Understanding the State Community Reinvestment Act

By Gabriel Ruzin

One of the most insidious forms of discrimination in lending over the past several decades has been redlining, a long-illegal practice where financial institutions would target particular areas or neighborhoods thought to be ‘high risk’ and disallow lending business or advertising in those areas. Many federal regulations and programs have been created and enforced over the years to eliminate redlining in the name of equal lending access and treatment for all prospective borrowers, no matter their location, race, gender, and so on. One of these programs is the Community Reinvestment Act (CRA), also known as the Housing and Community Development Act of 1977. 

Specifically designed in response to inequality in lending opportunity across certain geographical parameters, the CRA authorizes federal lending agencies - including the Federal Reserve, the FDIC, and the Office of the Comptroller -  to evaluate all banking institutions that receive FDIC insurance on the basis of whether they are offering fair and equal credit opportunities to all areas that they service. The CRA was signed into law in response to the Home Owners’ Loan Corporation’s (HOLC’s) infamous nationwide neighborhood maps, which were widely shared among lenders shortly after the HOLC was established in 1933. Ostensibly created to gauge geographical lending risk, minority and black neighborhoods within nearly every major city in the country were outlined in red, cataloging these areas as ‘high risk’ and warning lenders that doing business there would attach unpreferable liabilities to their portfolios. As a result, many prospective borrowers were denied loans to buy or improve their homes in lower-income neighborhoods and property values in these neighborhoods declined even further. 

To combat this unequal and discriminatory pattern of lending, a variety of regulatory stopgaps were created, including the CRA. While the CRA in and of itself does not have any specific penalizing power to hold offending lenders accountable, it does have the authority to create a CRA ‘rating’ for every lending institution based on the findings of CRA evaluators. This rating is taken into account whenever a lending institution seeks Federal Reserve approval to merge with a competitor, acquire a competitor, or open new branches. Although these ratings were not originally part of the CRA framework, the Act has seen several updates to its original goal over the years. Perhaps most notably, the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989 added the aforementioned ratings, along with a requirement that evaluators create a written evaluation of every FDIC-insured lender, with a specific focus on how well low-to-moderate-income neighborhoods’ credit needs were being served. In 1995, CRA ratings were made available to the public for the first time, so that prospective borrowers, as well as advocacy groups, had access to evaluator feedback regarding the perceived level of effort that banks have been putting forth in disallowing redlining as part of their lending practices. 

The CRA has come under fire in the past for what some industry analysts consider to be originally unforeseen consequences, most famously the housing crisis of 2008. These detractors claim that the CRA led to some lenders being forced to take on risky investments that they normally would not approve, lest they be labeled as unfairly biased. However, a study by leading economists showed that these so-called ‘CRA-backed’ mortgages represented a very small percentage of the subprime loans which precipitated the housing crisis and were not considered to be a mitigating factor. Perhaps a more worthwhile criticism of the CRA is that - as it does not have specific authority to discipline non-compliant lenders - it is not as powerful a tool as other statutes utilized by the CFPB and other federal regulations. Some industry analysts have called for the CRA to be “modernized” and updated to be given more influence when it comes to combating illegal redlining practices. Only time will tell how the CRA is enforced and adapted for the future when it comes to weeding out these discriminatory lending methods.