Community Reinvestment Act (CRA)
1. What is the CRA? When was it passed and who is covered by it?
CRA is a law that intends to encourage depository institutions to help the neighborhood communities in which they operate to meet their credit needs. These communities include low- and moderate-income (LMI). It encourages safe operations as well as sound banking. This law was enacted in 1977, and its main purpose was to eliminate the likelihood of poor neighborhoods from being redlined by the banks. CRA covers Federal Deposit Insurance Corporation (FDIC) – insured institutions, and they include banks, saving institutions, and both the state-chartered commercial and saving banks (Occ.Gov 1).
2. How is CRA performance assessed?
According to Occ.Gov, the Office of the Comptroller of the Currency (OCC) has the mandate to evaluate the bank’s lending to the communities they operate in (2). CRA’s performance is assessed based on the regulations provided by the regulators, that is, OCC. These regulations consider the differences in size, operations of the banks, and other institutions. The guidelines provided by the regulations state:
a) Small banks are assessed based on their lending performance
b) Intermediate small banks are assessed in the category of small banks lending test and community development test.
c) Large retail banks are evaluated under the following three tests: lending, investment, and service tests.
d) Wholesale and limited-purpose institutions are assessed based on their communities’ development operations.
The CRA regulations also allow other institutions that do not fall under the size and business strategy categories to be assessed using the plan. OCC evaluates the banks based on the information on both the institution and the community being served (Occ.Gov 2).
3. Why are CRA ratings so important?
After evaluation, OCC assigns the bank a rating that falls either of the following categories: outstanding, satisfactory, need to improve, or either substantial non-compliance. The rating is essential when OCC is reviewing bank’s depository facility application. The ratings also help the stakeholders (public, government, et al.) to the banks to express their views based on the CRA evaluation rating (Occ.Gov 3).
4. Do the Fed and OCC agree on how CRA should be implemented. Explain.
Fed and OCC do not agree on how CRA should be implemented. OCC oversees 70% of the CRA activity, while the Fed oversees around 15% of the CRA activity. In his article, Ackerman Andrew says that banks are faced with the challenge of following one law that is controlled by multiple regimes. OCC is one of the major regulators of CRA had drafted its own set of rules to control CRA. Federal Deposit Insurance Corp. being the third regulator of CRA, declined overhaul on CRA, citing inappropriateness in time to change the rules. Both the OCC and Fed have different sets of rules on CRA. Fed declined to support the OCC plan citing that the process was rushed and could have led to a decrease in lending to lower-income areas. The fed officials had also suggested that their approach plan could be effective than the OCC’s plan since they would offer more credit on the number of loans that banks provide to their retail customers (1).
Ackerman, Andrew. “Fed Moves To Overhaul Lending Rules For Poorer Communities”. WSJ, 2020, https://www.wsj.com/articles/fed-to-propose-overhaul-of-lending-rules-for-poorer-communities-11600695600.
Occ.Gov, 2020, https://www.occ.gov/publications-and-resources/publications/community-affairs/community-developments-fact-sheets/pub-fact-sheet-cra-reinvestment-act-mar-2014.pdf.