The Community Reinvestment Act
The CRA was passed by Congress in 1977 to encourage deposit-taking banks to reinvest in the communities where they operate. The law was passed to combat “redlining” – a practice where banks would not issue loans in neighborhoods with high populations of low- and moderate-income or minority residents.
CRA requires banks to meet the credit needs of all communities, including low- and moderate-income areas, consistent with the safety and soundness of the banks’ operations. The law created a framework wherein community organizations, banking regulatory agencies and financial institutions interact in assessing how well a financial institution is meeting the needs of disadvantaged communities.
This framework has proven critical in promoting greater investment and service in areas that banks might otherwise disregard. In the three decades since Congress passed CRA, lenders and community organizations signed $6 trillion worth of CRA agreements, resulting in loans and investments for affordable housing, small businesses, economic development, and community service facilities in minority and low- and moderate-income neighborhoods.(1) A Federal Reserve study found CRA agreements increased bank lending to minorities and low- and moderate-income borrowers by up to 20 percent.(2)
While CRA agreements are not required by the law, they often came into being as a result of community organizations using the regulatory points of engagement that are created through the framework of CRA. This document will explore those potential points of engagement and how community organizations can use them to increase investment in their communities.
Footnotes:
1) NCRC’s “CRA Commitments,” which includes $4.6 trillion in commitments. See http://www.ncrc.org/images/stories/whatWeDo_ promote/cra_commitments_07.pdf After the CRA Commitments publication, Bank of America pledged $1.5 trillion when it was acquiring Countrywide. See http://newsroom.bankofamerica.com/index.php?s=press_releases&item=8152
2) Raphael Bostic and Breck Robinson “Do CRA Agreements Influence Lending Patterns?” July 2002, available via https://lusk.usc. edu/research/working-papers/do-cra-agreements-influence-lending-patterns
CRA requires banks to meet the credit needs of all communities, including low- and moderate-income areas, consistent with the safety and soundness of the banks’ operations. The law created a framework wherein community organizations, banking regulatory agencies and financial institutions interact in assessing how well a financial institution is meeting the needs of disadvantaged communities.
This framework has proven critical in promoting greater investment and service in areas that banks might otherwise disregard. In the three decades since Congress passed CRA, lenders and community organizations signed $6 trillion worth of CRA agreements, resulting in loans and investments for affordable housing, small businesses, economic development, and community service facilities in minority and low- and moderate-income neighborhoods.(1) A Federal Reserve study found CRA agreements increased bank lending to minorities and low- and moderate-income borrowers by up to 20 percent.(2)
While CRA agreements are not required by the law, they often came into being as a result of community organizations using the regulatory points of engagement that are created through the framework of CRA. This document will explore those potential points of engagement and how community organizations can use them to increase investment in their communities.
Footnotes:
1) NCRC’s “CRA Commitments,” which includes $4.6 trillion in commitments. See http://www.ncrc.org/images/stories/whatWeDo_ promote/cra_commitments_07.pdf After the CRA Commitments publication, Bank of America pledged $1.5 trillion when it was acquiring Countrywide. See http://newsroom.bankofamerica.com/index.php?s=press_releases&item=8152
2) Raphael Bostic and Breck Robinson “Do CRA Agreements Influence Lending Patterns?” July 2002, available via https://lusk.usc. edu/research/working-papers/do-cra-agreements-influence-lending-patterns
How CRA Works
CRA was enacted in 1977 and states that “regulated financial institutions have continuing and affirmative obligations to help meet the credit needs of the local communities in which they are chartered.” CRA establishes a framework for monitoring banks’ performance in serving low- and moderate-income communities and also requires that banks’ lending and investing practices are consistent with safe and sound business practice.
Examination Process
CRA establishes a regular schedule of examinations for banks that are insured depositories – mortgage companies and other financial institutions that do not take deposits are not currently subject to CRA.
The federal agencies that conduct CRA examinations are the Office of the Comptroller of the Currency, which examines nationally chartered banks and savings and loan institutions; the Federal Deposit Insurance Corporation, which examines state-chartered banks; and the Federal Reserve Board, which examines state-chartered banks that are a part of the Federal Reserve System.
