Community Reinvestment Act... In The Community

"I would have more governments and industries that participated in redlining be held accountable. More direct investment (such as credit enhancements/subsidies) needs to be made into projects that serve the needs of people with low income. We need to encourage policymakers such as the Biden administration and Congress to permanently strengthen CRA, including applying it to a broader set of financial companies such as insurance, fintech, and credit unions."

— Omar Elhagmusa, senior lender at IFF, a community development financial institution

Data related to CRA that can be used to better understand needs in low- and moderate-income areas and evaluations that reveal how well financial institutions are complying with the CRA can be found at the following sites:

• Federal Financial Institutions Examination Council online Census data system: https://www.ffiec.gov/census/default.aspx
  *Explore data by state/county, metro areas, and census tract levels.
• US Census Bureau: https://www.census.gov/quickfacts/fact/table/US/PST045219
  *Quick facts by state, county, city, town, or zip code.

—Susan Schaaf, senior examiner–risk specialist, and Mike Coleman, banking supervisor–risk specialist, Federal Reserve Bank of Cleveland

The CRA does not cover all financial areas. CRA primarily covers mortgage, small business, and small farm lending and may cover certain types of consumer loans if they are considered to be a major product offering. Payday lending is not likely a major product offering for a bank and is not specifically considered with regard to CRA.

While there haven’t been changes to CRA relating to payday lending, bank examiners must consider evidence of illegal credit practices, such as discriminatory and predatory lending practices, before assigning an overall CRA rating. As part of any bank examination, we assess how banks are limiting harm to consumers and ensuring they are not discriminating in their lending practices.

These examination results are not made public unless there are significant weaknesses that result in a public enforcement action. However, as a result of that examination work, if there is evidence of illegal credit practices, examiners are required to consider the impact on a bank’s overall CRA rating, and that may result in a downgrade of the CRA rating, which is public.

—Susan Schaaf, senior examiner–risk specialist, and Mike Coleman, banking supervisor–risk specialist, Federal Reserve Bank of Cleveland

As the CRA pertains to large banks (thresholds differ based on assets held), banks are required to help and are evaluated by how they meet the needs of low-and moderate-income people and geographies through three ways: lending, investments, and services. Qualified investments may include grants and donations that have the primary purpose of community development, which means activities that identify and address communities’ needs, assets, and priority investments to build stronger, more resilient communities.

Grants and grant programs are one type of qualified investment but are not required for a bank to receive an outstanding or satisfactory CRA rating.

Banks that do not receive an outstanding or satisfactory rating face consequences, among them not being permitted to merge with or acquire other banks or open branches.

— Susan Schaaf, senior examiner–risk specialist, and Mike Coleman, banking supervisor–risk specialist, Federal Reserve Bank of Cleveland

The CRA applies to institutions, including national banks, state-chartered banks, and savings associations, that take in deposits and are insured by the Federal Deposit Insurance Corporation. Credit unions and other nonbank entities are exempt from the legislation.

It is true that nonbank mortgage companies are among the largest loan originators in the country and that credit unions are becoming formidable competitors against banks. Bank trade associations and other community groups have called for CRA to expand to credit unions and independent mortgage companies. They assert that if one segment of the lending industry must comply with CRA while the other segments do not, this may make lending to underserved communities more difficult because nonCRA-covered institutions can focus on the most profitable parts of their markets and focus their lending on the most affluent borrowers.

If you want to suggest changes, please comment on the Fed’s Advance Notice of Proposed Rulemaking (ANPR), which seeks to modernize how the Fed regulates institutions per the CRA. The ANPR specifically seeks comment on how best to define an assessment area for branchless banks that primarily make loans over the Internet.

— Susan Schaaf, senior examiner–risk specialist, and Mike Coleman, banking supervisor–risk specialist, Federal Reserve Bank of Cleveland

The current CRA is income-defined, not demographically defined, so it should support investments involving lower-income businesses regardless of the owners’ race. However, the Fed’s Advance Notice of Proposed Rulemaking (ANPR) seeks to modernize how the Fed regulates institutions per the CRA and asks multiple questions about race—minority-owned businesses and minority-owned institutions. For example:

• Question 57. What other options should the Board [of Governors of the Federal Reserve System] consider for revising the economic development definition to provide incentives for engaging in activity with smaller businesses and farms and/or minority-owned businesses?
• Question 60. Should the Board codify the types of activities that will be considered to help attract and retain existing and new residents and businesses? How should the Board ensure that these activities benefit LMI [low- and moderate-income] individuals and communities, as well as other underserved communities?
• Question 64. Would providing CRA credit at the institution level for investments in MDIs [minority depository institutions], women-owned financial institutions, and low-income credit unions that are outside of assessment areas or eligible states or regions provide increased incentives to invest in these mission-oriented institutions? Would designating these investments as a factor for an “outstanding” rating provide appropriate incentives?
• Question 65. Should MDIs and women-owned financial institutions receive CRA credit for investing in other MDIs, women-owned financial institutions, and low-income credit unions? Should they receive CRA credit for investing in their own institutions, and if so, for which activities?
• Question 66. What additional policies should the Board consider to provide incentives or additional investment in and partnership with MDIs?
• Question 88. Should consideration for an outstanding rating prompted by an investment or other activity in MDIs, women-owned financial institutions, and low-income credit unions be contingent upon the bank at least falling within the “satisfactory” range of performance?
• Question 89. Would it be helpful to provide greater detail on the types and level of activities with MDIs, women-owned financial institutions, and low-income credit unions necessary to elevate a “satisfactory” rating to “outstanding”?

— Susan Schaaf, senior examiner–risk specialist, and Mike Coleman, banking supervisor–risk specialist, Federal Reserve Bank of Cleveland

It’s true that banks often invest in physical buildings, such as affordable housing, for CRA purposes, but they also invest in financial literacy, housing counseling, and healthcare-related projects, among others. It’s also true that the Fed’s Advance Notice of Proposed Rulemaking (ANPR), which seeks to modernize how the Fed regulates institutions per the CRA, asks multiple questions about an array of potential CRA investments. Here are a few examples of these questions:

• Question 57. What other options should the Board consider for revising the economic development definition to provide incentives for engaging in activity with smaller businesses and farms and/or minority-owned businesses?
• Question 58. How could the Board establish clearer standards for economic development activities to “demonstrate [low- and moderate-income] LMI job creation, retention, or improvement”?
• Question 59. Should the Board consider workforce development that meets the definition of “promoting economic development” without a direct connection to the “size” test?

— Susan Schaaf, senior examiner–risk specialist, and Mike Coleman, banking supervisor–risk specialist, Federal Reserve Bank of Cleveland