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The Community Reinvestment Act helps struggling communities. Bankrate explains it.
The Community Reinvestment Act was enacted by Congress in 1977 to encourage banks and thrifts to help meet the needs of the communities where they operate, including low and moderate-income neighborhoods. Under the CRA, insured depository institutions are evaluated periodically to assess their efforts to support their communities. The record is then used to evaluate applications for future branch openings, bank mergers, charters and bank acquisitions.
Before the CRA was passed, few banks made loans to consumers with low or moderate incomes. Many banks redlined certain parts of cities and refused to lend to people and businesses in those areas. This left most inner cities without access to capital to revitalize their neighborhoods, aside from government investment. The CRA outlawed redlining. Since its enactment, the CRA has evolved to also include rural communities.
Depository institutions that are regulated by the Office of the Comptroller of the Currency (OCC), the Federal Reserve System, the Federal Deposit Insurance Corp. and the Office of Thrift Supervision are subject to reporting requirements. The OCC is responsible for evaluating banks’ records of helping communities meet their credit needs.
Regulators use several indicators to evaluate depository institutions’ compliance with the CRA, but banks are not subject to lending quotas. They are not required to meet a certain number of loans or make a certain percentage of loans to their local communities. Additionally, the CRA does not mandate that banks make high-risk loans that would compromise the institution’s financial stability.
Under the CRA regulations:
The CRA permits any depository institution, regardless of its size or strategy, to be evaluated. Doing so allows institutions to develop performance plans, with the community’s business needs in mind, and with community input.
The OCC provides the bank with a written performance evaluation and CRA rating. The OCC publishes the evaluation schedule in advance to enable the community to provide feedback about the bank’s performance. Banks are assigned one of the below CRA ratings:
On average, the OCC evaluates banks every three years, but small banks are assessed less frequently. Banks with assets of $250 million or less that receive an overall CRA rating of satisfactory or outstanding may not be evaluated by the CRA more than every 48 months or 60 months, respectively.
Some ways that banks comply with the CRA and invest in their communities are to: