Community Reinvestment

This article will focus on the practice of community reinvestment by financial institutions. Community reinvestment, which became mandatory for lending institutions, such as banks and thrifts, as legislated in the Community Reinvestment Act (CRA) of 1977, will be introduced as a remedy to economic underdevelopment, economic disinvestment, and redlining in minority communities. The Community Reinvestment Act's implementation, compliance, and examination procedures will be discussed in detail. In addition, issues related to Community Reinvestment Act compliance management will be covered.

Keywords Community Reinvestment Act (CRA); Community Reinvestment Act Compliance Management; Economic Disinvestment; Economic Underdevelopment; Lending Institution; Redlining; Thrifts

Management > Community Reinvestment

Overview

Minority communities in the United States experienced unequal and lagging economic growth and development throughout the twentieth century. The economic inequality experienced by minority communities, in part, was created or exacerbated by the unwillingness of banks to fully service minority communities. The federal government responded to the reported bias and neglect by banks in low and moderate-income neighborhoods by passing the Community Reinvestment Act (CRA). The Community Reinvestment Act, enacted by Congress in 1977 (U.S. Code, Title 12 Chapter 30) and implemented by Regulations 12 CFR parts 25, 228, 345, and 563e, encourages economic development in low and moderate-income neighborhoods. The Community Reinvestment Act requires depository institutions, such as federally insured banks and thrifts, to help meet the credit needs of the communities in which they operate with safe and sound business practices and operations. The federal government passed the Community Reinvestment Act to ensure that banks and thrifts were meeting the lending and credit needs of all people and groups within their communities regardless of income, age, or race.

The Community Reinvestment Act was enacted to eliminate the practice of redlining and the resulting disinvestment that occurs when banks export deposits from one community in order to provide credit in another community. The practice of redlining creates a flow of funds from low to moderate-income neighborhoods to middle to high-income communities. Redlining refers to the practice of denying or increasing the cost of services, such as banking and insurance, to residents in low-income areas. Mortgage discrimination is one of the forms of redlining most responsible for lagging economic development. The Community Reinvestment Act, along with the Fair Housing Act (1968), which prohibited housing discrimination based on race, religion, gender, familial status, disability, or ethnic origin, effectively stopped the practices of redlining and mortgage discrimination in many minority neighborhoods.

The Community Reinvestment Act has affected lending institutions and the communities in which they operate in equal measure. The Community Reinvestment Act has affected lending institutions in numerous ways. Lending institutions, their practices, procedures, goals, and objectives, are altered by increased Community Reinvestment Act regulatory oversight, the public release of Community Reinvestment Act performance ratings, and the relationship between Community Reinvestment Act performance and possible denial or delay of an institution's application for a merger or acquisition (Bostic & Robinson, 2003).

The Community Reinvestment Act has changed banking practices and communities throughout America. The Community Reinvestment Act has resulted in significant economic growth and opportunity for underserved and underdeveloped communities as well as strengthened relationships between banks and the communities they serve. The Community Reinvestment Act has encouraged banks to open new branches, provide expanded services, adopt more flexible credit underwriting standards, and increase lending to underserved segments of local economies and populations. The Community Reinvestment Act has begun to remedy the problems of economic disinvestment and economic underdevelopment in minority neighborhoods and communities (Matasar, 2004).

The following section will describe regulatory oversight and implementation of the Community Reinvestment Act. This section will serve as the foundation for later discussions of Community Reinvestment Act compliance, examination, and management procedures. In addition, Community Reinvestment Act agreements, a new form of voluntary partnership that unites lending institutions, community-based organizations, and low to moderate income neighborhoods, will be introduced.

Community Reinvestment Act: Oversight & Implementation

The Community Reinvestment Act is an inter-agency initiative that is overseen and implemented by four different federal bank regulatory agencies. The four federal bank regulatory agencies responsible for enforcing the Community Reinvestment Act include the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve System FRB, the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS). The Community Reinvestment Act requires these four agencies to analyze and evaluate banking activity and performance in two main areas: First, the Community Reinvestment Act requires financial institution regulators to assess whether individual banks are meeting the needs and fulfilling the obligations of the communities in which they operate. Second, the Community Reinvestment Act requires financial institution regulators to assess whether proposed bank mergers, acquisitions, and branch openings meet the needs of the communities in which they operate.

