Main image courtesy of ADHI Schools.

One of the best parts about owning a home and living in a neighborhood is that you feel a strong sense of community. You take pride in your property, and want to make sure that it looks good and is always properly taken care of. One of the many perks of being a homeowner is that you also develop close bonds with the people who own houses around you, which means that you all work together as a team to keep the area safe and welcoming for everyone who is lucky enough to live there.

But people who can’t get access to home loans due to their particular economic status don’t get to feel that amazing sense of community that comes from living in a neighborhood where everyone owns their own homes. Unfortunately for too long many lower and moderate income neighborhoods could not get their credit needs met due to discriminatory practices. The U.S. government sought to put an end to that when Congress approved the Community Reinvestment Act.

Keep reading to learn:

• What the Community Reinvestment Act is
• What the act requires of financial institutions
• Is the Community Reinvestment Act still important?

What is the Community Reinvestment Act (CRA) and why is it important?

Learn the ins and outs of the Community Reinvestment Act

Banks and financial institutions are designed to serve the members of the community and the neighborhoods that they’re a part of, which includes those neighborhoods that are considered low or moderate income (LMI). Traditionally, many of these lower and moderate income areas were “redlined” out of receiving the type of credit in loan opportunities that they deserved. The discriminatory practice of redlining effectively designated certain districts that were determined too risky and unsafe to loan mortgage capital to. 

These designations were drawn up in the 1930s by the Federal Housing Administration and the color-coded maps of safe and unsafe areas were created by the Home Owners Loan Corporation and continued to be used for years after the fact. These neighborhoods also tended to be inhabited by African Americans, who when they weren’t outright denied a loan, were forced to come up with higher down payments and have a shorter repayment schedule than white borrowers.

These discriminatory lending practices stifled home ownership in these communities, which was a significant cause in the deterioration of many parts of American cities, especially those neighborhoods dominated by minorities. In order to stop these practices and to help borrowers from low and moderate income areas receive credit and loan opportunities, Congress passed the Community Reinvestment Act in 1977.

This was a major stride in addressing the discriminatory practices that had been happening for decades. Banks and credit institutions were now obligated to meet certain standards and would be evaluated to ensure those standards were met.

What is required under the Community Reinvestment Act?

Who ensures the CRA conditions are met and how is that enforced?

Even though financial institutions were now required by law to ensure that residents of low and moderate income neighborhoods were offered access to credit and loans, if it was to make any difference, someone still had to ensure that this was enforced. Every institution that receives Federal Deposit Insurance Corporation insurance (FDIC) is evaluated to ensure they are meeting the needs of all members of the areas they serve. This means offering loans to individuals and businesses in a safe and sound manner. 

This does not mean that banks in these neighborhoods are required to make high risk loans, it simply means that every applicant is to be given the same evaluation as to whether or not they’d be a good candidate for a loan, regardless of where they live or where their place of business is.

Compliance of the CRA is the responsibility of:

• The Office of the Comptroller of the Currency
• The Federal Reserve System
• Federal Deposit Insurance Corporation 

Each bank or lending institution is assessed based on their size, reach into the community, and the type of financial opportunities they offer. The evaluators are looking for practices that improve the standing of individuals in the community, or that will improve and stabilize neighborhoods, such as investing in local businesses or additional community development. Banks are rated on a scale based on the amount of opportunities they’ve approved in low to moderate income areas, the economic indicators of the area, what the demographic makeup looks like, and by speaking to other institutions in the community. 

Each institution will receive a write up of its evaluation and how it is (or is not) meeting the credit and lending needs of the residents in their assessment area. This is important because the rating of:

• Outstanding
• Satisfactory
• Needs to improve
• Substantial noncompliance

is made publicly available to the community as a whole. The rating can have an impact when the bank is looking to expand or is interested in a merger. Each banking institution and the community that they serve is different, and a lot of factors can determine whether or not an institution has made the effort that is required of them. 

As we mentioned early, this act was not intended to just increase credit access to low or moderate income areas, forcing the banks to lend high risk loans. Instead it was designed to ensure that those individuals and businesses in these areas who are good candidates for credit are not outright denied, forcing the bank to do their due diligence to make a fair determination. 

Is the Community Reinvestment Act still important today?

Has it improved access to loans for low to moderate income areas?

The CRA has had multiple legislative and regulatory changes since 1977, but the majority of studies on effectiveness have shown that it has increased access to lending in low and moderate income areas. And most of these loans were profitable to banks, and did not result in loss. 

However, there are critics of the CRA that cite it’s just another regulatory mechanism, or that banks would have offered lending to lower to moderate income areas eventually if it was profitable. There is also the criticism that the CRA forces banks to make high risk loans, stifles their expansion, and does not allow them to diversify their lending portfolios.

Whatever the criticisms of today, the CRA in 1977 finally added the force of the law to stop the discriminatory practices that kept minorities in low and moderate income out away from home and business loans.