Definition
The Community Reinvestment Act (CRA) is a US federal law enacted in 1977 to encourage commercial banks and savings associations to meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods. It was established to prevent discriminatory lending practices that could negatively impact these neighborhoods. Essentially, the law obligates financial institutions to help meet the credit needs of all societies within their operating region.
Phonetic
/wɒt/ /ɪz/ ðiː/ /kəˈmjuːnɪtiː/ /ˌriːɪnˈvɛstmənt/ /ækt/ /ˈsiːɑːrˈeɪ/ /ˌdɛfɪˈnɪʃən/
Key Takeaways
- Objective and Regulation: The Community Reinvestment Act (CRA), enacted in 1977, was put in place with the chief goal of reducing discriminatory credit practices against low-income neighborhoods. It encourages commercial banks and savings associations to meet the needs of borrowers in all segments of their communities, including those in low- and moderate-income neighborhoods. It is overseen and enforced by the Federal Reserve Board (FRB), Office of the Comptroller of the Currency (OCC), and Federal Deposit Insurance Corporation (FDIC).
- Assessment and Ratings: Under the CRA, financial institutions are ranked based on their “record of meeting the credit needs” of their entire service area. This is achieved through routine assessment of their loaning practices by the concerned regulatory bodies. The rating categories are: Outstanding, Satisfactory, Needs to Improve, and Substantial Non-compliance.
- Impact: The CRA has had various impacts since its enactment. It has led to an increase in lending and services to low- and moderate-income communities, encouraging investment in these areas. However, critics have questioned the effectiveness of the CRA, linking it to risky lending practices and even implicating it in the 2008 financial crisis.
Importance
The Community Reinvestment Act (CRA) is a critical business/finance term as it represents a federal law in the United States aimed at promoting financial inclusion and preventing discriminatory lending practices towards marginalized communities. Passed in 1977, the CRA establishes that insured depository institutions—like banks—have an ongoing obligation to provide access to credit and financial services to all segments within their operational area, particularly low-income and medium-income neighbourhoods. By grading banks based on their efforts in this regard and making the results public, it brings into focus the social responsibility of financial institutions and encourages them to contribute positively to all communities they serve. Its importance lies in its ability to enhance financial inclusivity, economic equality, and growth.
Explanation
The Community Reinvestment Act (CRA) is a federal law in the United States enacted in 1977 with the primary objective of encouraging banks and other financial institutions to meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods. The Act came as a response to prejudiced lending practices, particularly ‘redlining’ , a discriminatory practice where banks would not lend money or provide services within a neighborhood based on racial or socioeconomic considerations. Through the CRA, the aim was to prevent such practices and ensure a fair distribution of credit across all areas where a bank operates.In its practical application, the Community Reinvestment Act is used to enhance access to vital financial resources for community development and individual entrepreneurial endeavors in underserved communities. Banks are periodically evaluated on their support to these communities based on criteria set forth by the CRA. These evaluations are incorporated into the regulatory framework – for instance, an institution’s CRA performance evaluation is considered when a financial institution applies for deposit facilities, including mergers and acquisitions. Thus, the CRA has been instrumental in encouraging financial institutions to contribute to the betterment of all communities they serve.
Examples
The Community Reinvestment Act (CRA) is a federal law in the United States, enacted in 1977, aimed at encouraging banks and financial institutions to help meet the needs of all borrowers in all segments of their communities, including low- and moderate-income neighborhoods.1. Bank of America: One of the initiatives by Bank of America that fulfills the requirements of the CRA is the ‘Community Homeownership Commitment.’ The bank, under this initiative, provides low to moderate income homebuyers with solutions such as down payment assistance, affordable homeownership, and counseling options, hoping to bridge the affordable housing gap.2. JPMorgan Chase: Under the CRA, JPMorgan Chase launched a $30 billion initiative to address the wealth gap in America’s Black and Latinx communities. Over the next five years, the firm confirmed it would aid in providing economic opportunity to these communities, including housing, supporting businesses, and improving access to banking.3. Wells Fargo: Wells Fargo, in compliance with the CRA, launched a program called ‘Wells Fargo NeighborhoodLIFT.’ This program offers down payment assistance and financial education to prospective homeowners across the United States, focusing on revitalizing neighborhoods and promoting homeownership. These examples show how financial institutions use the directive of the Community Reinvestment Act to improve the socio-economic conditions of the communities they serve.
Frequently Asked Questions(FAQ)
What is the Community Reinvestment Act (CRA)?
The Community Reinvestment Act (CRA) is a federal law in the United States enacted in 1977. This act was made to encourage depository institutions to assist meet the needs of local communities by lending within those communities, particularly in low and moderate-income neighborhoods.
How does CRA impact banks?
The CRA compels financial institutions to serve their local communities. It requires that each insured depository institution’s record in meeting the credit needs of its entire community be evaluated and reviewed periodically. The bank’s CRA rating can impact their business operations, including their ability to merge or expand.
Who regulates these regulations under CRA?
The CRA is supervised by the Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Where does the Community Reinvestment Act (CRA) apply?
The CRA applies to financial institutions that are insured by the government, such as banks and savings & loan associations in the United States.
What goals does the CRA have?
The primary goal of the CRA is to prevent redlining, a discriminatory practice by which banks refuse or limit loans within specific geographic areas, typically inner cities or economically-distressed area. The CRA strives to ensure that all community members have equal access to credit and financial services.
Do the regulations under CRA have any impact on housing laws?
Yes, CRA regulations align with the housing laws to prohibit discriminatory practices in lending that are based on race, color, religion, national origin, sex, marital status, or age. In fact, successful compliance with the CRA can often result in improved fair lending performance.
Can consumers or communities have any say in a bank’s CRA commitment?
Yes, when a bank’s CRA performance is evaluated, members of the public are invited to provide comments on how well the bank has met community credit needs. These comments are considered during the evaluation procedure.
Related Finance Terms
- Redlining: This is a corrupt practice where banks refuse to provide loans to certain neighborhoods based on their racial or socio-economic status. The CRA was enacted to combat this problem.
- Low and Moderate-Income Communities (LMI): One of the main focuses of the CRA is to improve the financial accessibility for these communities that are diagnosed as ‘underserved’ by financial institutions.
- Regulatory Agencies: These agencies – such as the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation – are responsible for enforcing and maintaining the standards of the CRA.
- Bank Examination: Under the CRA, banks are subjected to periodic examinations to ensure they are meeting their obligations in serving all community members equitably.
- Community Development: This refers to the efforts made by banks under the CRA to provide loans for affordable housing, community services for LMI individuals, activities related to economic development and revitalization, and loans to support these activities.
