Community Reinvestment Act
In 1977, Congress passed the Community Reinvestment Act to encourage depository institutions to help meet the credit needs of the communities in which they manage, including low and moderate income neighborhoods, consistent with safe and sound banking operations. This process is also known as redlining. It was originally geared towards more lower-income communities. The CRA was designed “to help meet the credit needs of the local communities in which they are chartered, consistent with the safe and sound operation of such institutions”. This was a major tool to help with discriminatory credit. The ratings and evaluations are based on individual characteristics. It is an important factor in being a part of your community and doing your part to better enrich the society. The Community Reinvestment Act is questioned as one of the reasons of the subprime mortgage crisis, according to mainly Conservatives and Libertarians. However, some pieces of evidence and statistics prove otherwise.
Neither the CRA nor its applying regulation gives specific criteria for rating the performance of depository institutions. Rather, the law indicates that the evaluation process should accommodate an institution's individual circumstances. Community Reinvestment Act performance is based on by their lenders in part by the number of loans to lower-income borrowers or borrowers in lower-income neighborhoods relative to total originations within their assessment-area. Community groups can make written comments on a bank's performance at any time and have the comments put into the bank's CRA file so that regulators consider them as part of the evaluation. As a result of CRA, lenders have made what some estimate to be over $1 trillion in loans to residents and businesses in low-income areas. Critics often say the law forces banks to make risky loans, but banks have found that CRA is good business. The possible financial institutions that rate CRA’s are the Federal Reserve Board, the FDIC, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision. It depends on which agency has responsibility for that bank and its CRA compliance. Over the last 15 years, CRA loans have steadily declined.
There is an issue with the Community Reinvestment Act in that it was the actual cause of the subprime mortgage crisis. Some people believe this because of aggressive enforcement due to the reform in the 1990’s to enforce the CRA more. Some believe that they were a little too encouraging to struggling communities. Republican critics point out that the Association of Community Organizations for Reform Now (ACORN) has used the CRA to pressure banks to pour money into ACORN and its affiliates, allowing ACORN to facilitate loans to clearly unqualified borrowers. It is hard to blame CRA for the mortgage meltdown when CRA does not even apply to most of the loans that are behind it. The contribution of it seems very marginal. Half of sub-prime loans came from those mortgage companies beyond the reach of CRA. A further 25 to 30 percent came from bank subsidiaries and associates, which come under CRA to varying degrees but not as fully as banks themselves (See Chart). About one in four sub-prime loans were made by the institutions fully governed by CRA.
As you can see, it is hard to see how a 30-year-old law that has been substantially watered-down and is now to blame for the crisis. The crisis at hand is from unregulated loans; not from regulated institutions.
Loans Made to Lower-Income Borrowers and/or
Lower-Income Neighborhoods, by Lender Type
Higher-Priced (Subprime) Lower-Priced (Prime)
Note: Lower-Income Borrower/Lower-Income Neighborhood defined as a personal or median neighborhood income less than
80% of the MSA/MD median income. Higher-priced, or subprime, loans are defined as having an APR at least 3 percentage
points above a Treasury security of comparable maturity. Chart includes conventional first lien loans for owner-occupied sitebuilt
one-to-four family properties, purchase and refinance, between 2004 and 2006.