In 1977, Congress passed a landmark piece of legislation called the Community Reinvestment Act (CRA) that encourages banks to meet the credit needs of low- and moderate-income (LMI) individuals.1 The regulations that implement the CRA highlight LMI neighborhoods and other economically distressed or financially underserved areas where banks’ activities are important for meeting the requirements of the legislation. The CRA is race-neutral on its face. But in Minnesota, borrowers in the geographic areas targeted by the CRA’s current framework are more likely to be Native American or people of color than those in the state as a whole.
In this article, we touch on the CRA’s purpose and workings and discuss how a proposal from the three banking agencies that have oversight of the CRA seeks to revise its regulations to meet the core purpose of the statute, including addressing inequities in credit access. In May, those three banking agencies—the Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve System (Board), and the Office of the Comptroller of the Currency (OCC)—released a joint Notice of Proposed Rulemaking (NPR) to modernize and strengthen the CRA regulations, and they are seeking feedback on the proposed rule changes. We close this article with a call for public comments on their proposal. Members of the public can submit comments through August 5, 2022.
The CRA’s origins: Counteracting racially motivated redlining
The CRA was one of several civil rights laws enacted in the 1960s and 1970s to address systemic inequities in credit access.2 It was intended to reinforce the other civil rights statutes by addressing redlining, a practice wherein banks declined to make loans or extend other financial services in neighborhoods made up largely of Black households, other households of color, or households of certain ethnic groups. The term “redlining” derives from maps that were created for government programs and that literally delimited these neighborhoods in red while classifying them as high credit risks. For example, one set of maps from the 1930s redlined the West Side of St. Paul, describing it as “the Ghetto District—Russians, Jews, Mexicans, Chinese, and riff-raff live here, the most undesirable district in St. Paul… Much reconditioning is necessary, also very inadvisable.”
Federal policies discouraged lending in redlined areas. The historical legacy of redlining is clearly demonstrated in homeownership data. At their outset, federally guaranteed mortgages were rare in redlined neighborhoods. From 1934 to 1962, nearly every loan backed by the Federal Housing Administration went to a White home buyer in a White neighborhood. The program provided access to both homeownership and wealth for White families.
Unlike the fair lending and housing laws, the CRA does not apply a racial lens to its analysis of regulated entities’ activities. But redlining’s legacy remains important for the law and its regulations, because it is part of the context for CRA’s contemporary implementation.
The CRA, along with other fair lending and housing laws of its time, aimed to address these sorts of discrimination in credit markets. Unlike the fair lending and housing laws, the CRA does not apply a racial lens to its analysis of regulated entities’ activities. But redlining’s legacy remains important for the law and its regulations, because it is part of the context for CRA’s contemporary implementation.
For example, around the nation, redlined neighborhoods remain economically and racially segregated, and Native Americans and people of color are less likely to have a bank account and more likely to rely on expensive credit products like auto title loans or payday loans.
How the CRA works
Under the current CRA regulations, the FDIC, the Board, and the OCC evaluate the distribution of bank lending to consumers, small businesses, and small farms by income or revenue level and geography. For larger banks, the agencies’ examiners also look at the institutions’ community development and retail services activities. Banks are assigned a rating ranging from “Substantial Noncompliance” to “Outstanding.”
Banks are rated based on their activities within an assessment area—a geographic area that is generally determined by the location of a bank’s physical branches. A CRA examination includes an analysis of banks’ lending to LMI households and neighborhoods within their assessment areas. The exact tests used to conduct the analysis vary based on a bank’s size. The regulations currently categorize banks as small, intermediate small, or large, depending on their total assets.
If a bank is found to be underserving LMI neighborhoods or households in its assessment area(s), its rating may suffer. Banks receiving a less-than-satisfactory CRA rating may be prevented from expanding via mergers or new branches.3 Low ratings also introduce reputational risk.
The CRA’s geography in Minnesota
In Minnesota, Native Americans and people of color are much more likely to live in CRA-defined LMI, distressed, or underserved areas than White people. Taken collectively, 27 percent of the households in these areas of the state are made up of Native Americans or people of color. In the remaining areas of the state, only 10 percent of households are made up of Native Americans and people of color. The general trend is the same in both the seven-county Twin Cities area and in Greater Minnesota.
With the exception of Asian households, Native Americans and people of color in Minnesota earn less than White Minnesotans.4 As shown in the table below, these income differences alone do not explain why there are so many more Native Americans and people of color living in CRA-eligible areas.
Shares of households by race and income in Minnesota
* The seven counties referred to here are Anoka, Carver, Dakota, Hennepin, Ramsey, Scott, and Washington, which are a subset of the 16 counties in the Twin Cities metropolitan statistical area (MSA).
