What is the Community Reinvestment Act (CRA)?
The Community Reinvestment Act (CRA) is a U.S. law enacted in 1977 that requires banks and other financial institutions to meet the credit needs of the communities they serve, especially low- and moderate-income neighborhoods. The act ensures that these institutions provide equitable access to loans, investments, and financial services.
Regulatory agencies evaluate banks for compliance, assigning ratings based on performance in lending, investment, and service activities. These ratings influence approval decisions for mergers, acquisitions, and branch expansions. The CRA encourages transparency and accountability while promoting economic development and housing opportunities in underserved areas.
CRA Performance Ranking
The Community Reinvestment Act (CRA) mandates that federal banking agencies assess financial institutions’ efforts to meet the credit needs of their communities, particularly in low- and moderate-income areas. These evaluations result in performance ratings that influence regulatory decisions, such as approvals for mergers and acquisitions.
Banks receive one of four ratings based on their CRA performance:
- Outstanding: Exceptional performance in meeting community credit needs.
- Satisfactory: Adequate performance in fulfilling community credit requirements.
- Needs to Improve: Insufficient efforts are being made to address community credit needs.
- Substantial Noncompliance: Significant failure to meet community credit obligations.
These ratings are publicly accessible and provide insight into a bank’s commitment to community development. For detailed evaluations and ratings, the Federal Financial Institutions Examination Council (FFIEC) offers a comprehensive search tool.
What Are the U.S. Fair Lending Laws?
U.S. fair lending laws ensure all individuals receive equal access to credit and financial services regardless of race, color, religion, national origin, sex, marital status, age, or other protected characteristics. These laws prohibit discriminatory practices in lending and promote fairness in credit transactions. The primary fair lending laws include:
- Equal Credit Opportunity Act (ECOA)
- Purpose: Prohibits lenders from discriminating based on race, color, religion, national origin, sex, marital status, age, receipt of public assistance, or exercising rights under the Consumer Credit Protection Act.
- Enforcement: The Federal Trade Commission (FTC) and the Consumer Financial Protection Bureau (CFPB) enforce this law.
- Fair Housing Act (FHA)
- Purpose: Ban discrimination in housing-related credit activities based on race, color, national origin, religion, sex, familial status, or disability.
- Enforcement: Enforced by the Department of Housing and Urban Development (HUD) and the Department of Justice (DOJ).
- Home Mortgage Disclosure Act (HMDA)
- Purpose: Financial institutions must collect and report data on mortgage applications and originations. This helps identify discriminatory lending patterns.
- Enforcement: The CFPB oversees compliance.
- Community Reinvestment Act (CRA)
- The purpose is to encourage banks to meet the credit needs of all segments of their communities, particularly low—and moderate-income areas.
- Enforcement: Monitored by federal banking regulators like the OCC, FDIC, and Federal Reserve.
- Dodd-Frank Act – Section 1071
- Purpose: Enhances oversight of small business lending practices and aims to reduce discrimination in this sector.
- Enforcement: The CFPB ensures compliance with this provision.
Key Requirements Under Fair Lending Laws:
- Equal treatment in loan terms and conditions.
- Transparent lending processes.
- Non-discriminatory underwriting and pricing practices.
How to Satisfy CRA Requirements
Understand Community Needs
- Why It Matters: CRA compliance begins with knowing the specific needs of the local community, especially in low- and moderate-income (LMI) areas. Financial institutions must tailor their services to address affordable housing, small business loans, or economic revitalization gaps.
- How to Do It: Conduct community needs assessments by engaging local stakeholders, such as nonprofit organizations, housing authorities, and small business groups. This helps banks align their strategies with community priorities.
Offer Inclusive Financial Products
- Why It Matters: CRA ensures that everyone, particularly those in underserved areas, has access to fair and affordable financial services. Inclusive products help build financial equity and support economic growth.
- How to Do It: Develop products like affordable mortgages, low-interest small business loans, and personal credit lines with terms suitable for LMI borrowers. Offer financial literacy programs and digital financial tools to empower individuals and business owners in practicing proper financial management.
Expand Access to Banking Services
- Why It Matters: Physical and digital access to banking services is crucial for LMI communities, where underserved populations might face limited branch locations.
- How to Do It: Leverage online banking and financial management tools for increased access to programs. Introduce low-fee or no-fee account options to encourage participation from LMI individuals.
Invest in Community Development
- Why It Matters: CRA encourages banks to invest in activities that improve community infrastructure, housing, and employment opportunities, directly benefiting underserved areas.
- How to Do It: Support affordable housing projects, contribute to community development organizations, or finance initiatives that create jobs in LMI neighborhoods. Partner with CDFIs for larger-scale community investments.
Maintain Comprehensive Records
- Why It Matters: Regulatory agencies require proof of CRA compliance during evaluations. Documented activities provide transparency and demonstrate accountability.
- How to Do It: Keep detailed records of loans and investments, and identify ways to measure the impact of programs targeted toward LMI areas. Use this data to showcase your institution’s compliance during CRA examinations.
Ensure Strong Performance in CRA Evaluations
- Why It Matters: CRA evaluations assess a bank’s effectiveness in meeting community credit needs. A strong rating, such as mergers or branch expansions, is necessary for growth.
- How to Do It: Focus on three key tests:
- Lending Test: Ensure your lending activities serve LMI borrowers and neighborhoods.
- Investment Test: Contribute to local development through impactful investments.
- Service Test: Deliver banking services that are accessible, affordable, and beneficial to the community.
Engage in Public Outreach
- Why It Matters: Building relationships with local communities enhances trust and identifies areas where the bank can make a difference. It also demonstrates a commitment to CRA goals.
- How to Do It: Host workshops, informational sessions, or open houses to educate LMI communities about available products and services. Collaborate with local groups to extend your outreach.
Stay Updated on CRA Regulations
- Why It Matters: CRA rules evolve, and staying informed ensures compliance and alignment with new requirements. Noncompliance can lead to penalties or a lower performance rating.
- How to Do It: Monitor guidance from federal regulatory bodies like the Federal Reserve, FDIC, and OCC. Provide ongoing staff training to keep them informed about regulatory updates and best practices in fair lending.
FAQ
What Qualifies as a CRA Investment?
CRA investments must support community development by benefiting low- and moderate-income individuals or areas. Examples include funding affordable housing, revitalizing underserved neighborhoods, supporting small businesses, or financing community facilities like schools or healthcare centers. Investments can also involve partnerships with community development financial institutions (CDFIs) or nonprofits aligned with CRA goals.
Who Does the CRA Apply to?
The Community Reinvestment Act (CRA) applies to federally insured depository institutions, including national banks, state-chartered banks, and savings associations. It requires these institutions to meet the credit needs of their entire community, with a focus on low- and moderate-income areas, while operating safely and soundly. Non-depository institutions are not subject to CRA requirements.
What Is the Asset Size Threshold for CRA in 2024?
Effective January 1, 2024, the Community Reinvestment Act (CRA) defines asset-size thresholds for banks as follows:
- Small Bank: Institutions with assets less than $1.564 billion as of December 31 of either of the prior two calendar years.
- Intermediate Small Bank: Institutions with assets between $391 million and $1.564 billion as of December 31 of both of the prior two calendar years.
These thresholds are adjusted annually based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Read more: FDIC
