In 1977, Congress passed the Community Reinvestment Act (CRA) and required the federal banking agencies to assess a bank’s record of helping to meet the credit needs of the local communities, including low- and moderate-income neighborhoods, in which the institution is chartered, consistent with the safe and sound operation of the institution.
Today, the agencies do an unsatisfactory job in determining what the credit needs are and also do not carefully solicit the views of community-based organizations and community residents about what their needs are and how well the banks meet those needs. As a result, CRA exams produce inflated ratings with more than 98 percent banks passing their exams. If the agencies did a better job uncovering needs, ratings would be more rigorous and more effective in holding banks accountable.
Three federal agencies: the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation conduct CRA exams and rate banks on their level of loans, investments, and services in low- and moderate-income communities. Banks receive one of four ratings: Outstanding, Satisfactory, Needs-to-Improve, and Substantial Noncompliance. The last two ratings are considered fail ratings, and less than two percent of the banks have received them over the last several years. The ratings should depend on how well the banks respond to credit and community needs, but alas, these needs are really not identified on CRA exams.
CRA examiners conduct “performance context analysis.” What this jargon means is that they are supposed to analyze housing and economic conditions and develop a needs analysis. For example, are vacancy rates low for rental or homeowner housing and does a high percentage of renters and/or owners experience a cost burden (paying more than 30 percent of their monthly income for housing)? If so, what is the bank doing to address this need? Is it financing construction of new or rehabilitated rental and homeowner units? What is the state of small business lending in the community and what obstacles do small businesses experience in accessing loans? Have banks tightened up on collateral requirements, for instance?
Other questions involve priority needs and the perspectives of nonprofit organizations. Within a state or metropolitan area, what are the counties or cities with greater relative need as measured by differences in housing cost burden, foreclosure rates, or percentage of residents that are underbanked or unbanked? What are community organizations saying about these conditions and needs? What are nonprofit community-based organizations saying about how easy or hard it is to acquire grants and other financing for core operating support, for pre-development or development financing for affordable housing, for funding for the provision of technical assistance to small businesses or job training?
Alarmingly, CRA exam performance context analysis seldom clearly illuminates or identifies needs. CRA exams also provide very general narratives regarding conversations with community groups, citing observations like the need for more affordable housing or financial education. In addition, CRA performance context analysis is often a blur of census statistics with unimaginative and uninformative analysis focused on data such as the number and percentages of households in low- and moderate-income census tracts.
All is not lost. The San Francisco Federal Reserve Bank has reformed the way it conducts CRA performance context analysis, which can serve as a model for other regulators. It has a researcher that conducts these analyses for exams of the banks it supervises. The researcher coordinates his work with community affairs officials and CRA examiners. While the most recent San Francisco Fed CRA exams still need work from a community perspective, their performance context analyses are the most sophisticated and clearly highlight needs. The analyses also compare smaller areas like cities and counties within large metropolitan areas so they provide a reader with priority needs in smaller areas that the bank can address.
In a forthcoming paper, NCRC will be proposing several recommendations for CRA examiners, banks, and community groups on how to improve CRA performance context analysis. One recommendation will be the development of a set of performance context measures like housing cost burdens and vacancy rates that illuminate relative need across geographical areas. Another recommendation will be much more robust conversations between CRA examiners and community groups so much more insight about unmet needs can be developed. Currently, some banks make efforts to engage community organizations in performance context analysis, including establishing advisory committees consisting of community stakeholders. These efforts as well as more frequent communication between banks and community groups should occur.
Ultimately, CRA must be about dialogue to identify community needs and how well banks respond to them. This will create more vigorous evaluations and ratings of banks. The current implementation of performance context analysis and engagement with communities in insightful conversations fall far short of the goals of the CRA statute and regulations.
(Photo credit: _limoe, via flickr, CC BY-NC-ND 2.0)
Great article on CRA Josh. In my community many of the banks receive the Satisfactory designation on the CRA exam and do little in the community to change and improve their services.
Thanks Josh for putting this article in print for others to see. We have a situation in Port Arthur, Texas where banks are “Redlining” in an African American city, with a high poverty rate. Glad to be a part of the National Community Reinvestment Coalition (NCRC). The Texas Community Reinvestment Group has been formed to address CRA issues in the State of Texas. There is a lot of work to be done with CRA in Texas. I look forward to coming to the National NCRC Conference in March 2016.
Dear Emma and Ike:
Let’s work on getting the banks to make more responsible loans and investments in underserved communities! Glad you are thinking about the NCRC conference!