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CRA Reform: Impact on Lending and Investing in Underserved Communities

On May 14th, 2020, the National Community Reinvestment Coalition, or the NCRC, hosted an event in their ongoing Just Economy Sessions on the proposed reforms to the Community Reinvestment Act, that are being seen as controversial to many as they are weakening the regulations.

What is the Community Reinvestment Act?

The Community Reinvestment Act, or the CRA, originally passed in 1977 as a Federal Law, designed to encourage commercial banks and savings associations to help meet the needs of borrowers in all segments of the communities where they drew deposits , including low- and moderate-income neighborhoods (in the Philadelphia metropolitan area a low- to moderate-income neighborhood is considered one where most families are at approximately 50 – 80 % of AMI for a family of 4 that is $43,500 – $87,000 respectively). This law was and is crucial in combating the disastrous effects of redlining, and has helped to create beneficial changes in the way that banks operate within low to moderate income communities by ensuring that they were investing in the communities they were operating in.

How does the CRA work?

The CRA, last reformed in 1995, has leveraged hundreds of billions of dollars in loans, investments, and services to low- and moderate-income communities, and has been a crucial asset within the community development field. The CRA essentially makes it so that banks are required to meet the financial needs of the areas that they operate within and requires banks to pass a variety of tests to ensure that this is being done. Under the CRA, banks need to meet certain levels of investing, lending, and service to the communities that they operate within. These requirements are currently ensured through Federal Regulation and a series of annual tests. The proposed reform would potentially change the ways in which these requirements were measured and the ways the tests are conducted. These changes could lead to negative outcomes for those that the CRA is protecting.

Proposed Reform

Two federal agencies, The Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) have proposed major changes to the CRA that would have negative impacts on the Act’s effectiveness.

The proposed reform includes changes to the ways that CRA evaluations would be conducted and changes the requirements about where and how banks make investments. In the new proposal, all investments made by banks will be counted towards CRA requirements, for example, a bank could invest in the construction of a stadium, rather than a small business, and pass CRA requirements. The new proposal also changes geographical requirements, meaning that the CRA would be less effective at combating the long-lasting effects of redlining should the proposed reform go through.

Why does it matter?

In the NCRC session, Jamie Weisberg, a Senior Campaign Analyst at the Association for Housing and Neighborhood Development, noted that if the proposal were implemented today, the long-term impacts would be disastrous. In the current COVID-19 epidemic, small business loans and similar investments that were made possible by the CRA are more important than ever, and the proposed reforms could stop or discourage banks from making these kinds of loans. During the session, Stephen Cross, Senior Advisor at Alvarez and Marsal, mentioned that the new proposal would remove economic development, as well as revitalization and stabilization in distressed areas during a time when these things are absolutely vital in terms of maintaining the economic strength of communities.

In other words, the proposed reform could have devastating effects on low- and moderate-income communities and their access to financial services, as well programs and organizations supported in part by investments from banks, that the CRA has helped to make possible.

What you can do about it

If you are reading this post, the CRA is most likely important to you in some way, it may have made it possible for you to achieve financial literacy (banks donate to organizations like Clarifi), access capital (banks create accessible safe banking products for all levels of income part of CRAs “work”), or given your organization the ability to help others (banks lend, invest and donate to non-profits who help people with housing, food access,  education and more, again due to CRA. Much of what will happen with CRA reform in the coming months and years as changes are rolled out may be out of your control, but that doesn’t mean you shouldn’t pay attention to what’s happening.

Stay informed, contact your elected officials, tell them why the Community Reinvestment Act is important to you and how you feel about the proposed reforms.

Learn more about the CRA here.