Community reinvestment act

What Is the Community Reinvestment Act?

The Community Reinvestment Act (CRA) is a United States federal law enacted in 1977 that encourages depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income (LMI) communities, consistent with safe and sound banking practices. This legislation falls under the broader category of financial regulation, specifically aiming to promote equitable access to banking and credit across all segments of society. The CRA ensures that federally insured banks are evaluated on their performance in serving these communities.⁶⁵

History and Origin

The Community Reinvestment Act was passed against a backdrop of urban decay and a pervasive practice known as redlining. Prior to the CRA, banks systematically denied mortgages and other financial services to individuals and businesses in certain geographic areas, particularly those inhabited by racial minorities and low-income populations.⁶⁴ This discriminatory practice contributed significantly to disinvestment in urban areas and exacerbated the racial wealth gap.⁶², ⁶³

Congress passed the CRA in 1977 to address these inequities and compel financial institutions to reinvest in their local communities.⁶¹ The Act was signed into law by President Jimmy Carter on October 12, 1977. The CRA built upon earlier civil rights legislation, such as the Fair Housing Act of 1968 and the Equal Credit Opportunity Act of 1974, which outlawed explicit discrimination.⁵⁹, ⁶⁰ However, the CRA differed by focusing on proactive measures banks should take to serve their entire communities.⁵⁸ Since its enactment, the CRA has undergone several regulatory updates, with significant revisions in 1995, 2005, and a recent rule issued in 2023.⁵⁶, ⁵⁷ Further revisions were proposed in 2025 to potentially roll back some of the 2023 updates and reinstate aspects of the 1995 framework.⁵⁴, ⁵⁵

Key Takeaways

• The Community Reinvestment Act (CRA) encourages federally insured banks to address the credit needs of all communities, especially LMI areas.
• Federal banking regulators evaluate institutions based on their lending, investment, and service activities in their assessment areas.⁵³
• CRA performance ratings can influence a bank's ability to undertake corporate activities like bank mergers and branch openings.⁵²
• The CRA was enacted to combat redlining and promote equitable access to credit and investment.
• Recent updates to CRA regulations aim to adapt to modern banking trends, including digital banking.

Formula and Calculation

The Community Reinvestment Act does not involve a specific formula or calculation that yields a numerical result. Instead, it relies on qualitative and quantitative evaluations conducted by federal banking agencies. These evaluations consider various factors related to a bank's lending, investments, and services. For example, examiners assess a bank's volume and distribution of home mortgage, small businesses, and small farm loans, as well as its qualified community development activities.⁵⁰, ⁵¹ Data from sources like the Home Mortgage Disclosure Act (HMDA) are often utilized in these assessments.⁴⁹

Interpreting the Community Reinvestment Act

The CRA is interpreted through performance evaluations conducted by the primary federal banking agencies responsible for supervising depository institutions: the Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).⁴⁷, ⁴⁸ Each bank receives a CRA rating—Outstanding, Satisfactory, Needs to Improve, or Substantial Noncompliance—which is made public. A b⁴⁵, ⁴⁶ank's CRA performance is considered when these agencies review applications for corporate actions like bank acquisitions or branch openings. A l⁴³, ⁴⁴ess than satisfactory rating can significantly impact a bank's reputation and its ability to expand. Reg⁴²ulators also provide guidance and illustrative lists of activities that qualify for CRA credit, encouraging banks to engage in actions that benefit LMI communities.

##⁴⁰, ⁴¹ Hypothetical Example

Imagine "Community First Bank," a federally insured institution operating in a mid-sized city. Under the Community Reinvestment Act, Community First Bank's performance is regularly evaluated by its primary federal regulator. During an evaluation period, the bank might actively pursue several initiatives to demonstrate its commitment to meeting credit needs in its assessment areas, which include several designated low- and moderate-income (LMI) communities.

For example, Community First Bank could:

1. Offer tailored mortgage products with flexible underwriting standards for first-time homebuyers in LMI neighborhoods, helping increase homeownership.
2. Provide loans to local small businesses operating in these areas, even if those businesses might be considered higher risk by conventional lending metrics.
3. Invest in a local affordable housing project through bond purchases or direct equity investments, contributing to community development.
4. Host financial literacy workshops for residents in LMI communities, providing access to essential financial services education.

The regulator would review the volume and distribution of these activities, along with the bank's services and investments, to determine its CRA rating. A strong record in these areas would likely lead to an "Outstanding" or "Satisfactory" rating, affirming the bank's compliance with the CRA's objectives.

Practical Applications

The Community Reinvestment Act has broad practical applications across the financial sector, influencing how depository institutions engage with their operating environments.

