Background:
The Community Reinvestment Act (CRA), a critical piece of bank regulation, was recently updated for the first time since 1995. Below is a summary of the background of the CRA and the impacts its updated language may have on community development in Colorado.
Originally passed in 1977 as a federal statute, the Community Reinvestment Act (CRA) requires that banks be regularly evaluated to ensure they are meeting the needs of the communities they serve through their loans and investment services. It was part of a series of laws that passed in the 1960s and 1970s aimed at prohibiting discrimination in the provision of housing and in receiving banks’ loans or credit services, and it works in partnership with other laws, including The Fair Housing Act. After being evaluated, banks receive a “CRA score”. Banks that do not score well are penalized.
The CRA is responsible for 10s of millions of dollars worth of community investment in Colorado that otherwise might not have occurred. However, in recent years it has been criticized for, among other things, not actually ensuring equitable outcomes for Black families in underserved communities. In Urban Institute’s 2022 piece titled, The Community Reinvestment Act Meant to Combat Redlining’s Effects. 45 Years Later, Black Homebuyers are Still Significantly Underserved, it stated that the CRA’s “focus on LMI neighborhoods and borrowers has left significant gaps in lending to neighborhoods and borrowers of color, particularly Black borrowers.” This not only applies to mortgage loans, but loans of any type to Black and Brown borrowers. Additionally, CRA requirements to date have been very lenient; nearly every bank receives a passing grade–giving the appearance that banks are doing more for communities than they actually are.
The News
In a historic moment on October 24th this year, the OCC, the Federal Reserve Board (FRB), and the Federal Deposit Insurance Corporation (FDIC) issued language to strengthen and update CRA regulations to better achieve its purpose – to govern how banks meet the credit needs of their communities, particularly in low-to-modern income areas. Among the stated goals underlying these changes are: 1) Modernize the CRA; 2) Increase Transparency; 3) Tailor standards to fit different bank sizes, types, and geographies
These changes are poised to have a substantial impact on affordable housing and community development in Colorado, in part, by prompting banks to partner with developers focused on affordable housing – subsidized or otherwise. The revised rule acknowledges a broader range of community development activities, like building or preserving affordable units, that can now count toward a bank’s CRA obligations. This encourages banks to support affordable housing projects and to collaborate with affordable housing developers, opening the door for private/public partnerships, fostering joint initiatives and access to capital for housing development. Community Development-related changes in the CRA include:
- Expands the types of community development investments that qualify under CRA
- Provides credit for community development investments outside of a bank’s assessment area (Previously, the scope of CRA evaluations was limited to areas where there were physical bank branches)
- Improves scoring criteria to help determine the relative performance bank CRA activities
- Assists with determining impact and responsiveness of any community development investments
Overall, the final rule of the CRA has the potential to create a more conducive environment for affordable housing by incentivizing increased investment, encouraging innovation, emphasizing community engagement, and offering clarity in evaluation. Nevertheless, the successful execution of these updated regulations will undoubtedly be the linchpin in realizing their full potential. Effective implementation will be crucial to ensuring that these measures translate into tangible, sustainable benefits for communities in need. As the revised CRA enters this new phase, the impact and efficacy of these changes will be closely watched, marking a critical juncture in the ongoing quest for equitable financial services and robust community development.