When conducting the evaluations, examiners consider the “performance context” of the financial institution. In other words, examiners are advised to consider factors such as the economic conditions and business opportunities available to a lending institution and its size and financial condition. Examiners may, and should, also speak to local community organizations to get a better sense of the needs of low- and moderate-income people in the community and to hear how the bank is perceived locally.
Although CRA does not explicitly cover racial discrimination, a CRA rating can be downgraded if a federal agency uncovers evidence of illegal, abusive, or discriminatory lending on fair lending exams that occur approximately at the same time as CRA exams. It is critical that community groups bring fair lending concerns to the attention of CRA examiners if they know of abuses and improprieties.
Examiners are required to consider public comments, a key part of the process that allows people and organizations from the community where the bank operates to give candid feedback about the bank’s local performance. CRA establishes different tests for lending institutions based on asset size and bank structure. It also provides an option for banks to write their own strategic plan. The different kinds of examinations based on asset size are explained below.
Large Bank Exam
Lending institutions with assets greater than approximately $1 billion, commonly known as large banks, undergo the most rigorous exams. They are primarily evaluated under a lending test that considers the number and percentages of loans made to low- and moderate-income individuals and census tracts. They are also evaluated under an investment test and a service test that consider the number and types of investments and services (branches and bank accounts) in low- and moderate-income communities, respectively.
Mid-Size Bank Exam
In 2005, the federal agencies established a streamlined exam for “intermediate small banks” (institutions with assets of approximately $250 million to $1 billion, with an asset range adjusted annually for inflation). These intermediate small banks or mid-size banks undergo a lending test and a community development test. The community development test incorporates elements of the large bank’s investment and service tests. The community development test scrutinizes the amount and responsiveness of a mid-size bank’s community development lending, investing, and services. Unfortunately, the mid-size banks are not required to report small business or community development lending data.
Small Bank Exam
Small banks (institutions with less than approximately $250 million in assets) are evaluated under a test that encompasses less than the evaluations of their larger counterparts. Small banks are not subject to investment and service tests. Their lending test consists of the following five criteria: a loan-to-deposit ratio analysis; the percentage of loans in a bank’s assessment area; a bank’s distribution of loans to individuals of different income levels and businesses and farms of different sizes; the geographic distribution of loans; and a bank’s record of responding to written complaints about its lending performance in its assessment area.
Wholesale and Limited Purpose Bank Exam
The traditional framework of CRA focuses on banks that use consumer deposits to make home mortgages and other loans, but wholesale and limited purpose banks are also assessed under a test tailored to their capabilities. These banks provide services such as offering credit cards or specialize in large commercial deposits. Lending tests cannot adequately assess wholesale and limited purpose banks because many of these banks do not accept consumer deposits or make retail loans. Instead, examiners focus their evaluation of these banks on their number of community development loans and investments, such as construction loans for housing developments, Low Income Housing Tax Credits (LIHTC), or investments in organizations that finance small businesses. The tests for mid-size and large banks also consider community development loans and investments.
Strategic Plan Option
Any lending institution can choose to develop a strategic plan in lieu of a regular examination. Developed in consultation with neighborhood organizations, a strategic plan seeks to satisfy the credit needs of a bank’s assessment area and must address the lending, investment, and service criteria that would have been part of the usual evaluation. Federal regulators must approve the strategic plan and rate it at least “Satisfactory.” If a bank receives a lower rating on its plan, it has the option of submitting to the applicable tests for large, small, or limited purpose banks.
Examination Ratings and CRA Enforcement
Banks receive a rating based on their evaluations. The bank receives an overall rating and a rating on each of the tests it undergoes. Banks that operate in a larger footprint receive a rating in each “assessment area,” or market where they have branches.
The ratings a bank can receive are:
The last two scores are considered failing and can result in delays or denials of mergers, acquisitions, or expansions of services. If a lending institution receives one of these ratings because it is not adequately serving low- and moderate-income borrowers and neighborhoods or borrowers and neighborhoods of color, regulatory agencies can delay or deny that institution’s request to expand their business through mergers, opening branches or expanding their services.
CRA Action: Points of Engagement
The actions of financial institutions have lasting, tangible impacts on communities, and community organizations have a vested interest in ensuring that banks are held accountable for their actions, good and bad. Fortunately, enforcement of CRA includes important elements of public accountability.
