History of the CRA
What Is the CRA?
The Community Reinvestment Act (CRA) is a U.S. law, passed in 1977, that encourages depository financial institutions to help meet the credit needs in all parts of the communities they serve, including low- and moderate-income (LMI) neighborhoods.
Rallying Against Discrimination
The CRA is a result of the neighborhood movement of the 1970s and 1980s, when community groups rallied against historical practices of housing and banking discrimination in low-income urban neighborhoods. The CRA specifically addressed a discriminatory practice called redlining that had become entrenched in federal housing policy and was used to deny or raise the cost of loans to low-income and minority borrowers.
Although the CRA is a product of the late twentieth century, it has roots in an early civil rights law from a century before. Immediately following the Civil War, the Civil Rights Act of 1866 was passed, stating that every citizen of the United States, including former slaves, had the same right to inherit, purchase, lease, sell, hold, or convey property, both real and personal. The definition of citizen, however, excluded women and Native Americans.
Almost 100 years later, following a long history of discrimination and exclusion against African Americans and other communities of color, the 1964 Civil Rights Act was passed. Title VI of the Civil Rights Act states, “No person in the United States shall, on the ground of race, color, or national origin, be excluded from participation in, be denied the benefit of, or be subjected to discrimination under any program or activity receiving federal financial assistance.”
Another civil rights law that arose out of the civil rights movement, the Fair Housing Act, was passed in 1968. It prohibits conduct that makes housing “unavailable” to any person on the basis of race, or that discriminates on the basis of race, color, religion, sex, familial status, or national origin in provision of services or facilities in connection with the sale or rental of housing.
The Equal Credit Opportunity Act (ECOA) was one of the key housing and lending reforms that came under the broader civil rights legislative umbrella. It prohibits financial institutions from discriminating between otherwise creditworthy borrowers on the basis of race, color, religion, national origin, sex, marital status, age, receipt of public assistance funds, or the exercise in good faith of the rights guaranteed under the Consumer Credit Protection Act.
Another significant law to address discrimination in lending was the Home Mortgage Disclosure Act (HMDA). The goal of HMDA is “to provide the citizens and public officials of the United States with sufficient information to enable them to determine whether depository institutions are filling their obligations to serve the housing needs of the communities and neighborhoods in which they are located.”
The Community Reinvestment Act (CRA)—another major piece of federal legislation passed in the 1970s to combat lending discrimination—reaffirms the longstanding principle that financial institutions must serve the “convenience and needs,” including credit needs, of the communities in which they are chartered, including low-and moderate-income communities, and low- and moderate-income borrowers.
In order to strengthen the CRA and make it more transparent, Congress passed the Financial Institution Reform and Recovery Act of 1989, which amended the original CRA statute. It required public disclosure of banks’ CRA ratings and performance evaluations, as well as expanded data collection and the public disclosure of certain data reported under HMDA.
The federal agencies that implement the CRA reviewed and revised the act’s regulations in order to clarify performance standards, make CRA examinations more consistent, and reduce the compliance burden for banks. Revisions adopted for large banks established a three-pronged test based on performance in the areas of lending, investments, and services. While the regulations placed the greatest emphasis on lending, they encouraged innovative approaches to addressing community development credit needs. Several provisions were included to reduce compliance costs—among them a new rule that allowed small banks to meet their requirements by means of a streamlined examination focused on lending activities.
The Gramm-Leach-Bliley Act was enacted, authorizing commercial banks to affiliate with investment banks; bank holding companies to engage in any type of financial activity; and subsidiaries of banks to engage in a broad range of financial activities that are not permitted for banks themselves. There were also three CRA-related provisions in the act: (1) the establishment of “Satisfactory” CRA ratings as a condition for engaging in the act’s new activities; (2) a requirement to disclose CRA agreements between financial institutions and third parties; and (3) the establishment of a lengthened CRA exam cycle for community banks and thrifts.
New revisions to the CRA regulations include new definitions for “small” banks, which would be subject only to a lending test to assess compliance with the CRA, and the establishment of a new category, “intermediate small bank,” which would be subject to a lending test as well as a new and more flexible community development test. The 2005 revisions also encouraged banks to meet community development needs outside of metropolitan areas by adding the categories of “distressed and underserved nonmetropolitan middle-income geographies and designated disaster areas.”
Following the recent mortgage and financial crisis, the CRA was blamed for promoting unsound lending practices that contributed to widespread foreclosures. However, analysis has demonstrated that loans and investments that came under the purview of the CRA performed better than those made by lenders who were not subject to CRA.
New rule changes were implemented in November 2013 to address issues such as community development activities that occur outside a bank’s assessment area, investments in nationwide funds, and community services targeted to low- and moderate-income individuals.