How Will Proposed Changes to the Community Reinvestment Act Affect Lending to Historically Excluded Communities?

Passed in 1977 as part of a series of civil rights legislation, the Community Reinvestment Act (CRA) was designed to combat the effects of redlining. Though redlining explicitly denied access to credit to people of color, particularly Black people, the CRA has always relied on low- to moderate-income (LMI) classifications, not race, to expand equitable lending. Under the CRA, regulators evaluate banks’ lending and other services to ensure they help meet the needs of their entire communities, including LMI borrowers and neighborhoods.

On May 5, 2022, the three federal regulatory agencies responsible for enforcing the CRA—the Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC)—jointly issued a notice of proposed rulemaking with updates to CRA regulations that would modernize implementation of the law to better meet community needs. In particular, the changes are meant to increase equitable access to banking services, including credit, for LMI borrowers and communities and to adapt to the many structural and technological changes that have occurred in the banking industry over the past 25 years.

Reforms designed to reach all members of the communities banks serve are much needed, given that in the 40-plus years of bank lending subject to the CRA, wealth inequality has widened significantly and racial homeownership gaps have persisted. The proposed reforms will likely expand access to CRA lending for many historically excluded households and neighborhoods. However, by declining to directly consider race in bank evaluations under the CRA, the regulators haven’t maximized their opportunity to turn the tide on racial homeownership, entrepreneurship, and wealth gaps.

What are the major proposed changes to the CRA?

The last significant set of regulations under the CRA was issued in 1995, and a more modest set of revisions was adopted in 2005. (The 1995 reforms streamlined CRA compliance by making examinations more consistent and clarifying performance standards, and the 2005 changes instituted a community development measure for relatively few banks.) This latest set of proposed regulations includes several noteworthy changes, addressing several outstanding issues with enforcement as well as the impact of major structural and technological changes within the banking industry.

The regulators propose several changes to improve clarity on CRA compliance and enforcement, including the following:

• updating the thresholds used to categorize banks as small, intermediate, or large for evaluation purposes
• applying four new tests to evaluate large banks’ retail lending, retail services and products, community development financing, and community development services
• requiring large banks to establish additional “assessment areas”—the areas where their lending is evaluated—based on their concentrations of retail lending
• establishing specific standards and benchmarks to measure retail lending to low-income borrowers and neighborhoods and moderate-income borrowers and neighborhoods in each assessment area
• improving and standardizing CRA data by updating the record keeping, data collection, reporting, and disclosure requirements for large banks

Additionally, to reach more consumers and to respond to changes in how financial services are administered, the regulators propose the following updates:

• clarifying and expanding which lending, investment, and other banking services are considered community development activities, and encouraging longer-term loans and investments
• defining any ventures undertaken by a bank in cooperation with minority depository institutions, women’s depository institutions, community development financial institutions, and low-income credit-unions as community development activities regardless of any overlap with the bank’s assessment areas
• incorporating digital and nonbranch delivery systems into lending evaluations for large banks

Overall, the cumulative changes in the notice of proposed rulemaking could significantly expand access to credit and other banking services. The proposed community development updates, in particular, have been noted as having potential to greatly expand credit access and service to rural and Native land areas, which financial service providers have historically underserved.

The proposed changes do not include consideration of race in CRA lending

Notably, among the many proposed changes, and notwithstanding their recognition that the CRA is at its heart a civil rights statute, the regulators did not decide to explicitly include consideration of race in their evaluations of a bank’s performance under the CRA. Though the regulators have strengthened their focus on nondiscrimination and fair access to credit, the focus remains on expanding services to LMI borrowers and communities.

Analysis of CRA lending has demonstrated that although LMI borrowers and neighborhoods and borrowers and neighborhoods of color experience a certain degree of overlap, many people of color—Black people in particular—remain underserved. Previous Urban Institute research found of all 2018–19 homebuyer mortgages reported in Home Mortgage Disclosure Act data, 30.2 percent were to LMI borrowers. Of that LMI share, only 32.0 percent of the loans went to borrowers of color. And on the neighborhood level, Black households comprised 17.9 percent of existing homeowners in LMI neighborhoods yet received just 13.1 percent of homebuyer mortgage loans. Recent Urban research (PDF) indicates that by proposing to consider service to borrowers and communities with low incomes separately from service to borrowers and communities with moderate incomes, the regulations may improve to some extent the focus on service to people and neighborhoods of color.

Nevertheless, all these data suggest LMI lending alone is not enough to address structural racism and the persistent racial disparities baked into the credit system. Explicit racism and exclusion created the ongoing disparities in access to credit by race, and these disparities won’t likely be resolved until an equally explicit commitment is made to advancing racial equity.

How could the CRA better serve borrowers and communities of color going forward?

The notice of proposed rulemaking does seek feedback about whether the updated regulation should include special purpose credit programs (SPCPs) as a way to facilitate lending to LMI borrowers. SPCPs are primarily regarded as a racial equity tool that allow lenders to extend credit specifically to members of a protected class who have suffered economic disadvantages. If included, SPCPs are one way CRA regulations can address persistent racial homeownership and wealth gaps resulting from historic racism.

Additionally, the proposed changes aren’t final, and the 90-day comment period following the notice of proposed rulemaking will grant stakeholders the opportunity to express concerns or considerations for the Federal Reserve, OCC, and FDIC to review. Notably, statutes and regulations explicitly focused on overcoming racial disparities are under increasingly skeptical judicial scrutiny. However, it’s likely commenters will provide the regulators with constructive suggestions for a path forward.

Given the difficulties of cross-agency coordination, it’s extremely promising that the three agencies have come together to make significant updates to the CRA regulations to encourage banks to better support underserved communities. Further encouragement of equitable access to lending and other bank services could lead to real progress in closing racial gaps in homeownership, small business ownership, and household wealth that have persisted since the CRA’s passage more than 40 years ago.