Banking regulators are required to consider comments from the public in evaluating a bank’s CRA performance or in determining whether or not to approve an application for banks to merge or open new branches. Community members, and organizations that represent them, interact with local banks on a regular basis. They are equipped with first-hand knowledge about the implications of a bank’s practices within their communities. Federal agencies are ultimately responsible for assessing a bank’s performance and regulating it accordingly, but agency examiners can only see a snapshot of a bank’s interaction with low- and moderate-income consumers and neighborhoods without regular feedback from local organizations.
CRA Exam Comments
Examiners (individuals at the federal regulating agencies) conducting CRA examinations are required to consider comments submitted by members of the public. Timely comments can influence a bank’s CRA rating by directing examiners to particular areas of strength or weakness in a bank’s lending, investments, or services in low- and moderate-income neighborhoods. Community organizations can submit a comment to a bank’s CRA file at any time, even when it is not up for its CRA performance examination. In that case, the comment letter will be considered the next time the bank is due for its exam. Banks generally do not want critical letters in their CRA file. Submitting a comment to regulators in this way, and sending a copy to the bank, is a possible approach to initiate a relationship with the bank and a step toward meeting with the bank to achieve your goals.
Comments submitted on CRA exams should speak to a community member’s experiences with the bank, positive or negative. Comments should be grounded in data as much as possible and should focus on the bank’s performance in meeting community needs. More than any other entity, community organizations in low- and moderate-income neighborhoods are able to speak to what the banking needs of their communities are, and how well those needs are being met.
Examinations focus on particular areas where the bank does business, and the bank receives ratings for each of those markets. Comments can have an influence on the overall CRA rating for a market or one of the component tests – lending, investment, or service – on the CRA exam. Even changing a rating from an “Outstanding” to “Satisfactory” in one market or one component test can motivate a bank to increase the number of loans, investments, and services to low- and moderate-income communities.
Mergers and Acquisitions
One of the greatest opportunities for CRA engagement is when a bank applies to merge with or acquire another bank. As with a CRA exam, banking regulators are required to look at a bank’s previous performance, but in the case of a merger they must also assess whether or not a bank’s projected future performance will create even greater value for the community. Banks are required to include a forward-looking “convenience and needs” assessment in their application, which is meant to demonstrate how the merger will create a public benefit.
Community organizations can offer written comments on a bank’s performance when a bank has submitted an application to merge or acquire another bank. These comment letters can explore a bank’s prior CRA and fair lending performance and the bank’s branching pattern. They can also respond to the bank’s newly proposed public benefits or lack of adequate benefits.
The vast majority of merger applications are approved, but, even if a merger is permitted, challenging a bank merger can still produce significant benefits for low- and moderate-income communities. Submitting comments asking the regulatory agency not to approve the application can significantly delay the approval process, which costs the bank time and money. The average merger approval process (without public opposition) lasts 50 days, but that approval time increases to an average of 212 days—more than half a year—with public opposition. Because of the threat of delays, banks are often willing to negotiate about public benefits, particularly if they have clear areas of weakness in their performance. This can be used as leverage to formalize commitments designed to better serve a community through a public benefits agreement.
A federal agency can approve the merger application but still indicate in the approval order that the bank should improve upon its area of weakness or approve the order under specific conditions. Community members should engage regulatory agencies throughout the process of formulating a public benefits agreement with a bank to encourage the agency to include the agreement in any conditional merger approval.
Branch Closures
The closure of a bank branch can have a devastating effect on low- and moderate-income communities. For many, bank branches are the clearest route to the financial mainstream. Additionally, branches serve as anchors of economic development and sources of stable jobs in low- and moderate-income communities.
Banking regulators cannot prevent a bank from closing a branch, but if the closure occurs in a low- or moderate-income census tract, community members can request that the bank’s regulator hold a community meeting with the bank to discuss how the neighborhood will still receive vital banking services without a branch. In some cases, these meetings can also be points of leverage to encourage the bank to either keep the branch open, donate the branch building to a local credit union, increase funding for local community organizations or other commitments to continue to serve the neighborhood in different ways.
Even if the branch still closes, the dialogue begun by submitting a comment letter and participating in a community meeting is invaluable since it can help build a coalition focused on the banking and capital needs of the affected neighborhoods and begin the process of forming productive relationships with the banks doing business in your community.
