On Community Development, Bank Regulators Are Stuck in 1995
By Jessica Garcia
In 1977, Congress passed the Community Reinvestment Act (CRA) to encourage banks to meet the credit needs of the communities in which they do business, including low- and moderate-income (LMI) neighborhoods. This civil rights law was designed to address the failure of many banks to provide credit in the neighborhoods where they took deposits and to confront the historic and ongoing harms of redlining. The federal government effectively withheld affordable or any mortgage credit to many neighborhoods when it drew actual red lines on maps around Black, Brown, and immigrant neighborhoods deemed “hazardous” to property values.
The CRA requires the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board, and the Office of the Comptroller of the Currency (OCC) (together the “bank regulators”) to conduct regular performance evaluations of the banks they supervise and assess how well they are investing in the communities where they operate. The banking industry receives substantial explicit and implicit federal subsidies such as deposit insurance and, in return, banks are required to fully serve communities, including providing credit and other banking services.
Banking has changed a lot since 1977, but CRA regulations have not been meaningfully updated in three decades. In 2023, the banking regulators modernized the old brick and mortar banking rules for the modern era and strengthened CRA performance evaluations. Under new Trump-appointed leadership, regulators are now inexplicably walking away from these improvements, having announced their intent to rescind the 2023 CRA rule and reinstate the antiquated CRA framework from 1995.
It has been 30 years since substantial updates have been made to the CRA, and a lot has changed in that time. Unfortunately, what has not changed is that formerly redlined communities of color, low-income, and low-wealth communities continue to experience barriers and discrimination accessing loans, investments, and other financial services. The 2023 rule would have both modernized the CRA and improved its effectiveness at promoting community development in the following ways:
Improving coverage for online banks and online banking
More than 75 percent of the population now participate in online banking and many are even customers of branchless banks. The 2023 rule would have had CRA evaluations include, for the first time, all loans and investments for homes, small businesses or small farms, and community development regardless of whether the financial transaction was completed through a branch or online. In lawsuits against the 2023 rule, bank trade associations and business lobbying groups argue that banks should not be assessed for their performance in places where they don’t have on-the-ground branches. This doesn’t make sense when more and more banks have customers living, working, and online-banking even where they don’t have a physical footprint.
Cutting down on grade inflation
The banking regulators have often given overly favorable CRA ratings to banks with less than stellar records investing in their communities. For example, AFR Education Fund found that the OCC gave only one of the 1,062 banks it supervised the lowest CRA rating between 2019 and 2023 — 98 percent got satisfactory or outstanding ratings. This is certainly at odds with the lived experiences in neighborhoods that are woefully underserved by the banking industry. The 2023 rule included a more rigorous rating criteria to cut down the excessive grade inflation that has long allowed banks to “pass” their CRA evaluations without making significant investments in LMI communities.
Updating the definition of community development to include modern needs
The 2023 rule incorporated new categories for community development, including disaster preparedness and weather resiliency. Previous leadership at the bank regulators recognized that climate change has increasingly caused a shift in the kinds of investments and financial services that communities need, especially for those most vulnerable to climate change impacts. It also expanded the affordable housing activities eligible for CRA credit under community development to further support rental housing and LMI homeownership.
With rising housing costs and climate risk threatening access to capital and credit, now more than ever communities need flexible and fair access to financial services, both online and in person. The 2023 upgrades to the CRA rules provided a needed refresher to a durable civil rights law to make sure that communities everywhere are served by the financial system. Now is not the time to roll back community investment and withhold credit, financial services, and climate resilience from our lowest income and lowest wealth communities.
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