Community Reinvestment Act (CRA)

The Community Reinvestment Act (CRA) is a federal law enacted in 1977 that encourages financial institutions to help meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods. The Act is intended to reduce discriminatory credit practices against these groups within a community, a concept known as “redlining.”

Federal regulators assess and rate the performance of financial institutions in fulfilling their obligations under the CRA, and these ratings can impact the institution’s ability to expand through mergers or open new branches.

Key Provisions

Financial institutions are regularly evaluated and encouraged to provide loans, investments, and services to all community segments.
CRA examination results are taken into consideration during the approval process for mergers, acquisitions, and branch openings.

Examples

Example 1: A neighborhood organization brought suit against a local savings association, alleging redlining in violation of the Community Reinvestment Act. The federal regulators investigated and required the association to adjust its lending practices.
Example 2: A bank received a “Satisfactory” CRA rating, which it cited to obtain regulatory approval for a merger with another institution.

Frequently Asked Questions (FAQs)

Q1: What does the Community Reinvestment Act (CRA) aim to achieve? A1: The CRA aims to ensure that financial institutions serve the credit needs of their entire community, especially low- and moderate-income areas.

Q2: How are financial institutions evaluated under the CRA? A2: Institutions are evaluated by federal regulators who look at their lending, investment, and service activities in the community.

Q3: Can poor CRA ratings affect a financial institution’s operations? A3: Yes, poor CRA ratings can hinder an institution’s ability to expand, such as through mergers or opening new branches.

Q4: What is redlining, and how does it relate to the CRA? A4: Redlining is a discriminatory practice where services (such as loans) are denied to residents of certain areas based on racial or ethnic composition. The CRA aims to eliminate such practices.

Q5: Who enforces the CRA regulations? A5: CRA regulations are enforced by federal regulatory agencies such as the Federal Reserve, FDIC, and the OCC.

Redlining: The discriminatory practice where services such as loans and insurance are denied to residents of certain areas based on race or ethnicity.
CRA Rating: A rating given by federal regulators indicating a financial institution’s compliance with the Community Reinvestment Act.
Federal Reserve: The central banking system of the United States, involved in the enforcement of CRA.
FDIC (Federal Deposit Insurance Corporation): An independent agency of the federal government that insures deposits and evaluates financial institutions under the CRA.
OCC (Office of the Comptroller of the Currency): A federal agency that oversees the execution of laws related to financial institutions.

Online Resources

References

Federal Reserve. “Community Reinvestment Act (CRA).” Link
FDIC. “CRA Performance Evaluations.” Link
OCC. “Community Reinvestment Act (CRA) Regulations & Interpretations.” Link

Suggested Books for Further Studies

“The Color of Law: A Forgotten History of How Our Government Segregated America” by Richard Rothstein.
“Color and Money: How Rich White Kids Are Winning the War over College Affirmative Action” by Peter Schmidt.
“The New Urban Crisis: How Our Cities Are Increasing Inequality, Deepening Segregation, and Failing the Middle Class – and What We Can Do About It” by Richard Florida.

Real Estate Basics: Community Reinvestment Act (CRA) Fundamentals Quiz

### What does the Community Reinvestment Act (CRA) encourage financial institutions to do? - [ ] Focus on high-income neighborhoods exclusively - [x] Meet the credit needs of all community segments, including low- and moderate-income neighborhoods - [ ] Avoid loans to high-risk customers - [ ] Reduce mortgage interest rates for affluent communities > **Explanation:** The CRA encourages financial institutions to meet the credit needs of all community segments, including low- and moderate-income neighborhoods, to reduce discriminatory practices and promote economic equality. ### Which year was the Community Reinvestment Act (CRA) enacted? - [ ] 1965 - [ ] 1970 - [x] 1977 - [ ] 1985 > **Explanation:** The Community Reinvestment Act (CRA) was enacted in 1977 to promote fair lending standards and practices. ### What practice does the CRA aim to eliminate in financial institutions? - [ ] Investment banking - [ ] Subprime lending - [x] Redlining - [ ] Fractional reserve banking > **Explanation:** The CRA aims to eliminate the practice of redlining, which involves denying services to residents of certain areas based on demographic factors such as race or ethnicity. ### What are the CRA ratings based on? - [x] Lending, investment, and service activities in the community - [ ] Number of branches a financial institution has - [ ] Interest rates offered by the institution - [ ] Profit margins of the institution > **Explanation:** CRA ratings are based on the financial institution's lending, investment, and service activities in the community, particularly in low- and moderate-income areas. ### Which agencies are responsible for enforcing CRA regulations? - [ ] Bureau of Indian Affairs - [x] Federal Reserve, FDIC, OCC - [ ] Environmental Protection Agency - [ ] Department of Education > **Explanation:** Federal regulatory agencies such as the Federal Reserve, FDIC, and OCC are responsible for enforcing CRA regulations and ensuring compliance by financial institutions. ### What can a poor CRA rating affect for a financial institution? - [ ] Liquidity ratio - [ ] Share price - [x] Ability to expand through mergers or new branches - [ ] Asset appreciation rate > **Explanation:** A poor CRA rating can affect a financial institution's ability to expand through mergers or new branch openings, as regulatory approval may be conditional on CRA performance. ### What must financial institutions under the CRA regularly provide to the regulators? - [ ] Daily rate sheets - [ ] Quarterly earnings reports - [x] Performance evaluations - [ ] Real estate appraisals > **Explanation:** Financial institutions must provide regular performance evaluations to regulators, which show their efforts and success in meeting the community's credit needs under the CRA. ### How does the CRA impact low- and moderate-income communities? - [ ] Increases housing regulations - [ ] Decreases home ownership opportunities - [x] Encourages lending and financial services to these communities - [ ] Makes property more expensive > **Explanation:** The CRA positively impacts low- and moderate-income communities by encouraging lending and financial services catered to their needs, which helps alleviate neglect and discrimination. ### What type of activities are assessed in CRA evaluations? - [ ] Political donations - [x] Lending, investment, and service activities - [ ] Marketing campaigns - [ ] Foreign exchange operations > **Explanation:** CRA evaluations assess the lending, investment, and service activities provided by financial institutions to various community segments to ensure they meet the local credit needs effectively. ### How does the CRA address the issue of discriminatory lending? - [ ] Mandates equal loan terms for everyone - [ ] Bans all high-risk lending practices - [x] Requires institutions to serve all community segments and helps prevent redlining - [ ] Implements property ownership quotas > **Explanation:** The CRA addresses discriminatory lending by requiring financial institutions to serve all community segments and prevents practices like redlining, ensuring fair access to credit across demographics.

Community Reinvestment Act (CRA)