Examination Process
CRA establishes a regular schedule of examinations for banks that are insured depositories – mortgage companies and other financial institutions that do not take deposits are not currently subject to CRA.
The federal agencies that conduct CRA examinations are the Office of the Comptroller of the Currency, which examines nationally chartered banks and savings and loan institutions; the Federal Deposit Insurance Corporation, which examines state-chartered banks; and the Federal Reserve Board, which examines state-chartered banks that are a part of the Federal Reserve System.
When conducting the evaluations, examiners consider the “performance context” of the financial institution. In other words, examiners are advised to consider factors such as the economic conditions and business opportunities available to a lending institution and its size and financial condition. Examiners may, and should, also speak to local community organizations to get a better sense of the needs of low- and moderate-income people in the community and to hear how the bank is perceived locally.
Although CRA does not explicitly cover racial discrimination, a CRA rating can be downgraded if a federal agency uncovers evidence of illegal, abusive, or discriminatory lending on fair lending exams that occur approximately at the same time as CRA exams. It is critical that community groups bring fair lending concerns to the attention of CRA examiners if they know of abuses and improprieties.
Examiners are required to consider public comments, a key part of the process that allows people and organizations from the community where the bank operates to give candid feedback about the bank’s local performance. CRA establishes different tests for lending institutions based on asset size and bank structure. It also provides an option for banks to write their own strategic plan. The different kinds of examinations based on asset size are explained below.
Large Bank Exam
Lending institutions with assets greater than approximately $1 billion, commonly known as large banks, undergo the most rigorous exams. They are primarily evaluated under a lending test that considers the number and percentages of loans made to low- and moderate-income individuals and census tracts. They are also evaluated under an investment test and a service test that consider the number and types of investments and services (branches and bank accounts) in low- and moderate-income communities, respectively.
Mid-Size Bank Exam
In 2005, the federal agencies established a streamlined exam for “intermediate small banks” (institutions with assets of approximately $250 million to $1 billion, with an asset range adjusted annually for inflation). These intermediate small banks or mid-size banks undergo a lending test and a community development test. The community development test incorporates elements of the large bank’s investment and service tests. The community development test scrutinizes the amount and responsiveness of a mid-size bank’s community development lending, investing, and services. Unfortunately, the mid-size banks are not required to report small business or community development lending data.
Small Bank Exam
Small banks (institutions with less than approximately $250 million in assets) are evaluated under a test that encompasses less than the evaluations of their larger counterparts. Small banks are not subject to investment and service tests. Their lending test consists of the following five criteria: a loan-to-deposit ratio analysis; the percentage of loans in a bank’s assessment area; a bank’s distribution of loans to individuals of different income levels and businesses and farms of different sizes; the geographic distribution of loans; and a bank’s record of responding to written complaints about its lending performance in its assessment area.
Wholesale and Limited Purpose Bank Exam
The traditional framework of CRA focuses on banks that use consumer deposits to make home mortgages and other loans, but wholesale and limited purpose banks are also assessed under a test tailored to their capabilities. These banks provide services such as offering credit cards or specialize in large commercial deposits. Lending tests cannot adequately assess wholesale and limited purpose banks because many of these banks do not accept consumer deposits or make retail loans. Instead, examiners focus their evaluation of these banks on their number of community development loans and investments, such as construction loans for housing developments, Low Income Housing Tax Credits (LIHTC), or investments in organizations that finance small businesses. The tests for mid-size and large banks also consider community development loans and investments.
Strategic Plan Option
Any lending institution can choose to develop a strategic plan in lieu of a regular examination. Developed in consultation with neighborhood organizations, a strategic plan seeks to satisfy the credit needs of a bank’s assessment area and must address the lending, investment, and service criteria that would have been part of the usual evaluation. Federal regulators must approve the strategic plan and rate it at least “Satisfactory.” If a bank receives a lower rating on its plan, it has the option of submitting to the applicable tests for large, small, or limited purpose banks.
Examination Ratings and CRA Enforcement
Banks receive a rating based on their evaluations. The bank receives an overall rating and a rating on each of the tests it undergoes. Banks that operate in a larger footprint receive a rating in each “assessment area,” or market where they have branches.
