American banking has a dark history of discrimination against blacks, immigrants and other minorities. The Community Reinvestment Act (CRA) was passed in 1977 to end that discrimination, known as redlining. But discrimination is still a problem in lending across the nation.
Banks earn profits by investing the money deposited in them by individuals, businesses and governments. Historically, most of those profits came from interest paid on mortgage and small business loans. CRA requires banks to meet the credit needs of the communities where they take deposits, including low- and moderate-income (LMI) neighborhoods. The law requires banks to reinvest deposits back into their communities in ways that are responsive to the community’s needs.
Government agencies that regulate banks periodically review bank compliance with CRA rules. In recent years, nearly all banks have earned passing grades from the government. That’s not new to the Trump Administration. Nearly all banks passed under President Obama too.
In rare cases, when banks fail their CRA exams, regulators may stop the banks from growing or entering new markets until they address their CRA problems.
Regulators also look closely at CRA performance when banks want to buy or merge with another bank.
Community benefits agreements (CBAs) are a way for banks to spell out, in writing, how they will satisfy CRA requirements when they merge. The agreements are between banks and community groups.
CBAs open doors for LMI communities and communities of color, and they increase lending, investments and philanthropy for underserved borrowers and neighborhoods compared to prior practices. CBAs boost financial support for small businesses and a variety of other community development initiatives.
Since 2016, the National Community Reinvestment Coalition (NCRC) has facilitated the creation of CBAs worth nearly $150 billion with 10 banking groups. The largest-to-date plan, finalized in July 2019, was a three-year, $60 billion agreement with BB&T Corporation and SunTrust Banks, Inc., for the region served by Truist Financial Corporation, the combined company to be created through the proposed merger of the two banks. Truist committed $31 billion towards specific home purchase lending to people of color and LMI communities. It dedicated $7.8 billion in lending to small businesses with annual revenue of less than $1 million, $17.2 billion to community development loans and $3.48 billion to community development investments. Truist also pledged $120 million for CRA-qualified grants.
In addition to the monetary obligations of the agreement, Truist pledged to open 15 new branches in LMI neighborhoods and communities of color and to create a Signature Capacity Building program with a focus on racial equity and economic mobility. Truist also agreed to design a lending strategy to impact rural communities and strive to spend 10% of their third-party vendor spending on diverse suppliers. Lastly, Truist committed to creating a Community Advisory Board in collaboration with NCRC.
When it brings banking and community group leaders together to negotiate a CBA, NCRC plays the role of facilitator and negotiator on behalf of community groups that are members of NCRC. Our first step is to analyze local lending and community development data and review it with NCRC member organizations to identify gaps in services and how a bank merger would affect LMI constituents. We also compare community development loans and investments (CDLI) to banks of a similar size. Due to relaxed enforcement of CRA rules, many banking institutions have fallen behind in reaching the appropriate CDLI level.
NCRC also looks at the Herfindahl-Hirschman Index (HHI), which measures how concentrated a banking market is. Federal regulators use it to evaluate whether a merger will create anti-competitive effects. This information is important in ensuring that merger agreements contain a forward-thinking commitment to the community.
With data in hand, NCRC seeks commitments from the banks to participate in a series of local market meetings, where NCRC members discuss their experiences and views on their community needs and propose improvements to the bank’s community reinvestment plans.
CBAs depend on collaboration between banks and community organizations. That starts with dialog and negotiation on the scope and scale of a bank’s CBA commitment, and it continues after an agreement is signed through community councils set up to advise on implementation and monitoring of the agreement.
The 10 completed CBAs are:
- KeyBank in March 2016 for $16.5 billion.
- Huntington Bancshares in May 2016 for $16.1 billion.
- Fifth Third Bank in November 2016 for $30 billion.
- First Financial Bank in October 2017 for $1.7 billion.
- Santander Bank in November 2017 for $11 billion.
- IBERIABANK in November 2017 for $6.7 billion.
- First Tennessee Bank in April 2018 for $4 billion.
- Wells Fargo & Company (DC) in October 2018 for $1.6 billion
- Fifth Third updated agreement in October 2018 for an additional $2 billion.
- Truist in July 2019 for $60 billion.
Alexandria Robinson was a 2019 summer intern at NCRC.