As we celebrate the 30th anniversary of the Community Reinvestment Act (CRA), we are grateful that CRA has generated an extraordinary increase in access to credit and capital for working class and minority communities. Congress passed CRA in 1977 to end redlining, or the practice of discriminating against working class and minority neighborhoods.
Congress imposed upon financial institutions an affirmative obligation to serve the needs of all neighborhoods, including and especially low- and moderate-income neighborhoods. A regulatory system of CRA exams, merger application reviews, and public participation requirements held banks publicly accountable for increasing access to credit and capital in traditionally underserved neighborhoods.
The CRA regime worked. The National Community Reinvestment Coalition’s (NCRC) 600 member organizations have been at the forefront of commenting on bank performance during merger reviews and CRA exams. CRA exams involve rating a bank based on how many loans, investments, and services banks provide in low- and moderate-income communities.
The outcome of a bank’s merger application to a federal agency depends, in part, on the bank’s CRA performance. While the vast majority of merger applications have been approved, the application process has resulted in bank commitments to regulatory agencies and community groups to institute anti-discrimination policies and new lending and investing programs.
We have witnessed firsthand the rebuilding of neighborhoods due to the private-sector financing leveraged by CRA. Yet critical gaps remain in the law. Congress can honor CRA’s 30th anniversary by updating the law to cover non-bank financial institutions and to strengthen CRA as applied to banks.
Consider the following achievements due to CRA.
CRA agreements: NCRC has compiled a unique database of substantial CRA agreements negotiated by banks and community groups. These agreements commit banks to specific amounts of loans and investments for affordable housing, small businesses, economic development, and community service facilities in minority and lower-income neighborhoods. Since the passage of CRA in 1977, lenders and community organizations have signed CRA agreements totaling more than $4 trillion in reinvestment funds. Using NCRC’s database on CRA agreements, a former Federal Reserve economist documented that CRA agreements increased bank home lending to minorities and low- and moderate-income families in geographical areas encompassed by the CRA agreements.
Community development lending: Since 1996, banks and thrifts (depository institutions) have made 309,609 community development loans totaling more than $287 billion. The annual dollar amount of community development loans increased 196 percent—from $17.7 billion in 1996 to $52.5 billion in 2005.
Small business lending: Depository institutions made 10,118,499 small business loans totaling more than $449 billion in low- and moderateincome neighborhoods from 1996 through 2005.
CRA-covered banks made a higher portion of their loans to low- and moderate-income borrowers than non-CRA lenders: CRA-covered banks and thrifts make a greater percentage of their loans to low- and moderate-income borrowers (defined as having up to 80 percent of area median income) than mortgage companies. In 2005, CRA-covered banks and non-CRA covered lenders made 25.1 percent and 23.8 percent of their home purchase loans, respectively, to lowand moderate-income borrowers.
The U.S. Treasury Department, the Brookings Institution, Harvard University’s Joint Center for Housing Studies, and NCRC’sstudy of credit union lending have all considered and affirmed the benefits of the CRA: A Harvard study produced in 2000 demonstrates that without CRA, home purchase lending to low- and moderate- income borrowers and communities would have decreased by 336,000 loans from 1993 through 2000. The study also reveals that banks’ lending to low- and moderate-income borrowers is higher in geographical areas where federal agencies grade banks on CRA exams than in localities where banks lend but are not subject to CRA exams.
Likewise, the Treasury Department found that CRA-covered lenders increased their home mortgage loans to low- and moderate-income areas and borrowers by 39 percent from 1993 to 1998, more than twice the increase (of 17 percent) to middleand upper-income borrowers and areas.
Banks outperform credit unions: NCRC’s study, Credit Unions: True to Their Mission, affirmed the difference between banks and credit unions, currently exempt from CRA coverage. NCRC looked at the lending patterns of credit unions and banks in 50 states and compared their record of lending to low- and moderate-income and minority borrowers. We found that credit unions, the taxexempt institutions, lag banks the overwhelming majority of time. In spite of the original purpose of credit unions “to serve people of small means,” the absence of CRA has contributed to credit unions lagging banks and thrifts. CRA has worked to motivate banks to out-perform credit unions in serving people of modest means.
All of these accomplishments have been tremendous and are the result of the hard work of community groups and lenders in furthering the goals of CRA. Yet as we go forward after CRA’s 30th birthday, we must update CRA if we are to build upon our progress. NCRC’s allies on this effort are Rep. Eddie Bernice Johnson and Rep. Luis Gutierrez, who introduced the CRA Modernization Act of 2007 (H.R. 1289).
CRA needs to be updated in the following manner:
- The statute and/or regulation needs to be changed so that assessment areas on CRA exams cover the great majority of banks’ loans, including bank loans made through brokers, in addition to the lending through banks covered now. This gap in the CRA regulation may be partly responsible for depository institutions making a lower percentage of home purchase loans to low- and moderate-income borrowers in 2005 than 2004.
- CRA must apply to independent mortgage companies and large credit unions to encourage them to increase product choice and prime lending to lowand moderate-income borrowers and communities.
- CRA must also explicitly consider lending and branching to minority borrowers and communities so that CRA can be as effective in reducing differences in access to and price of credit for minorities as it has for low- and moderate-income borrowers.
- Detailed small business loan data must be made available, similar to how Home Mortgage Disclosure Act (HMDA) data is reported. By eliminating the prohibition on the collection of race and gender data under Regulation B, NCRC believes that CRA’s impact would be greatly enhanced in the area of access to small business lending for minority and low- and moderate-income borrowers. All banks must be required to report CRA small business loans data; the recent elimination of the reporting requirement for mid-size banks must be revoked. In addition, the CRA small business data must include the race and gender of the small business owner, similar to HMDA data.
- Another very important reform that can be implemented immediately is bolstering the fair lending tests associated with CRA. Recently, the federal regulatory agencies have added a critical anti-predatory lending provision to their CRA regulation. Illegal and abusive lending, if pervasive, will result in a downgrade of a bank’s CRA rating. The difficulty is that the vast majority of CRA exams contain only one or two sentences on the fair lending review indicating that no discrimination was found. The fair lending reviews should at least discuss what types of tests were conducted— did the exam probe for steering, evidence of loan flipping, and other possible abuses?
NCRC believes that CRA is vital to making capitalism work in all communities by requiring banks to serve the needs of low- and moderate-income neighborhoods. If all financial institutions had this obligation, they would discover more profitable opportunities, and distressed neighborhoods would stand their best chance in decades of revitalizing themselves. The $4 trillion in loans and investments due to CRA would be multiplied many times over if CRA were updated. To make the American dream a reality for all hardworking Americans, NCRC will work with Congress to pass the CRA Modernization Act of 2007. John Taylor is president and CEO of the National Community Reinvestment Coalition. NCRC is an economic justice trade association of 600 community organizations dedicated to increasing access to credit and capital for working class and minority people and organizations. For more information, contact NCRC at (202) 628-8866 or visit www.ncrc.org.