The Community Reinvestment Act is implemented through Regulations 12 CFR parts 25, 228, 345, and 563e. These regulations establish the framework and criteria by which the agencies assess an institution's record of helping to meet the credit needs of its community (Matasar, 2004).

  • Regulation 12 CFR Part 25 refers to the Officer of the Comptroller of Currency's Community Reinvestment Act and Interstate Deposit Production Regulations. The OCC is required to assess, through national examination every three years, a national bank's record of helping to meet the credit needs of its entire community regardless of income or race. The Office of the Comptroller of the Currency performs Community Reinvestment Act audits for banks to which it has issued a national charter.
  • Regulations 12 CFR Part 228 refers to the Federal Reserve Board's Disclosure and Reporting of CRA-Related Agreements. The FRB is required to implement the Gramm-Leach-Bliley Act that requires reporting and public disclosure of written agreements between insured depository institutions and nongovernmental entities or persons made in connection with fulfillment of Community Reinvestment Act requirements. The Federal Reserve Board performs Community Reinvestment Act audits for state chartered banks that have joined the Federal Reserve System.
  • Regulation 12 CFR Part 345 refers to the Federal Deposit Insurance Corporation's community reinvestment responsibilities. The regulation establishes standards for assessing performance as well as records, reporting, and disclosure requirements. The FDIC, which provides banks with deposit insurance, performs Community Reinvestment Act audits for state chartered institutions that have not joined the Federal Reserve System.
  • Regulation 12 CFR Part 563e refers to the requirement of the Office of Thrift Supervision to maintain a searchable database including a complete list of publicly released Community Reinvestment Act ratings and recent public evaluation documents available for savings associations regulated by the OTS.

Application

Community Reinvestment Act Compliance & Examination

Community Reinvestment Act regulations and requirements were substantially revised in 1995. The new regulations focused on and measured performance rather than process. Lending institution Community Reinvestment Act compliance procedures changed completely as a result of the new examination requirements. The 1995 reforms created a tri-partite compliance test for different kinds of institutions: large institutions, small institutions, and wholesale and limited purpose institutions. Lending institutions rely on compliance management officers and strategies to satisfy the many requirements. The 1995 changes and revisions to the law are so significant that the Community Reinvestment Act is now referred to and differentiated by pre or post-1995 Community Reinvestment Act.

Small banking institutions, large banking institutions, and wholesale and limited purpose banks are evaluated by the regulatory agencies, as directed by the Community Reinvestment Act, in the following ways:

  • Small banking institutions are evaluated based on small streamlined lending procedures.
  • Large banking institutions are evaluated based on a three-part lending, service and investment test.
  • Wholesale and limited purpose banks are evaluated based on a community development test.

The evaluation areas and criteria focus primarily on patterns and history of lending and community development services. Examples of community development services include community development loans, investments, and services tailored to community needs and the capacity of the bank. The Community Reinvestment Act performance rating is a rating system used by the federal banking agencies to assess a lending institution's Community Reinvestment Act performance. The lending, investment, and service test ratings include outstanding, high satisfactory, low satisfactory, needs to improve, substantial noncompliance:

  • Outstanding (O): The regulatory agencies rate a bank's lending performance outstanding if the bank demonstrates excellent responsiveness to credit needs and community development in its assessment area.
  • High satisfactory (H): The regulatory agencies rate a bank's lending performance as high satisfactory if the bank demonstrates good responsiveness to credit needs and community development in its assessment area.
  • Low satisfactory (L): The regulatory agencies rate a bank's lending performance as low satisfactory if the bank demonstrates adequate responsiveness to credit needs in its assessment area.
  • Needs to improve (N): The regulatory agencies rate a bank's lending performance needs to improve if the bank demonstrates poor responsiveness to credit needs in its assessment area.
  • Substantial noncompliance (S): The regulatory agencies rate a bank's lending performance as being in substantial noncompliance if the bank demonstrates a very poor responsiveness to credit needs in its assessment area.

