More Changes to the Community Reinvestment Act Ahead: Who Is Impacted?

by: The Knowledge Group

January 16, 2018


The federal Community Reinvestment Act, enacted in 1977 as 12 U.S.C. 2901, and carried out under Regulation BB (12 CFR 228), mandates a certain amount of lending to borrowers with low or moderate income. Essentially the Act put a halt to redlining, a banking practice that avoided loans for buyers in minority neighborhoods. The CRA prompted banks to attend to needy communities as well as buyers in affluent areas.

The Trump administration is expected to effect major changes in the Act.

Last June, Treasury Secretary Steven Mnuchin questioned whether the Act “absolutely” bolsters the communities it means to help, or whether it merely makes for a “check the box” compliance routine. The Treasury Department is now poised to unveil a set of recommendations to modify the impact of key CRA requirements.

How the CRA Works

The law serves as an evaluation tool, assessing the availability of branches, loans, and investments in areas of need. The public may submit comments on the way a bank complies with CRA requirements.

Low performance ratings can impede a bank’s business activities, including mergers.

The Industry’s Recommendations

The industry position on revamping the CRA can be found in the ABA Banking Journal. The American Bankers’ Association urges federal regulators to, among other things, apply CRA-type requirements to other financial players, such as credit unions and fintech companies.

The Association also asserts that projects “that would benefit a bank’s entire community”—e.g. improving financial literacy or financing hospital construction—should count in community development credits.

Who Pays and Who Gains?

The current administration’s proposed changes have yet to be seen. Yet some modifications have already occurred, and have loosened the compliance standards and lowered penalties.

Rachel Louise Ensign and Ryan Tracy write in the Wall Street Journal that we’ll soon see “major” changes, with the potential to “transform the way banks make billions of dollars in loans, investments and donations.” A question reporters are asking? Whether the costs of these changes will mainly be visited upon working-class customers who find themselves struggling harder for access to loans.