Re-Visiting Your Approach to the CRA- Embracing the Needs of Your Community

Since its inception, the Community Reinvestment Act (“CRA”) has received a great deal of attention. From consumers advocacy groups, the reception of the CRA has been positive, while many in the banking community are either ambivalent or downright hostile towards this legislation. Over the past year, the CRA has enjoyed a special, albeit unfair place of contempt for those who insist that compliance with the CRA is somehow at the root of the financial meltdown. But wait, what if the CRA had nothing to do with the financial crisis? What if instead of being an administrative burden, compliance with the CRA resulted in greater marketing opportunities and greater opportunities for overall profitability? These opportunities exist if you embrace the concept of meeting the needs of your community. 

When the CRA was first enacted, it was designed to get financial institutions to take a second look at communities that had been historically overlooked for credit by financial institutions. Though these communities tended to be populated with low to moderate income borrowers, these borrowers represent significant opportunities for good credit. The CRA was a means to an ends to get banks and financial institutions to “meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound banking operations”  [1] 

Over the years, even though billions of dollars of investments have been made in communities that were being overlooked[2], the reputation of the CRA has become on of the regulation that forces banks to make “bad loans”. However, the true emphasis of the regulation has been and always will be to encourage banks to assess the credit needs of the communities they serve. In other words, one of the main goals of the regulations was to get banks to find credit “diamonds in the rough” in areas that had traditionally been written off.

The strategy of serving communities that have been overlooked has been successfully and very profitably employed by non other than hall of fame basketball star Earvin “Magic” Johnson. His Magic John Enterprises has partnered with all manner of fortune 500 companies to invest over $500 million in communities that had been overlooked.  Using the approach of finding the “diamonds in the rough” Johnson’s companies continue to grow and show amazing profits by investing in low to moderate income communities.  So how does he find these opportunities? “Magic Johnson Enterprises is known for successfully staying rooted in communities because they understand those communities’ unique needs and personalities”[3]  In other words, he knows the needs of his communities and provides services that meet those needs.

For banks, embracing the concept of determining and meeting the credit needs of the community can yield the same results. The list of factors that make up the consideration of credit needs from the Federal Reserve Bank of Atlanta ’s publication “Community Reinvestment – Does Your Bank Measure Up?” includes the following;

• The makeup of the community;
• What the local and regional economic conditions are;
• What kind of opportunities exits for serving the community through lending and investments;
• What your banks business strategy and products are; how is your bank doing financially;
• What your bank sees as the credit needs of the community; and
• What individuals, community and civic organizations, and business-as well as state, local, and tribal government-think about your banks efforts toward meeting the community credit needs.

By placing a heavy emphasis on the determination of the credit needs of the community, banks can not only meet the requirements of the CRA, but also discover profit opportunities in communities that have been overlooked. This process does not have to involve a great deal of expense or effort.  Contacting civic groups, getting out into the community, talking with local businesses is painless and inexpensive. The only real requirement is embracing the idea that CRA is a good thing.

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[1] Don't Blame Subprime Mortgage Crisis or Financial Meltdown on CRA  Stable Communities.com 2008.

[2] See The Community Reinvestment Act: 30 Years of Wealth   Building and What We Must Do to Finish the Job John Taylor and Josh Silver National Community Reinvestment Coalition

[3] Magic Johnson Enterprises Helps Major Corporations Better Serve the Multicultural Consumer  Business Wire 2008