The Community Reinvestment Act (CRA) addresses discrimination in U.S. credit and financial markets. For decades, going back to at least the 1930s, low-income communities and communities of color were intentionally cut off from lending and investment through a system known today as redlining. Today, those same neighborhoods suffer not only from reduced wealth and greater poverty, but also from higher incidence of chronic diseases and lower life expectancy.
Passed in 1977, the CRA requires banks to provide wealth-building opportunities for households and communities that were historically starved of capital. It accomplishes this through regular evaluations of a bank’s branches, loans, investments, and services to underserved borrowers and neighborhoods, with penalties for banks that continue to ignore these needs.
The three agencies responsible for implementing the CRA—the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Federal Reserve—recently finalized the most significant update to the CRA’s rules since 1995, a monumental task considering how much the banking industry and the economy have changed since then.
The updated rules make several improvements to the metrics and benchmarks for evaluating CRA performance in lending, as well as helpful updates to the definition of ‘community development.’ CRA exams will now evaluate large banks on how well their online banking services serve low- and moderate-income households, a major part of banking today that was nonexistent during the last major change to the CRA.
But the agencies also missed several opportunities for reform, most significantly by not incorporating a racial analysis into CRA lending examinations. There is also no change to how CRA performance will affect bank mergers. A negative CRA rating will still make it difficult for banks to merge or acquire other banks, but the regulators did not propose any additional requirements to preserve local CRA activity from the negative effects of mergers, such as when banks with lower CRA ratings acquire banks with higher ratings.
Ultimately, final judgment of these new rules will depend upon real-world outcomes once the changes are fully online in 2026. If the new rules lead to increases in low- and moderate-income homeownership and other improvements in bank performance inside and outside of their branch networks, including securing much-needed community development financing for native and tribal communities, then that will be cause to celebrate.
However, if these rules have little impact on our most pressing national issues, such as the persistent racial homeownership gap and the threat that climate change poses to economic security, then we will have confirmation that the agencies—or Congress—must take additional steps.
The following are highlights of the CRA final rule. (You can find the National Community Reinvestment Coalition’s (NCRC) in-depth guide to the final rule here.)
Positive CRA Changes
- Large banks will now be evaluated using four tests instead of three. Those tests include a Community Development Financing Test, a Retail Services and Products Test, a Retail Lending Test, and a new Community Development Services test. The updated Retail Lending Test accounts for 40 percent of a large bank’s CRA rating and is much more objective and transparent than before. The expansion of the test’s reach and reformulation of its scoring process for large banks should make this CRA component’s incentives much stronger. For instance, to pass the Retail Lending Test, large banks must lend at least 80 percent of their total lending to borrowers with low- or moderate incomes or small businesses/small farms, or at least 60 percent of local demographics in 60 percent of their assessment areas.
- The addition of two new types of assessments—Retail Lending Assessment Areas and Outside Retail Lending Areas—ensures that CRA exams will evaluate more mortgage and small-business lending. This brings CRA into the 21st century by solving a major blind spot, as online lenders that mainly lend outside of their branch networks have been able to avoid a CRA review of their lending in markets where they did not maintain branches. The Retail Lending Assessment Areas apply to large banks if they meet certain asset thresholds (see below). Outside Retail Lending Areas apply to all large banks and intermediate banks if more than half of their loans and purchases are in markets outside their branch network.
- The expansion of eligible activities in the Community Development Financing Test sharpens the test’s message to banks and rewards creative, proactive investment. Newly eligible community development activities in areas defined as Native Land Areas, in weather resiliency, and financing that contributes to the health and well-being of households are all significant positive steps.
- CRA exams will now include to what degree a bank’s community development activities fit into 12 different categories of impact and responsiveness, including activities that serve persistent poverty counties (areas where more than 20 percent of the population has lived in poverty for over 30 years) and census tracts with poverty rates over 40 percent. This could help local organizations secure community development financing that banks might not have previously offered since banks will want to avoid having nothing to report for the various categories.
- Special purpose credit programs (SPCP), which extend credit to folks who would typically be denied, are now explicitly encouraged under CRA. This provides confidence to continue expanding an innovative approach to lending that has taken off in the 25-plus years since the last significant update to CRA rules. The major takeaway for banks here is that SPCPs will help you pass CRA exams.
