The National Community Reinvestment Coalition (NCRC) recently released an exciting report about the effectiveness of the Community Reinvestment Act (CRA), a government program frequently used to encourage private investment in neglected neighborhoods.
In 1977, Congress passed the CRA in an attempt to increase the number and amount of loans flowing to neighborhoods that had been historically neglected by financial institutions.
What is the CRA?
The CRA was written after several decades of growing pressure for Congress to reverse damage done by the legalized racism of the mid-20th century. Between 1934 and 1968, the Federal Housing Authority effectively required that private mortgage institutions avoid lending to non-white communities by refusing to back loans that did not comply with their rules.
In the practice known as “redlining,” detailed city maps were distributed by the Authority to mortgage companies with neighborhoods color-coded to determine their desirability for lending.
The Whiter and more homogenous the neighborhoods were, the higher their ranking would be. The opposite held true as well: neighborhoods with Black, Latino, Jewish, and Asian-American populations were surrounded by red lines to show their danger because of, in the Federal Housing Authority’s words, the “infiltration of a lower grade population.”
This policy and others like it are in large part responsible for our present day racial wealth gap.
The CRA attempts to correct this by monitoring the volume of loans banks make to low- and moderate-income communities, as well as the number of branches and ATMs they have in these areas.
Financial institutions that meet the targets are more likely to be approved to open new branches and merge with other banks, whereas noncompliant institutions may be denied or required to make a plan for investment with community groups before being given approval.
Pitfalls and Accomplishments
It is, unfortunately, a colorblind policy. As the report points out, efforts to combat segregation without acknowledging the existence of race will have inherent blind spots. (For instance, as last week’s blog noted, higher income African-Americans are more likely than lower income Whites to receive predatory mortgages.)
The CRA has, however, contributed an enormous amount to community development work. Since 1996, banks covered by the CRA have issued over half a million community development loans, collectively worth $.8 trillion. That money goes to affordable housing and economic development in targeted communities.
CRA institutions have also been an important source of mortgages for moderate- and low-income families. From 2007 to 2008, as the housing market was collapsing and many institutions stopped lending, CRA banks issued almost 2 million prime loans (that’s the good kind) to targeted borrowers.
While some have claimed that the CRA is responsible for the crash because it forces banks to lend to groups they would otherwise avoid, the data tell a different story.
Researchers found that mortgages from CRA-exempt institutions, mainly mortgage companies like Quicken Loans who do not take public deposits, were twice as likely to end up in foreclosure. In other words, expanding rather than limiting the CRA may be the best protection against future crises.
The CRA, says NCRC’s report, certainly has room for improvements in areas such as the consideration of race in lending and the expansion of its coverage to independent mortgage institutions. However, the report ultimately hails it as a model for reinvestment in neglected communities.
At a time when our country is struggling to respond to its historical and present segregation, the CRA offers concrete evidence of the impact that targeted legislation can achieve.