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Community Reinvestment Act (CRA) Definition
The Community Reinvestment Act (CRA) is a regulatory framework that ensures lending institutions meet the loan and credit needs of the communities they serve, including low-and-moderate-income neighborhoods.
A Little More on What is the Community Reinvestment Act (CRA)
The Community Reinvestment Act (CRA) was established in 1977 to reduce cases of loan rejections and motivate financial institutions to meet the credit needs of community members, particularly those coming from low and middle-income neighborhoods. The Act expands and clarifies the expectations that banks are supposed to serve the needs and interest of the locals.
CRA and other financial regulations require Federal agencies to evaluate the history of every bank and savings institution to ensure the needs of the community are met. CRA also expects banks to consider history when analyzing the applications or approval of mergers and acquisitions and branches banking opening.
CRA also offer a clear framework for depository organizations and institutions. Organizations world collaboratively to promote the availability of banking and credit services among under-served communities. Through the framework, savings institutions and banks open new branches and are continuing to provide more services. Some banks have also adopted flexible credit underwriting standards and are committing towards local government and community promotion organizations to increase lending among local communities.
Institutions that operate under CRA
The CRA applies to depository institutions that are insured by the federal government, national banks, commercial banks, and savings banks which have received incorporation articles from a state regulatory body.
Roles of OCC in accordance with CRA
The CRA requires OCC to evaluate the history of a financial institution in regard to the assistance they provide to the local community to meet credit needs including those who are from marginalized neighborhoods. CRA also ensures that these institutions remain consistent with reliable and safe operations, and ensures that every agency considers that history during the evaluation of a request to open branches or relocation of a branch, mergers, and possible acquisitions.
Every three years, the OCC is expected to conduct a compliance examination in the national banks through coordination with the CRA. However, Gramm-Leach-Bliley law stipulates that smaller banks can be examined less frequently. Investigations of banks with a CRA overall rating of “Outstanding” and assets valued at $250 million or less may start after 60 months from the last CRA exam.
Similarly, examination of banks with an overall CRA rating of “satisfactory” and assets valued at $250 million or less can begin only after 48 months’ elapse after the last exam. Banks can be excluded from this cycle with a reasonable cause or as a result of a request for a deposit facility.
The OCC is expected to publish the compliance reviews notice with the CRA; this should be done every quarter. After the examination process ends, an evaluation of the written performance of a bank’s activities is conducted in compliance with the CRA. The examination findings are made available to the public.
The OCC invites the general public including the community, civic organizations, and the government to express their opinions about the performance of a bank in compliance with the CRA. This process allows the bank to address all issues that may arise as well as ensures that the OCC takes into consideration public opinion when evaluating the compliance history of the bank with respect to CRA. If the public comments are sent to the OCC, they would be considered when reviewing any applications contemplated by the CRA.
Benefits of CRA to consumers
Every depository institution has a public file where information that includes written public comments for the last two calendar years are kept. This information which is usually related to a bank’s performance is usually used to help improve the bank to meet the credit needs of the public. Consumers present their complaints about the financial institution based on the CRA.
Depository institutions must place an appropriate public notice at their parent office’s public lobby and in each of their branches where the public can obtain information regarding the CRA file, and the institutions are expected to provide copies of the public file whenever there is demand.
References for Community Reinvestment Act
Academic Research for Community Reinvestment Act
- Credit where it counts: The Community Reinvestment Act and its critics, Barr, M. S. (2005). NYUL Rev., 80, 513. This article provides an analysis of the Community Reinvestment Act (CRA), its advantages, and critics. The author describes the introduction of the Act in 1977 and its aim to end the hindrances of credit access among low- and moderate-income communities. According to the author, many scholars argue that CRA has several challenges as it is unnecessarily costly, ineffectual, and lawless. Moreover, it is stated that CRA should be eliminated. On the contrary, the author suggests that government’s intervention by implementing CRA was justified due to the previously existing market failures and discrimination. Using empirical evidence, the author demonstrates how CRA has been used to enhance access to credit among the marginalized communities as well as market failures. Further, the author argues that a CRA’s legal directive is better than an effective response to market failures, and as such, CRA should not be abandoned. The article, therefore, concludes that CRA is justified, and should be retained for the benefit of the marginalized communities.
The community reinvestment act: an economic analysis, Macey, J. R., & Miller, G. P. (1993). Virginia Law Review, 291-348. According to this article, the Community Reinvestment Act (CRA) offers enough supervisory guidance to depository institutions thereby ensuring that low- and moderate-income neighborhoods receive their credit needs efficiently. This is made possible through the assessment of depository institutions by the federal bank representatives, ensuring that credits are offered in a safe and sound manner. The authors assert that it is the role of the supervisors to ensure that thorough evaluation is done during the review of applications of deposit facilities acquisitions or merger. For several years, the paper denotes, CRA has been a little more than a vague statement of principle. However, since 1989, the Congress enhanced the Act which became part of a comprehensive banking legislation. Thus, the article provides an economic analysis of CRA.
