The Community Reinvestment Act and Advocating for Greater Financial Inclusion and Community Resources
By Prince Osemwengie, Associate, Policy & Research
On August 5, 2022, select federal government agencies gathered comment letters on the Notice of Proposed Rulemaking for the Community Reinvestment Act (CRA); Inclusive Action submitted a letter advocating for economic just updates to the CRA.
INTRODUCTION
Did you know that thanks to the Community Reinvestment Act (CRA), between 2009 and 2020, banks awarded over $850 billion in loans to small businesses with revenue of less than $1 million? The Community Reinvestment Act is arguably one of the most important financial inclusion regulations you’ve probably never heard of and unknowingly benefited from. For community development-oriented organizations like Inclusive Action, the CRA is an important policy we track because it impacts the people we serve. In this blog, we want to share the basics of the Community Reinvestment Act, why you should care about it, and what can be done to improve it.
So what exactly is the Community Reinvestment Act, and how did it come about? The Community Reinvestment Act was enacted in 1977 under then-President Jimmy Carter. The CRA was created out of the need to resolve systemic disparities produced by public and private sector racial discrimination and redlining policies and initiatives. The underlying goal of the CRA is to close the racial wealth gap and expand access to capital to individuals and communities traditionally discriminated against and overlooked. To ensure the goals of the CRA are met, it mandates banks make intentional investments into low to moderate-income communities and minority households. Banks make investments by providing home mortgages, small business loans, grants, donations, and funding community development initiatives such as financing affordable housing development, business coaching programs, education, social services, and more. Three federal regulatory agencies are responsible for monitoring and enforcing banks' compliance with their CRA requirements and investments.
Why the Community Reinvestment Act Matters
There are two major reasons the CRA is vital for individuals like you and me.:
It holds banks accountable for their lending practices. The CRA regulatory agencies rate banks based on their lending activities to individuals, businesses, and communities; underperforming banks face consequences and penalties. The CRA accountability measures encourage banks to meet their investment requirements, which helps build and maintain local and regional economies.
The CRA expands access to non-exploitative/high-interest capital and credit sources for individuals and businesses. Communities with limited or zero access to traditional banks such as Chase and Bank of America and local banks tend to be vulnerable to predatory lenders - also known as payday lenders who can charge exorbitantly high interest on loans. Access to affordable, non-predatory money limits the chance of individuals acquiring these predatory loans.
For community-oriented organizations like Inclusive Action, which is also a community development financial institution (CDFI) that lends to small businesses, the CRA represents a tool that can foster essential partnerships with banks. Even more so, the CRA is an important source of funding for grants, loans, and technical assistance programs for small business owners - like the ones that we serve.
Recommendations on addressing the shortcoming of the Community Reinvestment Act:
While the CRA has proved to be a valuable regulatory tool to facilitate investment in underserved communities, its full potential to close the growing racial wealth gap has yet to be realized. In the summer of 2022, the federal regulatory agencies released a Notice of Proposed Rulemaking to update the CRA and solicited letters of recommendation on their proposed changes. This update is critical because the last significant one was 27 years ago in 1995. As a CDFI, Inclusive Action submitted a letter to the CRA federal agencies outlining five shortcomings and associated recommendations.
Below are proposed recommendations that should be considered to build upon the success of the CRA.
Consider Bank Activity by Race and Ethnicity - Despite the origins, the CRA does not mention race and ethnicity as examination criteria but maintains banks are required to serve all communities. While it has diverted capital to predominantly low to moderate-income communities, it's critical to underscore that low to moderate-income areas are not a proxy for race and ethnicity alone. The racial wealth gap and the homeownership gap between people of color and their white counterparts have remained unchanged since the CRA was enacted in 1977. Inclusive Action recommends the CRA examine banks' performance in meeting the credit needs of communities of color, similar to how banks are evaluated on their performance in meeting the needs of low and moderate-income (LMI) borrowers and communities. Additionally, language access services at their branches and online should be reviewed.
CRA Federal Agencies to Provide Guidance to States to Implement a State-Level CRA - Non-bank financial loan providers such as payday lenders are both a threat and a debt trap for financially vulnerable borrowers. Payday lenders are not required to provide below market-rate interest or obligated to implement CRA community development activities in the communities they harm because they are regulated by state authorities and the Consumer Financial Protection Bureau (CFPB). Inclusive Action recommends that CRA federal agencies coordinate with states and the CFPB to guide the implementation of a state-level CRAs that emulates the federal CRA. A state-level CRA should require non-bank financial lenders to invest in community development initiatives where they have physical branches or conduct substantial online lending.
Prioritize Data Transparency - Data transparency is critical to hold banks publicly accountable for their harmful activities or lack of CRA-compliant activities. Data insights on bank lending activities help local governments and community-based organizations make data-informed decisions on financial products and programs that fulfill unmet needs in predominantly low to moderate-income and BIPOC communities. Accordingly, we recommend that all proposed collected data be publicly available, including data on small business lending required by the Dodd-Frank Act’s Section 1071 policy; sensitive data on borrowers should be aggregated.
Expand Scope of Community Development Activities - The banking and financial services sector has undergone substantive changes since the CRA’s last update in 1995; today, it’s estimated 65.3% of Americans now use digital banking. Additionally, non-bank financial technology services like Paypal and Venmo, along with cryptocurrency, have emerged in recent years and provide bank-like services like cash transfers, deposits, and more. Inclusive Action recommends that CRA federal agencies develop agile processes with equitable language access support to ensure community input is gathered and assessed bi-annually to make incremental updates to respond to sectoral changes. An updated process will better allow the CRA to support relevant community needs and programs to address the digital divide, infrastructure, language accessibility services, real estate financing, and services for immigrant communities.
Strengthen Partnerships with Mission-Driven Lenders - Mission-driven lenders like Inclusive Action offer banks an opportunity to invest their CRA-designated funds into organizations that can serve the hardest-to-reach residents. In select municipalities such as Los Angeles, the CRA federal regulatory agencies established a task force to bring together banks with non-profits. This task force primarily caters to banks to learn about non-profits without providing a transparent path to collaborate. Inclusive Action recommends the regulators require large banks to partner and invest a select portion of their eligible community development CRA funds into local CDFIs, or mission-driven lenders. CDFIs’ ability to reach the unbanked and underbanked can significantly support the CRA’s objectives to provide access to capital to underserved communities and people.
CONCLUSION
The Community Reinvestment Act is a necessary regulation that holds banks accountable and encourages them to invest in typically overlooked and underserved communities, businesses, and households. Ultimately, we all stand to gain from an updated CRA that informs banks’ inclusive financial service practices.
Click here to read our full letter to the federal CRA regulator agencies.