The ratings a bank can receive are:
- Outstanding
- Satisfactory
- Needs to Improve
- Substantial Noncompliance
The last two scores are considered failing and can result in delays or denials of mergers, acquisitions, or expansions of services. If a lending institution receives one of these ratings because it is not adequately serving low- and moderate-income borrowers and neighborhoods or borrowers and neighborhoods of color, regulatory agencies can delay or deny that institution’s request to expand their business through mergers, opening branches or expanding their services.
CRA Action: Points of Engagement
The actions of financial institutions have lasting, tangible impacts on communities, and community organizations have a vested interest in ensuring that banks are held accountable for their actions, good and bad. Fortunately, enforcement of CRA includes important elements of public accountability.
Banking regulators are required to consider comments from the public in evaluating a bank’s CRA performance or in determining whether or not to approve an application for banks to merge or open new branches. Community members, and organizations that represent them, interact with local banks on a regular basis. They are equipped with first-hand knowledge about the implications of a bank’s practices within their communities. Federal agencies are ultimately responsible for assessing a bank’s performance and regulating it accordingly, but agency examiners can only see a snapshot of a bank’s interaction with low- and moderate-income consumers and neighborhoods without regular feedback from local organizations.
CRA Exam Comments
Examiners (individuals at the federal regulating agencies) conducting CRA examinations are required to consider comments submitted by members of the public. Timely comments can influence a bank’s CRA rating by directing examiners to particular areas of strength or weakness in a bank’s lending, investments, or services in low- and moderate-income neighborhoods. Community organizations can submit a comment to a bank’s CRA file at any time, even when it is not up for its CRA performance examination. In that case, the comment letter will be considered the next time the bank is due for its exam. Banks generally do not want critical letters in their CRA file. Submitting a comment to regulators in this way, and sending a copy to the bank, is a possible approach to initiate a relationship with the bank and a step toward meeting with the bank to achieve your goals.
Comments submitted on CRA exams should speak to a community member’s experiences with the bank, positive or negative. Comments should be grounded in data as much as possible and should focus on the bank’s performance in meeting community needs. More than any other entity, community organizations in low- and moderate-income neighborhoods are able to speak to what the banking needs of their communities are, and how well those needs are being met.
Examinations focus on particular areas where the bank does business, and the bank receives ratings for each of those markets. Comments can have an influence on the overall CRA rating for a market or one of the component tests – lending, investment, or service – on the CRA exam. Even changing a rating from an “Outstanding” to “Satisfactory” in one market or one component test can motivate a bank to increase the number of loans, investments, and services to low- and moderate-income communities.
Mergers and Acquisitions
One of the greatest opportunities for CRA engagement is when a bank applies to merge with or acquire another bank. As with a CRA exam, banking regulators are required to look at a bank’s previous performance, but in the case of a merger they must also assess whether or not a bank’s projected future performance will create even greater value for the community. Banks are required to include a forward-looking “convenience and needs” assessment in their application, which is meant to demonstrate how the merger will create a public benefit.
Community organizations can offer written comments on a bank’s performance when a bank has submitted an application to merge or acquire another bank. These comment letters can explore a bank’s prior CRA and fair lending performance and the bank’s branching pattern. They can also respond to the bank’s newly proposed public benefits or lack of adequate benefits.
The vast majority of merger applications are approved, but, even if a merger is permitted, challenging a bank merger can still produce significant benefits for low- and moderate-income communities. Submitting comments asking the regulatory agency not to approve the application can significantly delay the approval process, which costs the bank time and money. The average merger approval process (without public opposition) lasts 50 days, but that approval time increases to an average of 212 days—more than half a year—with public opposition. Because of the threat of delays, banks are often willing to negotiate about public benefits, particularly if they have clear areas of weakness in their performance. This can be used as leverage to formalize commitments designed to better serve a community through a public benefits agreement.
A federal agency can approve the merger application but still indicate in the approval order that the bank should improve upon its area of weakness or approve the order under specific conditions. Community members should engage regulatory agencies throughout the process of formulating a public benefits agreement with a bank to encourage the agency to include the agreement in any conditional merger approval.
Branch Closures
The closure of a bank branch can have a devastating effect on low- and moderate-income communities. For many, bank branches are the clearest route to the financial mainstream. Additionally, branches serve as anchors of economic development and sources of stable jobs in low- and moderate-income communities.
