Report: Bank regulators need to plug loopholes in Community Reinvestment Act exams

Regulators should plug loopholes and inconsistencies in the Community Reinvestment Act (CRA) exams used to measure how well banks meet the needs of their communities, according to a new report from the National Community Reinvestment Coalition (NCRC).

The NCRC study, based on government exams of the nation’s 50 biggest banks, found some banks get credit for investments outside of their assessment areas (AAs) even when those banks underinvested in the areas they are supposed to serve first. Meanwhile, other banks get little or no credit outside of assessment areas.

The report found that all but one of the nation’s top 50 banks in terms of asset size passed its most recent CRA exam. Thirty percent received the highest possible rating of “Outstanding” and almost 70% received “Satisfactory.” 

“With a nearly 100% pass rate, clearly the nation’s banks have figured out how to fulfill their CRA obligations,” said NCRC CEO Jesse Van Tol. “While some have suggested relaxing the rules around investments outside of assessment areas, our report suggests there is a need to strengthen those rules, while making them more consistent. The regulatory agencies need to plug loopholes that allow some banks to game the system, while others get no credit for the same activities. Our report also demonstrates a dire need for better data around what types of community investments are occurring, and where. Without clearer rules and better data, exams will continue to rate banks inconsistently to the detriment of both banks and communities.”

AAs are geographical areas on CRA exams where banks have their branches. Regulators give some banks credit – but not all – for investing outside of their AAs. This has led some stakeholders to suggest a complete overhaul of the AA procedures that would make it even easier for banks to receive credit for investments in areas outside of their branch locations. NCRC recommends a more incremental approach due to the already high ratings on CRA exams.

The report contends that by improving data collection, the federal regulatory agencies can evaluate whether AAs receive sufficient community development lending and investments at regular intervals in between CRA exams. With this information, they could then pre-qualify banks for community development financing outside of their AAs, particularly in underserved and distressed areas. The current lack of data makes it easy for some banks to convince compliant examiners that they have served their AAs and then make investments outside of their AAs that are not responsive to community needs.

NCRC also recommends that the agencies develop an annual list of underserved counties that banks can serve outside of their AAs. Additional recommendations include more timely CRA exams, combat grade inflation on the investment portion of the CRA exam, reform AA procedures for retail and affiliate lending and better presentation of community development lending and investing so an exam reader can easily identify these figures and compare banks’ performance in meeting community needs. 

“If the agencies had taken the approach recommended by NCRC, they would have found more substantive and effective solutions to impediments to community development financing,” said NCRC Senior Advisor Josh Silver, the author of the new report. “In fact, they may have found that if anything, the current procedures may be too lax and leading to abuses and gaming, particularly on the investment test on CRA exams. The question going forward is whether the agencies will engage in careful research and data analysis when developing CRA regulatory reform proposals. This would be the most effective way for preserving and improving the success of CRA in combating redlining and promoting reinvestment in low- and moderate-income neighborhoods. While many banks take CRA seriously and make significant investments in communities, the existing exam regime contains loopholes that will continue to be exploited if regulators do not plug them.”

Read the full report:

An evaluation of assessment areas and community development financing: Implications for CRA reform


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Redlining and Neighborhood Health

Before the pandemic devastated minority communities, banks and government officials starved them of capital.

Lower-income and minority neighborhoods that were intentionally cut off from lending and investment decades ago today suffer not only from reduced wealth and greater poverty, but from lower life expectancy and higher prevalence of chronic diseases that are risk factors for poor outcomes from COVID-19, a new study shows.

The new study, from the National Community Reinvestment Coalition (NCRC) with researchers from the University of Wisconsin–Milwaukee Joseph J. Zilber School of Public Health and the University of Richmond’s Digital Scholarship Lab, compared 1930’s maps of government-sanctioned lending discrimination zones with current census and public health data.

Table of Content

  • Executive Summary
  • Introduction
  • Redlining, the HOLC Maps and Segregation
  • Segregation, Public Health and COVID-19
  • Methods
  • Results
  • Discussion
  • Conclusion and Policy Recommendations
  • Citations
  • Appendix

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