Community Reinvestment Act in the 21^st Century – Innovations in the internet and technology have made it possible for banks to reach far beyond the immediate assessment areas they serve.  What are the implications for community banks that must meet the requirements of the CRA while attempting to stay competitive.   

Introduction

When the Community Reinvestment Act (“CRA”) was first enacted, there was a specific need that was being addressed-deposits being taken from certain communities.  The practice of “redlining” (refusing to issue credit in certain sections) was determined to be widespread.  In fact, the term redlining came from an established practice of color coding neighborhoods based upon perceived credit risk.  Those neighborhoods that were believed to be high credit risk were outlined in maps in red.  Red lined areas were to “written off” for credit activity.  However, financial institutions did not limit their deposit taking activity in these same neighborhoods.  As a result, funds left these neighborhoods through deposits in banks, but did not return in the form of lending activity.    These communities suffered from deterioration and decay.      

The basic approach of the CRA to address this problem was that the Banks and financial institutions that take deposits in a community should make a strong effort to address the credit needs of the same community.  Over the years, this vague terminology has been interpreted to mean at least half of all loans should be made within the designated assessment area.[1]    

Changes in the CRA

Over the years, there have been several changes to the law including small intermediate and large bank classifications, public disclosures and changing the formula between lending and investment to meet the threshold requirements.   Through all of these changes, however, the basic idea of the Community Reinvestment Act has not changed; banks and financial institutions should seek out credit worthy applicants within its depositor base.   CRA and the laws passed around the same time were designed to get banking activity in low to moderate income tracts

Changes in the Market

Since the enactment of the CRA, despite the fact that there have been few changes in the core principles of the law, changes in technology, regulatory schemes and products offered have changed the game.   Banks now have the ability to expand the reach of their influence, well beyond the traditional assessment area.   For example, through the use of Remote Deposit Capture technology, banks can serve customers who are located far away from a branch of the bank. 

The internet allows for Banks to offer products around the country.  Today there are a number of banks who advertise nationwide for depositors.   In addition the potential customers of a bank who use the internet are more sophisticated.  Potential borrowers have the ability to quickly and easily compare rates, terms and product offerings while searching for the best deals.  Banks have been forced to innovate and offer products that meet the needs of the mobile and information savvy public.   An increasing number of banks are issuing “smart cards” that have the ability to perform myriad functions beyond the traditional debit and credit functions.  

Despite the fact that technology is changing the overall definition of banking, the NEED that the CRA is designed to address has not really changed.  There are still communities that remain underserved by Banks and financial institutions.    In recent times, alternate financial institutions have developed to fill the need for banking services in low to moderate income communities.  Organizations such as check cashing centers and “pay- day” lenders often provide financial services to underserved communities.  Of course these services are provided at extreme rates, which the poor can ill-afford.    

Despite the ever-present need for banking services, many institutions have argued that the current economic conditions make it impossible to lend in low to moderate income areas.  Some have even argued that the need for the CRA has passed and that it is time to repeal the Act altogether.  

Innovation is the Key

Despite the doom and gloom of some around the CRA, there are many success stories.   The common theme among these successes is innovation.  Several banks throughout the country have addressed their CRA obligation in innovative ways.  For example, a bank with an outstanding CRA rating was recently cited for its educational program designed to information members of traditionally underserved communities about banking. [2]

There are a number of private-public partnerships that have been developed that have produced outstanding results in the housing industry.  With state and local guaranty programs, many first time homebuyers have been able to complete purchases.  A similar effort is now being being marshaled in the area of commercial lending, but a great deal more can and should be explored.

Very recently, a large bank announced the development and marketing of a “checkless” checking account that was specifically designed for low to moderate income customers.  These accounts will allow people who had no other choice but to pay the exorbitant fees of the check cashing centers to re-enter traditional banking.   

Probably the greatest area of need is still to do the research necessary to truly determine the matches between banks strategic plans and the credit needs of local communities.  There are many credit “jewels in the rough” in communities that are traditionally overlooked by banks and financial institutions.  Earvin “Magic” Johnson has based a whole financial empire on the idea that urban communities have a great deal of economic vitality. [3]

At the end of the day, complying with the CRA in the 21^st century is a matter of desire and imagination; and where there is a will-there is a way.

---

[1] As an aside, despite the common belief that the law requires banks to make bank loans, nothing could be further from the truth.  The preamble to the law makes it clear that the only loans that should be originated are those that meet the credit standards of the financial institution.

 

[2] Cambridge Savings Bank Recognized For Innovative Community Reinvestment Act Program With National Award-Water Town Patch-December 1012

[3] Infusing the Magic Johnson Enterprises philosophy and web of influence into the strategy of other established brands in order to serve and capitalize off of the growing buying power of minorities and value of the multicultural economy.- Magic Johnson Enterprises website