The Community Reinvestment Act (CRA) isn’t a new concept to the banking world by any means. We have probably all heard of the CRA, but do we know enough about it and how it can affect our community banks? The CRA was enacted in 1977 to encourage Federal Deposit Insurance Corporation (FDIC) insured banks to meet the needs of their local communities, most importantly their low- and moderate-income (LMI) neighborhoods. This piece of legislation was passed to stop the decades-old practice of redlining and to encourage business with customers who were typically shut out of this industry.
Twelve years after the CRA was passed the United States (US) Congress passed the Financial Institutions, Reform, Recovery, and Enforcement Act (FIRREA) of 1989 to ensure transparency. FIRREA mandated the public disclosure of an evaluation and rating for each FDIC bank that undergoes a CRA examination. For almost 30 years now, the FDIC has upheld FIRREA and every month a list of banks examined for CRA compliance is released. Each bank that undergoes this form of compliance is given one of four ratings: outstanding, satisfactory, needs to improve, and substantial noncompliance. This form of accountability has ensured that banks sufficiently meet the banking financial needs of all the members of their community. The FDIC is not the only federal agency that oversees the enforcement of the CRA. The Office of the Comptroller of the Currency (OCC) and the Board of Governors of the Federal Reserve System (FRB) also share the responsibility of oversight.
The CRA can have an impact on a bank's reputation within the community and their ability to expand. The rating received by an institution can be seen by anyone on the FDIC, OCC, and FRB websites. Also, banks are required to disclose their rating when asked by new and existing customers. These factors drive an increase in the importance of the rating system used and is vital that the current rating system is up to date. A significant criticism of the CRA is that the presence of a physical bank branch is accounted for within the score a bank receives despite the ever-increasing usage of online banking. That means that if a community bank does not have a physical branch in a certain neighborhood or area of their community, they will receive a hit to their overall rating. However, the institution could have hundreds or thousands of customers within that area that opt to utilize the services provided by the bank through online banking services instead of a physical branch. The CRA has no way to account for these online customers.
The CRA is essential in making sure that all areas of a community are given the opportunity to be customers of local community banks. It has also played a key role in eliminating the discriminatory practice of redlining that affected Americans for decades. Hopefully, with some modernization, the CRA can continue to impact communities’ LMI neighborhoods positively and encourage investment in these communities.