Unhelpful CRA Changes
- Fewer banks will be subject to some of the most positive changes in the final rule due to ill-advised increases to the asset thresholds used to define large, intermediate, and small banks. The agencies justify the higher thresholds by raising concerns with the capacity of intermediate and small banks, but other portions of the rule already addressed this. For instance, the new Community Development Financing test is optional for intermediate banks, and they also don’t have a Retail Services and Products test, or a Community Development Services test. These banks will also be evaluated using a modified version of the Retail Lending Test, which doesn’t include Retail Lending Assessment Areas. They will also be exempt from the new Outside Retail Lending Areas assessment if more than half of their loans are inside their branch network. The new rule also changes little for small banks as they have the option to retain their current lending test and will not be evaluated on community development or branches.
- When it comes to closed-end mortgage lending and small-business lending, the agencies raised the thresholds for when the new Retail Lending Assessment Areas kick in. The regulators initially proposed lower thresholds—100 closed-end mortgages or 250 small-business loans—and planned for them to apply to all large banks. Instead, loan thresholds were raised to 150 closed-end mortgages and 400 small-business loans, and banks that do as much as 20 percent of their retail lending outside their facilities-based assessment area will be exempt entirely. Based on an analysis of data from 2018-2020, the agencies estimate that these changes decreased the number of banks that would have to create retail lending assessment areas by half.
- New automobile lending provisions will unfortunately apply to few lenders. Though incorporating auto lending is a positive change, the final rule greatly restricts the change’s reach. The review of auto lending only kicks in if car loans account for more than half of a bank’s total retail lending. Otherwise, a bank’s CRA rating will only factor in auto lending if a lender specifically requests it.
- Two key areas of evaluation have “only contribute positively” caveats that mean poor performance will not hurt bank scores. Affordable and sustainable bank retail products can increase a bank’s score, but unaffordable or unsustainable ones cannot lower a score. This weakens CRA’s incentives and signals to banks that these are lower priorities.
- During the public comment period for the new rules, NCRC and many of our members requested a separate metric for investments to ensure that combining loans and investments on the Community Development Financing Test does not lead to banks decreasing investments. In response, the agencies added an additional investment metric and benchmark for banks with more than $10 billion in assets. However, bank performance in this instance can only contribute positively to a bank’s performance. This is a change from the status quo. Previously, all large banks would have a separate evaluation of investments factored into their overall rating, whether its effect was negative or positive.
Missed Opportunities for CRA Reform
The new rules perpetuate CRA’s troublesome racial blind spot. Though CRA’s intent is to address racist policies and business practices, banks will still not be evaluated on the demographic mix of their borrowers.
NCRC offered several recommendations to incorporate considerations of race into CRA exams that would complement an income-based lending review, including creating a disparity study that would identify racial groups and communities with significant gaps in loans and investments, and to factor in a bank’s performance at serving these identified groups. Instead, the agencies will start publishing data on the lending performance of large banks by race and ethnicity in all of their assessment areas on regulatory websites using Home Mortgage Disclosure Act data, but this will not affect a bank’s CRA ratings.
Another missed opportunity: nothing has changed to strengthen the link between CRA performance and merger or branch-siting review processes. Advocates encouraged the agencies to strengthen processes for community input in merger reviews and to update the if-then consequences of poor CRA performance on branch closure and merger review processes. The regulators did note that the majority of commenters supported the idea of requiring, or at least encouraging, the use of community benefits plans in merger applications. This is important to note in upcoming rulemakings related to bank merger review, which, like the CRA, is also in dire need of an update.
Weather-resiliency incentives in the new CRA also fall short. In addition to incentivizing weather-resiliency projects, regulators could have required an analysis of the climate impacts of a bank’s financing. The rule provides several examples of activities that would qualify under the disaster preparedness and weather resiliency category, including the construction of flood control systems in a flood-prone targeted census tract, the promotion of green space in targeted census tracts to mitigate the effects of extreme heat, and the funding of community solar projects and microgrid and battery projects that could help ensure access to power to an affordable housing project in the event of severe storms.
The agencies note that low- and moderate-income communities are more affected by “weather-related risks” but largely avoid acknowledging that climate change is increasing the frequency and severity of these risks. They specifically declined to consider activities related to decarbonization and transition to clean energy as eligible, citing difficulties with determining how those activities would benefit residents of low- and moderate-income census tracts and other targeted census tracts. This short-sighted approach focuses on addressing the weather-related symptoms of climate change, rather than the fossil fuels that are causing it.