Commercial lending and distance: evidence from Community Reinvestment Act data, Brevoort, K. P., & Hannan, T. H. (2006). Journal of Money, Credit and Banking, 1991-2012. This paper recognizes the fact that credit scoring innovations have increased the chances of banks to offer loans to distance business borrowers. However, with limited geographical expansions, it is posited that the market would become segmented and as a result there would be a decrease in the distance lending by banks. As such, the authors review this phenomenon by using new data sources and a spatial econometric model, attempting to prove that there is a relationship between market distance and commercial lending and how this relationship is transforming over time. Based on the findings, the authors claim that there is a negative association between distance and the likelihood of provision of a loan by banks. There was, however, no evidence that distance has become less significant in the US. On the contrary, it appears that distance may become more important in the local market lending.
The Community Reinvestment Act after fifteen years: It works, but strengthened federal enforcement is needed, Fishbein, A. J. (1992). Fordham Urb. LJ, 20, 293. This article describes the functioning of the Community Reinvestment Act (CRA), its adoption, and strengths. According to the author, the legislation was adopted to address issues of discrimination in the mortgage lending market where lenders refused to offer loans to certain geographical areas as a result of ethnic or racial discrimination. With lending institutions constantly overlooking credit needs of the local communities, the law was established to deter this form of neglect. The article asserts that CRA is based on the view that savings accounts and banks have the obligation to serve the banking needs of all communities including the under-served.
The Community Reinvestment Act and the recent mortgage crisis, Kroszner, R. S. (2008). Board of Governors of the Federal Reserve System. This article explores the efforts of the Federal Reserve and other financial regulatory bodies to address the credit needs of local communities using the Community Reinvestment Act (CRA). According to the author, it is important that financial institutions extend their services including mortgage lending, small businesses, and other types of credit to low-income communities. In addition, the lending institutions should offer investment and services that would help build capacity among the low-income regions to thrive.
Redlining, the Community Reinvestment Act, and private mortgage insurance, Ross, S. L., & Tootell, G. M. (2004). Journal of Urban Economics, 55(2), 278-297. This article illustrates how racial or income composition impacts the ability of a lender to approve mortgage applications. According to the author, recent studies have not found any linkage between racial or income composition of a neighborhood and mortgage application treatment by financial institutions.
Did the Community Reinvestment Act (CRA) lead to risky lending?, Agarwal, S., Benmelech, E., Bergman, N., & Seru, A. (2012). (No. w18609). National Bureau of Economic Research. This paper proves that Community Reinvestment Act (CRA) indeed leads to risky lending. To achieve this, the study involves the use of exogenous variation in the incentives of banks that conform to CRA standards. As such, the authors compare the lending behavior of banks that are undergoing CRA exams with those banks that do not face the exams. Based on their evaluation, the authors find that adherence to CRA results in riskier lending among banks. This was evident from the fact that six quarter surrounding the lending is elevated on average by about 5% in each quarter and loans were defaulted by 15% for every quarter. The patterns were more concentrated in large banks and CRA-eligible census tracts, and the effects were strongest when the private securitization market was booming.
Lending Discsrimination: Economic Theory, Econometric Evidence, and the Community Reinvestment Act, Hylton, K. N., & Rougeau, V. D. (1996). Geo. LJ, 85, 237. This article attempts to understand the correlation between the Community Reinvestment Act (CRA) and lending discrimination. The authors explain that although the law has been in place for the past 2 decades, it has attracted a heightened interest over the past few years. One of the factors considered to heighten this interest is the increasing economic gap in the society as well as the economic decline of inner cities. Another factor analyzed by the authors in the consolidation of the banking industry which promotes expansion-oriented banks to improve their CRA ratings in the market.
Trends in home purchase lending: Consolidation and the Community Reinvestment Act, Avery, R. B., Bostic, R. W., Calem, P. S., & Canner, G. B. (1999). Fed. Res. Bull., 85, 81. This paper identifies two trends around home purchasing lending which includes consolidation of the Community Reinvestment Act (CRA). It is stated that consolidation has had a significant impact on the structure of the banking industry. In particular, between 1975 and 1997, the number of savings associations and commercial banks reduced by over 40% due to consolidation. During the same period, the mortgage lending market changed substantially, and to-date is no longer the province of most banking institutions. These changes, according to the author, have fuelled discussion on their impacts on mortgage lending. A key concern is that it is possible that borrowers from lower-income areas and minority neighborhoods are more likely to face mortgage credit discrimination.
Market Failure and Community Investment: A Market-Oriented Alternative to the Community Reinvestment Act, Klausner, M. (1995). University of Pennsylvania Law Review, 143(5), 1561-1593. This paper proposes an alternative solution to the Community Reinvestment Act (CRA) in addressing discrimination in mortgage lending. The author illustrates how CRA is an ambiguous law that has failed to address the witnessed economic/wealth gap and the discrimination of low- and moderate-income neighborhoods. Although the congress intended to have banks do what market forces would not let them do, the author notes that a lot of factors were unclear.
The valuation effects of the 1977 Community Reinvestment Act and its enforcement, Johnson, S. A., & Sarkar, S. K. (1996). Journal of Banking & Finance, 20(5), 783-803. This article examines the wealth effects of the 1997 Community Reinvestment Act (CRA) on commercial banks and loan associations. The authors find a negative average excess returns among small NYSE/AMEX banks and S&Ls due to the CRA effect. In contrast, there is no evidence of loss of wealth or declined performance among large banks or NASDAQ institutions. Based on the findings, the authors propose changes to CRA in order to improve performance of the financial service industry towards providing credit to the low-income communities.