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How the Community Reinvestment Act has Influenced Investment in Inner Cities

Today, young and talented professionals are moving to urban areas to take advantage of the job opportunities that exist. They’re investing in urban real estate and neighborhood commercial corridors are coming back to life. Yet, the opportunity available in cities today looks dramatically different than it did in the 1960s and 70s, when inner city crime was rampant, racial tensions were high and poverty was on the rise.

Image courtesy of the New York Federal Reserve Bank

At the time, the banking system was only feeding into a cycle of disinvestment in inner cities. Federally-insured banking institutions were not making sufficient credit available in the local areas in which they were chartered and acquiring deposits. This primarily affected low- and moderate-income (LMI) areas. Someone who wanted to buy a home and invest in their community would be denied a loan. In this time period, “redlining”— the practice of denying a creditworthy loan applicant because of the neighborhood he or she wanted to buy a home in (even if that person would otherwise qualify for a mortgage in another neighborhood)—was rampant. Similarly, low-income, minority- and women-owned businesses struggled to access the capital needed to grow their companies.

Instead, deposits collected from people in these neighborhoods were used to fund lending activities outside the area—sometimes, even out of the country. The problem became so pervasive that the federal government realized it needed to intervene.

Congress responded by passing the Community Reinvestment Act (CRA) of 1977. According to the legislation, the CRA was intended to “re-affirm the obligation of federally chartered or insured financial institutions to serve the convenience and needs of their service areas” and “to help meet the credit needs of the localities in which they were chartered, consistent with the prudent operation of the institution.” The CRA requires federal regulators to periodically assess how well a bank is meeting local credit needs. Those records are then considered when a bank applies for a charter, new office branch, merger, acquisition or other act that requires federal approval.

In 1989, CRA regulations were amended to require written evaluations of a bank’s CRA compliance, a portion of which was mandated to become public record. At this time, the law was also changed to require banks be given a rating using a four-tiered performance scale: “outstanding,” “satisfactory,” “needs to improve” or “substantial noncompliance.” Making CRA compliance more transparent dramatically improved oversight, and allowed advocacy groups to perform more sophisticated, quantitative analyses of banks’ records. Community groups could then use this data to pressure banks and influence their lending policies in a way that would have a greater impact on the local community.

CRA regulations have since been amended a number of times. Various amendments have enhanced lending targeted toward woman- and minority-owned businesses, repealed restrictions on interstate banking, created a public comment period on CRA activities, clarified performance standards, reduced the frequency of evaluations among smaller banks, and created more opportunities for banks to fulfill their CRA obligations.

Despite the CRA’s good intentions, the legislation is not without its critics. Some have said that CRA requirements force banks to make bad loans to high-risk borrowers that result in default. Many point to the foreclosure crisis as evidence of this, arguing many LMI borrowers defaulted on their mortgages and wound up losing their homes and ruining their credit in the process. Others have said the CRA forces banks to forego more profitable lending in non-targeted neighborhoods because a disproportionately high amount of dollars is funneled into LMI areas. Others still say the CRA simply hasn’t met its goals because of weak enforcement at the federal level.

Although the CRA and its oversight are not perfect, the legislation has undoubtedly made an incredible difference to inner city communities. Research demonstrates that in the 1990s in Boston, for example, mortgage lending to low-income and minority households in inner city neighborhoods increased at rates higher than lending to higher-income and white households. Literature reveals significant increases in African-American homeownership rates as well.

Moreover, although loans-per-business in upper-income areas still exceed loans-per-business in lower income areas (by 37 percent), banks’ total business lending in low-income areas has increased since the introduction of CRA.

In 2016, Fifth Third Bank, in partnership with the National Community Reinvestment Fund, signed onto a five-year community development plan worth $30 billion. The plan includes $11 billion in mortgage lending to LMI individuals and communities and $10 billion in small business lending, including micro-lending. The plan is also funding community development loans and investments including support for affordable housing, community development corporations and CDFIs. Fifth Third Bank, which operates in ten states largely in the South and Midwest, reports it has already investment $8 billion towards that end.

Last year, the National Community Reinvestment Fund also worked to develop similar plans with KeyBank ($16.5 billion) and Huntington Bank ($16.1 billion). Both are five-year plans that also support mortgage, small business, community development lending and philanthropy.

Sometimes banks fall short of their commitments. This past March, Wells Fargo was given a two-step downgrade on their CRA rating from the U.S. Office of the Comptroller of the Currency. The rating dropped Wells Fargo’s CRA performance score from “outstanding” to “needs to improve.”

As part of its broader efforts to facilitate the availability of financial services and capital to communities in need, the Federal Reserve Bank provides training, roundtable convenings and collaboration with banks to ensure that their CRA investments maximize impact in low-income communities. The Federal Reserve Bank also works with a network of community development stakeholders to advance innovations in the application of the CRA that are adaptive to the evolving nature of the banking industry and community development field.

The Federal Reserve Bank reminds us in its Community Development Data Guidebook for CRA Bankers, Community Development Practitioners and Everyone in Between (2014) that “practice makes perfect.” Not all banks are going to perfectly align their efforts to community needs the first time around. But the more intentional and thoughtful banks are with their CRA programs, the bigger impact they’ll have on the communities they serve. In supporting everything from first-time homebuyer programs to financial literacy curriculum to increasing capital for inner city businesses, the CRA has had a significant impact on the revitalization of communities that were once considered “too risky” for banks to invest in at all.


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