The Community Reinvestment Act performance rating incorporates bank-specific data on the following factors and variables:

  • The number and amount of home mortgage, small business, small farm, and consumer loans in an assessment area.
  • The number of loans made in an assessment area.
  • The geographic distribution of loans in an assessment area.
  • The pattern of distribution of loans among individuals of different income levels and businesses of different sizes.
  • The record of serving the credit needs of highly economically disadvantaged areas in its assessment area, low- income individuals, or businesses with gross annual revenues of $1 million or less.
  • The use of innovative or flexible lending practices in a safe and sound manner to address the credit needs of low or middle-income individual or groups.

The Community Reinvestment Act performance rating reflects how well the institution is meeting its Community Reinvestment Act responsibilities rather than an institution's financial condition. Poor ratings have serious consequences for lending institutions. For example, Community Reinvestment Act ratings influence approval for bank branch expansions and bank mergers. In addition, banks with low Community Reinvestment Act ratings are often targeted by the media and development groups for their lack of financial commitment to their service area. Bostic and Robinsin (2003) argue that the negative press and criticism by community-based organizations that follows a low Community Reinvestment Act rating serves as an incentive for banking institutions to meet, if not exceed, Community Reinvestment Act regulations. Nesvisky (2013), however, cautions that the number of high-risk loans increase around Community Reinvestment exams.

The evaluation and examination cycle of each bank is determined by the size of the banks as well as previous Community Reinvestment Act performance. For example, Community Reinvestment Act examinations for banks with an overall Community Reinvestment Act rating of combined assets of $250 million occur every five years. In contrast, Community Reinvestment Act examinations for banks with an overall CRA rating of satisfactory and combined assets of $250 million or less occur every four years.

The Community Reinvestment Act encourages community and civic organizations, government, and other members of the public to express their views about a bank's Community Reinvestment Act performance directly to the bank and regulatory agencies. In an effort to promote public involvement and input into the examination process, the revised Community Reinvestment Act regulations require the agencies to publish a quarterly schedule of upcoming examinations, ratings, and public examinations. A written performance evaluation of the bank's Community Reinvestment Act activities, including a Community Reinvestment Act rating, is prepared at the end of each Community Reinvestment Act examination and made available to the general public.

Specific Community Reinvestment Act regulations are tailored to the resources and needs of each lending institution and related community. The federal government instructs that Community Reinvestment Act activities should be undertaken in a "safe and sound manner." For example, the federal government, as represented by Congress and regulatory agencies, does not want lending institutions to make high-risk loans that may jeopardize the safety and solvency of the bank. In keeping with the individualized approach of the Community Reinvestment Act directives and regulations, the Community Reinvestment Act evaluation criteria and procedure is also highly personalized to individual banks. The evaluation procedure should, by law, accommodate an institution's individual circumstances. Ultimately, Community Reinvestment Act oversight, implementation, examination, and evaluation are based on the idea that the differences in institutions and the communities in which they operate preclude rigid and fixed rules (Fettig & Rolnick, 2003).

Issues

Community Reinvestment Act Compliance Management

Lending institutions actively practice compliance management to avoid federal lawsuits and to prevent low Community Reinvestment Act ratings and their related problems. Compliance management, practiced in numerous industries, refers broadly to the actions of a set of people as they comply with a set of rules. Community Reinvestment Act compliance management, as a specialized form of compliance management, is the work of compliance officers and in-house attorneys.

Community Reinvestment Act compliance professionals, responsible for generating marketing programs to bring lending opportunities to underserved neighborhoods, are increasingly using cross-department management approaches to create stronger and more profitable bank-community partnerships. Community Reinvestment Act loans are increasingly profitable for lending institutions. As a result, Community Reinvestment Act compliance professionals play an increasingly important role in the banking world. Common Community Reinvestment Act compliance management practices, as described by Cocheo, include the following directives, principles, and strategies (1998):

  • Be ready to cross the threshold: Bank size is not constant. Lending institutions should prepare far in advance for the common transition from small bank status to large bank status. The Community Reinvestment Act requirements, regulations, and evaluation procedures vary based on the size of the banks. Banks with $250 million or more in assets qualify as large banks.
  • Gather relevant papers: The Community Reinvestment Act exam is multipart and ongoing. Lending institutions should continuously prepare for the three parts of the test including the lending test, the service test, and the investment test.
  • Sell the bank's performance: Community Reinvestment Act examiners tend to come from outside of the communities they evaluate. As a result, lending institutions need to make the connection between their bank and the community it serves very clear and apparent to examiners.
  • Look to academia for help: Lending institutions may not always realize the social issues and demographics at work in the communities they serve. Lending institutions may profit from seeking out college students and faculty researchers, ideally in the social sciences, for help researching groups and social influences at work in the bank's service area or community.
  • Search out multiple revenue opportunities: Lending institutions should seek out unusual revenue sources that count as Community Reinvestment Act-qualified investments.

