What is the US’ Community Reinvestment Act?

The Community Reinvestment Act aims to increase financial inclusivity in the lending space. While it’s been around for nearly half a century, new proposed rules to the Community Reinvestment Act will mean changes for every financial institution – small, intermediate and retail banks alike. 

History and Purpose

The Community Reinvestment Act (CRA) was introduced in 1977 to prevent redlining. This is the process of refusing credit to eligible individuals solely based on their address. The discrimination meant that those from low income areas couldn’t access financial support, even when they would be deemed worthy by the lending criteria. 

The Community Reinvestment Act specified that each depository institution must no longer redline, increasing the availability of credit to lower and moderate income families. This led to a greater commitment to serve the underserved, and better support community development.  

Moreover, the CRA increased inclusivity without forcing banks to approve loans with higher risk. This was important, because more people could get loans without affecting the operational resilience of the financial system.

Requirements of the Community Reinvestment Act

When it was first introduced, there were 2 types of CRA obligation for banks, credit unions and lenders to follow. These regulatory requirements are to: 

1. Assess how well their institution has previously met credit needs in neighbourhoods across the entire community (including lower or moderate incomes) 
2. Take this proportion into account for current and future applications

Importantly, though, each regulated financial institution is not evaluated based on a prescribed ratio of lower-income lending. Many have since called for this percentage to be a factor within the assessment. Instead, the assessment area depends on the type of bank: 

• Small: via an independent assessment of lending activities (no community input)
• Intermediate: via assessment (same as above) and community derived tests including an assessment of services and the percentage of qualified investments)
• Retail /large: three separate tests based on lending activities, qualified investments and community services 

The regulators then grade each institution with a “CRA rating”, from non-compliance to outstanding. These are the Office of the Comptroller of the Currency (OCC) and the Board of Directors at the Federal Reserve. 

The purpose of each grading is to inform individuals in the community about which banks are the most ‘low-income friendly’. The CRA provides an easily comparable factor – so it encourages banks to compete with one another. By appealing to lower and moderate income individuals, banks can improve their own reputation and gain more customers without increasing risk (protecting operational resilience).  

2022 Update to the CRA

After a CRA performance evaluation, the regulators proposed updates to CRA regulation in May 2022. A proposal for rulemaking was submitted. Community Reinvestment Act modernisation is the aim for regulators, especially considering the proportion of mobile and open banking today. 

The overall objective of the bill would remain the same, but this proposal would strengthen the CRA performance in better achieving its outcomes. It would also lead to a more unified approach towards inclusivity across the federal banking agencies in financial services. 

One example of a proposed change would be around how retail banks are evaluated. The test would separate data for borrower location and lending distribution. The proposed rulemaking would ensure that low and moderate income individuals could access financial support equally across every product, from mortgages to automobile lending. 

As of yet, financial institutions are not required to make any changes to their lending system in CRA compliance. But once each proposed rule becomes legally binding, we expect industry-wide changes to occur. 

If you want to figure out what’s round the corner in the regulatory world before it happens, CUBE can help. Demo RegPlatform today to benefit from horizon-scanning technology and regulatory intelligence to prepare your business for the upcoming changes in financial regulation. 

Keep ahead of emerging regulations by speaking to CUBE.