Banking regulators cannot prevent a bank from closing a branch, but if the closure occurs in a low- or moderate-income census tract, community members can request that the bank’s regulator hold a community meeting with the bank to discuss how the neighborhood will still receive vital banking services without a branch. In some cases, these meetings can also be points of leverage to encourage the bank to either keep the branch open, donate the branch building to a local credit union, increase funding for local community organizations or other commitments to continue to serve the neighborhood in different ways.
Even if the branch still closes, the dialogue begun by submitting a comment letter and participating in a community meeting is invaluable since it can help build a coalition focused on the banking and capital needs of the affected neighborhoods and begin the process of forming productive relationships with the banks doing business in your community.
Supporting DoughMain Financial Literacy Foundation and our FitKit School and Community programs under the CRA
The content below addresses Banks CRA as it relates to Personal Finance- Financial Literacy Education Investment. As you will also see, providing computer equipment to a non-profit that provides financial literacy education is also a qualified use under the CRA.
CRA Interagency Guidance from all three regulators (FDIC, FRB, OCC) in 2016, The answers are bank regulator agency responses to community groups and banks seeking clarity on CRA rules. See page 48532, at the bottom on the right and you will see the excerpt below as it relates to the stated question about what counts as a qualified investment.
ll.12(t)—4: What are examples of qualified investments?
A4. Examples of qualified investments include, but are not limited to, investments, grants, deposits, or shares in or to:
Furthermore, one of the positive outcomes of the OCC’s final CRA rule is a comprehensive list of qualified activities that count for CRA credit. These activities are in effect on October 1st, 2020, if the rule stands as is; however, there is pending litigation and legislation that could roll back the final rule. See page 19 and 20, from the CRA Illustrative List, These activities are only for banks regulated by the OCC.
§ 25.04(c)(9) Financial literacy programs or education or homebuyer counseling;
CRA Interagency Guidance from all three regulators (FDIC, FRB, OCC) in 2016, The answers are bank regulator agency responses to community groups and banks seeking clarity on CRA rules. See page 48532, at the bottom on the right and you will see the excerpt below as it relates to the stated question about what counts as a qualified investment.
ll.12(t)—4: What are examples of qualified investments?
A4. Examples of qualified investments include, but are not limited to, investments, grants, deposits, or shares in or to:
- Not-for-profit organizations serving low- and moderate-income housing or other community development needs, such as counseling for credit, homeownership, home maintenance, and other financial literacy programs;
Furthermore, one of the positive outcomes of the OCC’s final CRA rule is a comprehensive list of qualified activities that count for CRA credit. These activities are in effect on October 1st, 2020, if the rule stands as is; however, there is pending litigation and legislation that could roll back the final rule. See page 19 and 20, from the CRA Illustrative List, These activities are only for banks regulated by the OCC.
§ 25.04(c)(9) Financial literacy programs or education or homebuyer counseling;
- Financial counseling by bank employees to participants in a workforce development program.
- Bank employees conduct a first-time homebuyer counseling program for bank customers.
- Bank employees teach financial education or literacy curricula at local community centers. Bank employees delivering the FDIC’s Money Smart Program curriculum to residents at a senior living facility.
- Grant to a non-profit organization that provides financial literacy courses for a foreclosure prevention program.
- Activities supporting “train the trainer” programs that are designed to train teachers to provide financial literacy education to their students.
- In-kind donation of computer equipment to a non-profit that conducts personal money management courses for LMI individuals.
- Bank employees provide financial education in connection with a school savings program.
- Loan to a non-profit credit counseling organization that conducts personal money management courses.
- Donation to an organization that conducts elder financial abuse and identity theft prevention programs.
- In-kind donation of computer equipment to a non-profit that provides financial literacy courses.
- Bank employees assist in the preparation of tax filings under the Internal Revenue Service’s Volunteer Income Tax Assistance Program.
- Bank employees provide homebuyer education to potential buyers of single-family housing developed under a state program for middle-income individuals and families in high-cost areas.
- Volunteer service to open savings accounts offered through a school-based banking program, including financial literacy, to students of a K12 school that is located in and serves residents of an LMI census tract.
- Financial support of a nonprofit community program that provides digital literacy training to residents of an LMI neighborhood, in order to increase their ability to use online banking services.
- Bank employees provide financial capability training to individuals with disabilities.