Note: The LMI threshold is $77,840 for the Twin Cities MSA and $56,720 for the rest of Minnesota. Due to data limitations, the cutoffs used to identify the number of households whose earnings qualify as LMI are $75,000 for the Twin Cities MSA and $60,000 for the rest of Minnesota.
Source: Federal Financial Institutions Examination Council, U.S. Census Bureau 2015–2019 American Community Survey, and authors’ calculations
||Seven-county Twin Cities area*
|living in a low- to moderate-income (LMI), distressed, or underserved area
|whose earnings qualify as LMI
|with an income qualifying as LMI, and living in an LMI, distressed, or underserved area
|Native American households and households of color...
|living in an LMI, distressed, or underserved area
|whose earnings qualify as LMI
|with an income qualifying as LMI, and living in an LMI, distressed, or underserved area
Proposed changes aim to strengthen the CRA
The FDIC, the Board, and the OCC have worked together to develop a joint update to the CRA regulations—the first major update since 1995. Last time around, the modernization worked to both streamline the examination process and increase the law’s efficacy. For example, an oft-cited analysis from 2005 argues that the post-1995 CRA brought more lending activity to LMI neighborhoods. More recent analysis suggests that the CRA may still increase mortgage lending by banks in LMI neighborhoods.
In the proposed changes they released in May, the three agencies aim to strengthen the CRA regulations so they meet the core purpose of the statute and adapt to changes in the banking industry, including the expanded role of mobile and online banking.
Yet, despite positive impacts of the CRA, racial disparities in access to credit and banking services remain. These disparities continue to impact the ability of Native Americans and people of color to start and grow a business, purchase a home, and build wealth.
In the proposed changes they released in May, the three agencies aim to strengthen the CRA regulations so they meet the core purpose of the statute and adapt to changes in the banking industry, including the expanded role of mobile and online banking. Some of the proposed changes, discussed below, could help address credit disparities by unlocking new sources of capital in Native communities and communities of color.
Considering community development activities regardless of location
In the CRA NPR, the agencies propose that banks would be allowed to receive CRA credit for any activity that meets the current regulations’ definition of community development, regardless of where the bank and activity are located. This would include activities associated with online and mobile banking, and branchless banking. This provision could be particularly helpful in geographic areas that the NPR designates as Native Land Areas,5 many parts of which are far removed from bank branches.
Including CDFI-related activities
The agencies also propose that all lending, investment, and service activities by any bank undertaken in connection with a U.S. Department of the Treasury-certified community development financial institution (CDFI) would be presumed to qualify for CRA credit. CDFIs are specialized entities that provide financial products and services, such as small business loans and technical assistance, in markets not fully served by traditional financial institutions. CDFIs can play a vital role in LMI communities, and many have a mission to provide financial products and services to Native American communities and communities of color.
Considering activities in certain locations “highly impactful”
The agencies’ proposed CRA regulations consider activities in persistent poverty counties or in Native Land Areas to be “highly impactful” for CRA purposes. Persistent poverty counties must have a poverty rate of at least 20 percent over each of the past three decades. What effect would these proposed provisions regarding highly impactful activities have, if implemented? Using Minnesota as an example, the highest-poverty county in the state, Mahnomen County, had a poverty rate of 16.7 percent in 2000, below the persistent poverty threshold, but its poverty rate has averaged 20.4 percent since 2000.6 Despite its economic struggles, Mahnomen County would not qualify under the persistent poverty definition.
However, the county could attract more community development investments under the NPR’s provisions focused on Native American communities. Part of the White Earth Indian Reservation, Mahnomen is the only county in Minnesota located entirely within an American Indian reservation. The provision to consider activities in Mahnomen County and other Native Land Areas as highly impactful could encourage banks to engage in community development activities in more such areas.
Agencies seek feedback on proposed changes
The public currently has an opportunity to comment on the provisions highlighted in this article and on all aspects of the CRA NPR, including 180 questions for consideration that are outlined in the document. Some of the questions highlight implications the regulations may have for racial disparities. For example, questions 28 (in part) and 173 ask, respectively:
To what extent is the proposed definition of Native Land Areas inclusive of geographic areas with Native and tribal community development needs?
Should the agencies disclose HMDA [Home Mortgage Disclosure Act] data by race and ethnicity in large-bank CRA performance evaluations?
In preparing the NPR, the three agencies considered feedback they gathered from stakeholders at meetings and roundtables and in comment letters. Many stakeholders indicated that the CRA should be updated and strengthened while remaining true to the statutory objective of evaluating how banks meet the credit needs of their entire communities, including LMI people and communities. The agencies welcome more comments on the proposed changes. By August 5, 2022, members of the public may submit their important perspectives on how the CRA can address the contemporary credit-related challenges and opportunities within underserved communities.