Community Reinvestment Act (CRA) history

A law passed by Congress in 1977 in response to perceived failings of banks in meeting the credit needs of the communities in which they operate, especially low- and moderate-income neighborhoods. The act is intended to encourage depository institutions to meet the credit needs of the communities within the framework of operating safe and sound financial institutions. It requires the federal supervisory agencies (the FEDERAL DEPOSIT INSURANCE CORPORATION [FDIC], the Office of the Comptroller of the Currency [OCC] and the Board of Governors of the Federal Reserve System [FRB]) to evaluate an institution’s CRA performance.

The Riegle Community Development and Regulatory Improvement Act of 1994 (CDRIA) substantially amended the CRA statute to satisfy critics of the original CRA rating system and to provide some regulatory relief for small institutions. CRA performances are evaluated under one of four possible scenarios: (1) streamlined procedures for small institutions, (2) three-tiered test for large retail institutions, (3) limited-scope test for “special-purpose” institutions, and (4) strategic CRA plans. After the CRA performance of an institution is evaluated under these procedures, it is rated as “outstanding,” “satisfactory,” “needs to improve,” or “substantial noncompliance.” In recent years, more than 90 percent of institutions have received outstanding or satisfactory ratings.

The CRA provides incentives for institutions to serve the community credit needs, but the law does not grant the supervisory agencies enforcement authority. An institution’s CRA rating can be taken into account whenever an institution requests to open or relocate, establish a bank HOLDING COMPANY, or engage in merger and acquisition activity. The agencies also must solicit public comment on, and publicly disclose, an institution’s CRA performance.

The CRA was modified by the Gramm-Leach- Bliley FINANCIAL SERVICES MODERNIZATION ACT of 1999 (GLBA) by setting forth a graduated schedule of decreasing frequency of CRA examinations of certain small-sized banks (less than $250 million in assets) commensurate with their record of meeting CRA “community credit needs.” Generally, small institutions are evaluated every four years if their current CRA rating is satisfactory and every five years if their most recent rating is outstanding.

CRA’s renewed focus on mortgage, small business, and small farm loans has meant that institutions must collect and annually report their small business and farm loan activity, as well as their community development loans. As with the Home Mortgage Disclosure Act (HMDA) data, the regulatory agencies prepare a report on each institution and make it and the aggregate lending data available to the public.

In response to charges that community groups use the CRA application comment process to coerce institutions into making financial and other commitments to their organizations, GLBA attempts to prevent abuses by requiring public disclosure of written CRA agreements between an insured depository institution or affiliate and another party, such as a community group or an individual. Community groups or individuals may face stiff penalties for willful and material noncompliance or for the diversion of funds or resources for personal gain.

Further reading

• Papadimitriou, Dimitri B., Ronnie J. Phillips, and L. Randall Wray. “A Path to Community Development: The Community Reinvestment Act, Lending Discrimination, and the Role of Community Development Banks,” Jerome Levy Economics Institute of Bard College, Public Policy Brief No. 6, 1993. 
• Spong, Kenneth. Banking Regulation: Its Purpose, Implementation, and Effects. 5th ed. Kansas City, Mo.: Federal Reserve Bank of Kansas City, 2000. 

Ronnie J. Phillips