What is the Community Reinvestment Act?

Passed by the United States Congress and signed by President Jimmy Carter in 1977, and frequently re-crafted since, the Community Reinvestment Act was designed to eliminate the practice of “redlining” in making real estate loans and to thus extend the so-called American Dream of home ownership to all Americans. The law and the regulations promulgated under it essentially required that banks extend credit in those communities where they accepted deposits. While some have blamed the Community Investment Act for the collapse of the American real estate and mortgage industries in the first decade of the 21st century, credible experts provide evidence that such allegations are unfounded.

Although civil rights advances made during the first 75 years of the 20th century accomplished a great deal in establishing an environment of equality of opportunity in the United States, many minority group members were victimized by unfair lending practices and were thus unable to buy homes. When legislation barred lenders from discriminating on the basis of race, they began to discriminate on the basis of geography, refusing to lend money for residences within areas deemed unsafe, which often were areas of minority concentration. This practice was called “redlining” because such areas were originally outlined in red on maps.

The Community Reinvestment Act was enacted to end the practice of redlining. The vast bulk of banks' profits are derived from lending the money on deposit, and before CRA, banks would accept deposits within a community and lend the bulk of the money in other areas. CRA's supporters argued that if a community had sufficient resources for a bank to open a branch and accept deposits, it was worthy of having some of those resources reinvested in it in the form of mortgage and other lending. The CRA, however, applies only to federally-regulated and insured financial institutions, such as savings banks and commercial banks. Many mortgage lending companies, then, did not fall under the regulatory umbrella of the CRA.

To become more compliant with CRA, given the financial realities that existed in many communities, some banks modified their lending standards. Many people living in minority neighborhoods were paying as much in rent as they would for monthly mortgage payments, or more, yet they didn't have the savings built up to make a traditional down payment on a house. Thus, down payment requirements were reduced, and in some cases higher loan-to-value (LTV) loans were made. The risks associated with such changes sometimes prompted the banks to charge higher interest rates for their loans.

One of the key components of CRA is that while requiring FDIC-insured banks to extend credit within the communities where they operate, the law specifically does not expect banks to abandon prudent lending practices. Lending within the community was not intended to require lending to borrowers who were not creditworthy. This is why the law and regulations don't provide specific guidelines, goals, or standards. Instead, it required that ratings be assigned on a case-by-case basis, to avoid situations where a bank, simply to meet some performance goal, would issue loans to community-based clients who were not creditworthy.

The Community Reinvestment Act was controversial from its first introduction in the Congress. While there was no doubt that the credit available to many minority members was insufficient to help them grow, and was in fact unequal to that available to their white counterparts, critics argued against passage of the CRA because it would impose onerous regulations upon banks and encourage them to make bad loans. It was to overcome these objections that Congress and the agencies charged with enforcing the CRA purposely avoided specifying concrete goals or requirements.

Enforcement of the Community Reinvestment Act is non-traditional. Non-compliance carries with it no penalties or fines, and no bank officer can be jailed. The various government agencies charged with enforcing the law periodically evaluate a bank's activities, and it receives a rating from “A” to “D” for its CRA compliance. When a bank applies to the banking regulatory agencies for permission to expand through acquisition, merger, or construction of a new branch, its CRA rating is taken into account in the approval process.

Despite allegations that the Community Reinvestment Act was the underlying cause of the real estate and mortgage industries' collapse in 2007-08, the “toxic loans” that are acknowledged to have been instrumental in that collapse were issued, in large part, by institutions not subject to CRA; likewise, those institutions were far more involved in the securitization of those loans than were the CRA-bound banks.