board’s website.

The views expressed here do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System.