Community Reinvestment Act compliance management is multi-faceted and requires Community Reinvestment Act compliance officers to be knowledgeable about loans, community groups, community dynamics, Community Reinvestment Act regulations, and technology. Community Reinvestment Act compliance management, with its diverse issues and areas as described above, is often successfully executed through the use of technology. Major lending institutions rely on five main technology initiatives to meet Community Reinvestment Act requirements and remain profitable.

  • Best product assessment at the point-of-sale.
  • Well-integrated compliance systems.
  • Data mining to identify new markets.
  • Accurate market analysis.
  • Automated identification of secondary market opportunities.

Community Reinvestment Act managers seek out technology that allows lenders to assess loan program eligibility easily and quickly. The expenses of data collection, review, and analysis, considered to be the major expenses of Community Reinvestment Act compliance, are reduced by effective use and incorporation of technology. Compliance reporting is made significantly easier and more cost-effective through the adoption of point-of-sale compliance data, instant auditing systems, and automated data collection. These technologies offer real-time feedback to lenders and compliance officers. These technologies also allow compliance officers to focus on creating value-added programs, data analyses, and management rather than data flow and quality issues ("Bank Technology News," 2004).

Conclusion

CRA Agreements

Ultimately, the Community Reinvestment Act, along with the establishment of minority banks and the Fair Housing Act, has together alleviated the adverse lending environment for minority loan applicants in much of the United States. The Community Reinvestment Act is responsible for easing the problems, and associated burdens, of redlining, economic disinvestment, and economic underdevelopment in many minority communities. Community Reinvestment Act loans are currently popular and profitable. The profitability of Community Reinvestment Act loans, coupled with the requirements of Community Reinvestment Act compliance, drive many lending institutions to form Community Reinvestment Act agreements. Community Reinvestment Act agreements represent the latest evolution of a successful law. The Community Reinvestment Act resulted in fundamental changes in economic practices that, in turn, changed society (Matasar, 2004).

Community Reinvestment Act agreements refer to voluntary bank pledges to extend a certain volume of lending to targeted groups and communities. Pledges are usually made to a geographic area, such as a neighborhood, city or county as well as a particular population within that geographic area, such as low income or minority communities. The spirit and mission of the successful Community Reinvestment Act, along with the positive effects it has had for minority communities and banks, encourages banks to undertake Community Reinvestment Act agreements even though such agreements are not required under Community Reinvestment Act law. Community Reinvestment Act agreements involve the partnerships of lending institutions and community-based organizations rather than governmental agencies.

Community Reinvestment Act agreements demonstrate a lending institution's commitment to and compliance with the Community Reinvestment Act and fair-lending laws. Community-based organizations in poor and moderate-income minority neighborhoods are increasingly seeking out ever-larger Community Reinvestment Act agreements with community-based lending institutions to raise lending activity and related economic opportunity and growth in targeted neighborhoods. Community Reinvestment Act agreements, and the Community Reinvestment Act in general, create opportunities for lending institutions to discover profitable lending prospects among borrowers previously believed to be poor credit risks. Ultimately, the Community Reinvestment Act, three decades after its enactment, has had a significant positive impact on lending practices and lending opportunities in the United States (Bostic & Robinson, 2003).

Terms & Concepts

Community Reinvestment Act (CRA): The 1977 law which requires depository institutions, such as federally insured banks and thrifts, to help meet the credit needs of the communities in which they operate with safe and sound business practices and operations.

Community Reinvestment Act Agreements: Bank pledges to extend a certain volume of lending to targeted groups and communities.