• Lending Practices: Banks adjust their lending strategies to ensure adequate provision of credit to low- and moderate-income (LMI) communities and individuals. This includes offering mortgage loans, small businesses loans, and small farm loans in these areas.
• ³⁹ Community Development Investments: Financial institutions actively seek out and invest in projects that benefit LMI areas, such as affordable housing initiatives, economic revitalization efforts, and job creation programs.
• ³⁷, ³⁸ Service Offerings: Banks are incentivized to provide accessible banking services, including maintaining physical branch openings in LMI neighborhoods and offering financial education programs.
• ³⁶ Regulatory Scrutiny: The CRA requires federal banking agencies—the Federal Reserve Board, FDIC, and OCC—to periodically examine banks for CRA compliance and publicly disclose their performance evaluations. These e³³, ³⁴, ³⁵valuations are critical considerations in approving bank applications for new branches, mergers, or acquisitions.
• D³¹, ³²ata Reporting: Banks subject to the CRA collect and report data on their lending and community development activities, which are then analyzed by regulators to assess compliance. More in²⁹, ³⁰formation on bank compliance and examinations can be found through resources like the Office of the Comptroller of the Currency's CRA page.

Lim²⁸itations and Criticisms

While the Community Reinvestment Act is widely credited with increasing access to credit in underserved communities, it has also faced several criticisms and perceived limitations.

One common critique, particularly after the 2008 financial crisis, was that the CRA encouraged banks to make overly risky loans, potentially contributing to the proliferation of subprime mortgages. However²⁶, ²⁷, the Federal Reserve Board has largely refuted this claim, stating that the CRA's language and enforcement did not promote excessively risky lending, and that only a small portion of subprime originations could be reasonably linked to the CRA. Further²³, ²⁴, ²⁵more, many subprime mortgages at the time were originated by independent mortgage companies not regulated by the CRA.

Other ²²criticisms include:

• Administrative Burden and Cost: Some argue that the CRA's compliance and examination process can be costly and burdensome for banks, potentially discouraging them from expanding into new areas if they perceive it will increase their CRA obligations.
• E²⁰, ²¹ffectiveness Debates: Critics sometimes question the overall effectiveness of the CRA, suggesting that market forces would naturally lead banks to profitable lending opportunities in all communities without regulatory intervention.
• "¹⁹Grade Inflation": Concerns have been raised about a perceived "grade inflation" in CRA ratings, with a high percentage of banks receiving "satisfactory" or "outstanding" ratings, which some argue might diminish the incentive for improvement.
• A¹⁷, ¹⁸daptation to Modern Banking: The traditional CRA framework, with its emphasis on physical branch openings and assessment areas around them, has been challenged by the rise of online and digital banking, prompting regulatory updates. The Fed¹⁶eral Reserve Bank of San Francisco, among other institutions, has researched how the CRA can adapt to evolving financial landscapes, including addressing climate change resilience in LMI communities.

Com¹⁴, ¹⁵munity Reinvestment Act vs. Fair Housing Act

The Community Reinvestment Act (CRA) and the Fair Housing Act are both crucial pieces of legislation aimed at preventing discrimination and promoting equitable access to opportunities, particularly in housing and lending. However, they address different aspects of these issues.

The Fair Housing Act, enacted in 1968, primarily prohibits discrimination in the sale, rental, and financing of housing based on protected characteristics such as race, color, religion, sex, handicap, familial status, or national origin. It is a¹³ broad anti-discrimination law that focuses on what lenders should not do. Violations can lead to enforcement actions and potential referrals to the U.S. Department of Justice.

In con¹²trast, the Community Reinvestment Act (CRA) focuses on what depository institutions should do. It enco¹¹urages banks to proactively meet the credit needs of their entire communities, including low- and moderate-income (LMI) communities. The CRA¹⁰ does not directly prohibit discrimination based on protected classes, but rather assesses a bank's overall record of serving its designated assessment areas. While d⁹istinct, the two laws often overlap, as many LMI areas also have significant minority populations. Furthermore, violations of fair lending laws, such as the Equal Credit Opportunity Act, can lead to a downgrade in a bank's CRA rating.

FAQ⁸s

What is the primary goal of the Community Reinvestment Act?

The primary goal of the Community Reinvestment Act (CRA) is to encourage federally insured depository institutions to help meet the credit needs of all segments of their communities, especially low- and moderate-income (LMI) communities. It was designed to combat redlining and promote equitable access to credit.

Wh⁷ich government agencies enforce the CRA?

The Community Reinvestment Act is enforced by three primary federal banking agencies: the Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC). Each agency supervises different types of banks for CRA compliance.

Ho⁵, ⁶w is a bank's CRA performance evaluated?

A bank's performance under the Community Reinvestment Act is evaluated periodically based on its lending, investment, and service activities within its designated assessment areas. Regulators assess factors such as the volume and distribution of loans, qualified community development investments, and the availability of banking services. The eva⁴luation results in a public rating: Outstanding, Satisfactory, Needs to Improve, or Substantial Noncompliance.

Do³es the CRA require banks to make risky loans?

No. The Community Reinvestment Act explicitly requires banks to meet credit needs "consistent with safe and sound banking practices." While some critics have linked the CRA to risky lending, particularly concerning subprime mortgages, studies and regulatory bodies have generally found that the Act does not compel unsafe lending.¹, ²