Reforming The Banks: The Next Step in Enhancing the Community Reinvestment Act

Posted on 05 March 2010

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By Orson Aguilar
Greenlining Institute

Public anger over bank bailouts and fat Wall Street bonuses has put enormous pressure on President Obama to crack down – but a crackdown isn’t enough. It’s time to take positive steps to push our banking system to better serve all of America’s diverse communities.

Happily, an existing law provides the perfect vehicle. It just needs some long-overdue updates.

That law is called the Community Reinvestment Act (CRA). Originally passed in 1977 to curb the illegal practice of “redlining” – discriminatorily refusing to lend to residents in minority and low-income communities, even while taking deposits from those neighborhoods – CRA encourages banks to meet the credit needs of the communities in which they operate. 

As a result of this law banks have increasingly come to treat low-income communities as potentially profitable markets, not burdens. CRA commitments have led to successful partnerships between banks and community groups, helping to bring about projects like community health centers and affordable housing, as well as spurring increased lending to small businesses. In short, CRA benefits Main Street, AND Wall Street.

What CRA did not do – despite some irresponsible charges to the contrary – is bring about last year’s subprime mortgage crisis and the ensuing financial industry meltdown. Indeed, three quarters of those risky subprime mortgages were made by independent mortgage brokers or other institutions not subject to the CRA. And banks subject to the CRA were two-thirds less likely to offer borrowers the sorts of high-cost mortgages that forced too many homeowners into foreclosure.

But while CRA has done much good, it has not evolved as quickly as the financial industry. This year, Congress will consider possible enhancements to CRA. With a few simple steps, Congress can update CRA to better serve Main Street:

Expand CRA to Cover Other Financial Institutions

The vast majority of predatory lending occurred from non-CRA regulated entities. It’s time to apply the CRA, including its critical “safety and soundness” standard, to all sectors of the financial industry.

Get More Data

Much financial data collection – for example, on small business lending – fails to track information on race or ethnicity. What data we do have show that this is a critical piece of the puzzle. For example, African-Americans and Latinos are more likely to receive subprime loans, even after controlling for income and credit scores. What we don’t know – which is plenty – is hurting us.

Give CRA Both Carrots and Sticks

Ultimately, the goal of CRA should be building wealth and prosperity in all communities.  The simplest way to do this is to give CRA credit for what already works: investing in green construction, affordable housing, and community development loans; providing access to banking services to the millions who have no bank accounts; and implementing strong programs to ensure that the companies that banks work with represent the whole community, including minority-owned and operated businesses.  

And CRA ratings have to matter. Currently, almost all banks receive a satisfactory rating, regardless of any meaningful commitment to the community. This needs to change.

For banks that receive poor CRA ratings, there should be meaningful consequences such as fines that go to a community benefits fund, higher rates on depository insurance, limits on executive compensation, and a requirement to submit proposals for improvement.

Much attention is understandably focused on problems with the financial system, but progress requires much more than just assigning blame. Many of us are unhappy with the banks right now, but banks will be with us, like it or not. 

Lending is still down and people are still suffering, but the opportunity is now.
Reforming the CRA can open up vast new opportunities for communities that are most in need. It’s time to push America’s banks to be true partners with the communities they serve.


Orson Aguilar is Executive Director of the Greenlining Institute, a multi-ethnic coalition - originally founded to combat "redlining" by banks and create reinvestment into low-income communities - of nearly forty community-based, faith-based, and civil rights/immigrants rights groups.