Community Reinvestment Act Rating: A uniform four-tiered rating system used by the federal banking agencies to assess a lending institution's CRA performance.

Community Reinvestment Act Compliance Management: The actions of a set of people as they comply with a set of rules.

Redlining: The practice of denying or increasing the cost of services, such as banking and insurance, to residents in race-based areas.

Thrifts: Savings and loan associations, mutual savings banks, and credit unions.

Lending Institution: A financial institution that makes loans

Economic Disinvestment: The decision of a company to not replenish depleted capital goods in a region.

Economic Underdevelopment: A historical process that creates poverty often due to a lack of access to adequate health care, food, education and housing.

Bibliography

Fettig, D. & Rolnick, J. (2003). How do credit markets work? The Region, 1-29. Retrieved Thursday, April 19, 2007 from EBSCO Online Database Business Source Complete http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=10033084&site=ehost-live

Bostic, R., & Robinson, B. (2003). Do CRA agreements influence lending patterns? Real Estate Economics, 31, 23-51. Retrieved Thursday, April 19, 2007 from EBSCO Online Database Business Source Complete database. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=9614864&site=ehost-live

Cocheo, S. (1998). 14 tips for avoiding compliance trouble. ABA Banking Journal, 90, 33. Retrieved Thursday, April 19, 2007 from EBSCO Online Database Business Source Complete http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=1076649&site=ehost-live

Community reinvestment: about the CRA. (2007). Federal Financial Institutions Examination Council (FFIEC). Retrieved Thursday, April 19, 2007 from http://www.ffiec.gov/cra/about.htm

Community Reinvestment Act information. (2007). Office of the Comptroller of the Currency. Retrieved Thursday, April 19, 2007 from http://www.occ.treas.gov/crainfo.htm

CRA Regulation — appendix A — ratings. (2007). Office of the Comptroller of the Currency. Retrieved Thursday, April 19, 2007 from http://www.occ.treas.gov/cra/cra-appa.htm

How to get ahead of the curve on CRA compliance. (2004). Bank Technology News, 17, 53-54. Retrieved Thursday, April 19, 2007 from EBSCO Online Database Business Source Complete http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=12599736&site=ehost-live

Dahl, D., Evanoff, D.D., & Spivey, M.F. (2010). The Community Reinvestment Act and targeted mortgage lending. Journal of Money, Credit & Banking, 42, 1351-1372. Retrieved October 31, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=53418368&site=ehost-live

Friedman, S. & Squires, G. (2005). Does the Community Reinvestment Act help minorities access traditionally inaccessible neighborhoods? Social Problems, 52, 209.

Kobeissi, N. (2009). Impact of the Community Reinvestment Act on new business start-ups and economic growth in local markets. Journal of Small Business Management, 47, 489-513. Retrieved October 31, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=44133365&site=ehost-live

Matasarm A. & Pavelka, D. (2004). Minority banks and minority communities: are minority banks good neighbors? International Advances in Economic Research, 10, 43-58.

Nesvisky, M. (2013). Did the Community Reinvestment Act lead to risky lending?. NBER Digest, 3-4. Retrieved October 31, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=87492375&site=ehost-live

What is a Performance Evaluation? (2007) Federal Deposit Insurance Corporation. Retrieved Thursday, April 19, 2007 from http://www.fdic.gov/regulations/community/performance/index.html

Suggested Reading

Lash, N. (2005). Black-owned banks: a survey of issues. Journal of Developmental Entrepreneurship, 10, 187-202. Retrieved Thursday, April 19, 2007 from the Business Source Complete database. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=24566111&site=ehost-live

Singer, D. (2006). Online banking and the Community Reinvestment Act. Business & Society Review, 111, 165-174. Retrieved Thursday, April 19, 2007 from the Business Source Complete database. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=21072997&site=ehost-live

Sloan, S. (2006). Home Depot has a CRA plan. American Banker, 171, 3-3. Retrieved Thursday, April 19, 2007 from the Business Source Complete database. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=21690118&site=ehost-live

Essay by Simone I. Flynn, Ph.D.

Dr. Simone I. Flynn earned her Doctorate in cultural anthropology from Yale University, where she wrote a dissertation on Internet communities. She is a writer, researcher, and teacher in Amherst, Massachusetts.