The CRA Service Test: Are Bank Branches Serving Low- and Moderate-Income Customers?

The Community Reinvestment Act (CRA) exam for large banks with assets above $1 billion has three tests: the lending test, investment test, and service test. Columns the last two weeks covered the lending test and investment test. Like the lending and investment test, the service test has unfulfilled promise. It is somewhat effective in holding banks accountable, yet its full potential is not realized.

The service test measures the number and percent of branches in low- and moderate-income neighborhoods, the availability and effectiveness of alternative systems like ATMs for delivering bank services, the range of services offered in low- and moderate-income neighborhoods, and the amount of community development services. The last category, community development services, refers to the provision of financial services and can include bank professionals offering counseling sessions.

Rigorous service tests on CRA exams are needed. The rate of unbanked and underbanked households is too high. In the United States, as a whole, about 8 percent of the households are unbanked and 20 percent are underbanked according to the Federal Deposit Insurance Corporation.

An underbanked household has a bank account but also uses alternative financial providers like payday lenders.

In the District of Columbia, the percentages are higher: 12 percent are unbanked and 25 percent are underbanked.

Within the District of Columbia, traditionally underserved populations are more likely not to be using a bank. Consider:

Unbanked                  Underbanked

African-Americans                                                      22.3%                          36.8%

Hispanics                                                                     5.1%                            30.2%

Very Low Income (between $15,000 and $30,000)   15.2%                          42.5%

Low Income (between $30,000 and $50,000)            4.4%                            35.7%


When households are unbanked and underbanked, they often rely on expensive check cashing outlets, payday lenders, car title lenders, and other abusive fringe financial services. They cannot save for buying a home, pursuing further education, or starting a small business. Lack of access to affordable and responsible financial services perpetuates poverty. Access to responsible financial services starts with a low cost savings and checking account at a responsible bank.

In this context, the service test is vitally important. The test uses data to compare the number and percent of bank branches to the number and percent of households in low-and moderate-income census tracts. It examines the impact of branch openings and closings on the percent of bank branches in low- and moderate-income neighborhoods. It also engages in similar analysis to compare the number and percent of ATMs to the number and percent of households in low- and moderate-income census tracts.

The test, however, uses a fudge factor of branches in middle- and upper-income neighborhoods that are considered in close proximity to low- and moderate-income tracts. Sometimes a distance is mentioned by the test and sometimes the word “close proximity” is used. For populations with limited mobility like older adults, the “close proximity” of branches in middle- and upper-income neighborhoods should not be counted. When I was at NCRC, we complained about this practice. If a community group examines a bank branch distribution and notices that this practice is greatly inflating the “availability” of branches in low- and moderate-income neighborhoods, the community group should comment on the bank’s CRA exam. The only way to change a practice is to continue objecting to it.

The biggest blunder of the service test, however, is its almost complete failure to analyze the number and percent of bank accounts for low- and moderate-income customers. That’s where the service test is half incorrect. It is half correct to look at the distribution of branches but half incorrect to omit consideration of the income distribution of customers.

Currently, data is not collected by banks and reported to federal agencies on the income of checking and savings accounts customers. But this would not be too hard to do. Banks have been reporting on the income of home loan recipients in the Home Mortgage Disclosure Act (HMDA) data that they have been reporting to the federal agencies and the public since 1975!

If we really want to make a dent in the high percentages of unbanked and underbanked households, we need data on bank efforts to provide checking and savings accounts to these households! This data should also be used by CRA examiners. In addition, CRA exams should assess whether the accounts are affordable and free of abusive overdraft protection and high fees. Currently, banks receive CRA points on the service test for providing low-cost checking and savings accounts, but most CRA exams do not discuss whether banks do so. When CRA exams mention low cost accounts, data on how many are offered and the income of the customers is usually lacking.

The section of the service test on community development services is also weak. Bank staff service on the board of directors of community groups is often mentioned without any detail of whether bank staff just attended meetings or provided meaningful technical assistance. In addition, the exams will often mention hours of community service by bank staff with little detail about whether this service was counseling or other service that is actually related to the provision of financial services.

The bottom line: Now that you know the strengths and weaknesses of the service test, you can critically review CRA service tests and comment on CRA exams. Just like the lending test and investment test, the CRA service test is more likely to be rigorous when the public is involved.

Josh Silver is the Development manager at Manna, Inc. Prior to his time at Manna, Josh served as the vice president of research & policy at NCRC. Josh is an avid District sports fan and loves spending time with his daughter.

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One thought on “The CRA Service Test: Are Bank Branches Serving Low- and Moderate-Income Customers?”

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