Community Reinvestment Act

Community Reinvestment Act

The Community Reinvestment Act (CRA) has been critical to the expansion of responsible credit for low- and moderate-income borrowers since its passage in 1977. Designed to address low levels of lending activity in low- and moderate-income neighborhoods, it has helped spur a growing range of successful affordable loan programs that reduce credit access barriers. CRA expands the overall efficiency of the banking system by incentivizing banks to tap profit opportunities in underserved markets.

The Community Reinvestment Act ensures that banks make resources available to low-income or otherwise disadvantaged communities by offering “equal access to lending, investment and services to all those in an institution's geographic assessment area-at least three to five miles from each branch. In the case of large banks with many branches, the geographic area may encompass an entire county or even a state.” This policy was created as a direct response to “redlining”, a discriminatory practice used by bankers to avoid making loans to people of color or lower-income areas.

Cry Wolf Quotes

The problem with the Community Reinvestment Act is not its goals but its vagueness and ambiguity that have led to a nightmare of documentation, paperwork and formalized process that diverts bankers' time and bank resources from being utilized to serve our communities… we need to build a system of supervision and enforcement that encourages creativity and substance in community reinvestment lending.

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Michael K. Guttau, National Mortgage News

One cannot say with any certainty whether the more important cause of the current housing crisis was affordable-housing mandates or the actions of investment banks and ratings agencies. There can be no doubt, however, that both contributed. With that in mind, the best way to make sure that we don’t repeat our mistakes is to examine — and change — both… If the Community Reinvestment Act must stay in force, then regulators should take loan performance, not just the number of loans made, into account. We have seen the dangers of too much money chasing risky borrowers.

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Howard Husock, New York Times.

There’s little doubt that the rating agencies helped inflate the housing bubble. But when we round up all the culprits, we shouldn’t ignore the regulators and affordable-housing advocates who pushed lenders to make loans in low-income neighborhoods for reasons other than the only one that makes sense: likely repayment… in 1995 the Clinton administration added tough new regulations. The federal government required banks that wanted 'outstanding' ratings under the act to demonstrate, numerically, that they were lending both in poor neighborhoods and to lower-income households. Banks were now being judged not on how their loans performed but on how many such loans they made. This undermined the regulatory emphasis on safety and soundness.

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Howard Husock, New York Times.

The Community Reinvestment Act (CRA) did the same thing with traditional banks. It encouraged banks to serve two masters -- their bottom line and the so-called common good… By pressuring banks to serve poor borrowers and poor regions of the country, politicians could push for increases in home ownership and urban development without having to commit budgetary dollars. Another political free lunch.

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Russell Roberts, Wall Street Journal.

Evidence

Backgrounders & Briefs

Good Rules: Ten Stories Of Successful Regulation

Demos looks at ten laws and rules that we take for granted.

Community Reinvestment Act Policy Brief

By Philip Ashton, UIC

The Community Reinvestment Act (CRA) has been critical to the expansion of responsible credit for low- and moderate-income borrowers since its passage in 1977.