The Efficacy of CRA

10 min read

A survey of industry responses

The Community Reinvestment Act – CRA – was enacted in 1977 as a means of encouraging commercial banks and other consumer financial institutions to meet the needs of borrowers throughout the communities in which they operate. CRA has been credited with everything from ending the practice of discriminatory redlining to creating vibrant inner city neighborhoods, and blamed for everything from forcing banks to make unwise or over-leveraged loans to helping foment the 2008 sub-prime mortgage crisis.

The landmark legislation was conceived, in fact, to stamp out redlining by banks and financial institutions: the odious practice of separating out certain neighborhoods or geographical areas where minorities and lower-income individuals who were not considered credit-worthy, lived and did business. It is part of the same social and regulatory movement that began with the 1964 Civil Rights Act, and followed the passage of the 1968 Fair Housing Act, the anti-discrimination against disability Rehabilitation Act of 1973, the Housing and Community Development Act of 1974 and the Age Discrimination Act of 1975, as well as a string of executive orders. CRA itself has been subject to a number of updates and refinements over the years.

CRA directs the appropriate regulatory agency – the Office of the Comptroller of the Currency (OCC), the Federal Reserve Board of Governors and the Federal Deposit Insurance Corporation (FDIC) – to assess each financial institution under its jurisdiction as to how well and completely that institution is fulfilling its obligation to its communities’ credit needs. This evaluation is then used in considering requests for bank charters, mergers, acquisitions, and new branches. “Further,” according to the OCC, “CRA provides a framework for depository institutions and community organizations to work together to promote the availability of credit and other banking services in low- and moderate-income communities and for low- and moderate-income individuals.”

Does It Work?
To get a sense of the actual effect of the law, we reached out to people from various aspects of the affordable housing industry.

“CRA plays a valuable role in creating affordable housing and bringing capital to underserved markets,” states Marianne Votta, a Senior Vice President at Bank of America in Boston, who serves as the asset management executive of the bank’s Tax Credit Investment Group. “We’re here to help our clients do business. A lot of them are developers, and by following them, we’ve had great financial and ‘feel good’ success.” She says that Low Income Housing Tax Credits (LIHTC), New Markets and Historic Preservation deals “have all worked very well. Tax credits have done a great job in revitalizing inner cities at a time when there weren’t many other subsidies. And CRA is a major driver of why financial institutions are in this space.”

Robert “Rob” Likes, National Manager of Community Development, Lending and Investment for KeyBank, headquartered in Cleveland, Ohio, notes that Key’s CRA-qualified loans and investments have been among the lowest risk and best performing. “Part of our culture is to help our clients and communities thrive,” he says. “We are committed to safe, decent affordable rental housing in the communities which we serve. We have an entire dedicated platform that I run. We actually go out and originate loans, source them and manage them until they’re paid off. We have a very large tax credit portfolio.”

This success also shows that despite criticism from certain circles, CRA does not foster bad or risky loans through mandating investment in economically weak or deprived areas. “Clearly, there’s nothing that says a bank should make a bad loan,” says Likes. “We’re in low-income and affordable housing and community-driven development, and we do it with safe loans with good returns.”

KeyBank has had eight straight “Outstanding” CRA ratings, which are “a point of pride at the bank,” according to Senior Vice President and Director of Community Development Norman “Norm” Bliss. “It is part of our DNA: an overriding philosophy of commitment to the communities we serve. And the fact that CRA has required us as bankers to take a look at what we’re doing has changed the industry dynamic. Billions and billions of dollars have been invested in these underserved neighborhoods. In fact, I would encourage CRA to get involved [through appropriate legislation] in other kinds of financial institutions. It would be wonderful for everyone to get involved in these communities.”

“Performance Context”
Though Barry Wides, Deputy Comptroller for Community Affairs in the Office of the Comptroller of the Currency, says, “We want all banks to achieve their CRA objectives and we offer to meet with them to discuss CRA performance and offer training as well.” He points out that a “Satisfactory” rating, which more than 85% of institutions achieve, is perfectly, well, satisfactory. As the program has developed, separate categories and criteria have been established for small, medium, and large (by assets) financial institutions.

Wides concedes that some small banks might consider CRA a burden, but says, “Most banks have incorporated CRA into their business strategies. If you’re a community bank lender, you have most of the guidance you need. We’re there to help these banks understand heightened CRA expectations as they grow.” Among the services offered are training sessions that help with community development goals. The assessment criteria are purposely broad and, as Wides notes, “We don’t have numeric benchmarks. We’re not a ‘Gotcha’-type regulator. We give banks a lot of flexibility and latitude in undertaking activities that have a significant qualitative input; that is, we take ‘Performance Context’ into account.”

This is a critical concept. As Bliss explains it, “Through Performance Context, the regulation allows us to tell our own story. When you evaluate us, you consider: Who are we? What is our business focus? And what community interests do we serve?”

And CRA regulations allow institutions of any size the option of submitting a strategic plan, which the regulator will comment on and approve, if appropriate. When the plan has been put into place, it will be evaluated and a rating issued.

The CRA Effect
The take-away seems to be that though CRA imposes certain requirements and responsibilities on lending institutions, their effect has been to expand business.

From the perspective of the nonprofit affordable housing developer, the response is equally positive.

“Overall, I think the benefit has been significant,” says Sharon Geno, Senior Vice President of Legal Affairs for Volunteers of America, a 120-year-old institution that is the largest nonprofit affordable housing provider in the country. Prior to VOA, Geno was a partner at Ballard Spahr law firm, where she specialized in housing, governmental, and community development issues. “I’m like a kid in a candy store here,” she says, despite the longer hours and lower compensation.

Ronne Thielen, Executive Vice President of R4 Capital, a national affordable housing syndicator in

Newport Beach, California, agrees, “CRA has been an extremely beneficial program. It brings on competition and makes us compete with big banks. In California, there have been a lot of tax credit and bond deals and it’s great to have CRA for the more remote areas. We’ve spent a lot of time going out to smaller and regional banks.

“If a bank says to us, ‘I only need CRA credit for Fresno,’ we can say to the bank, ‘Okay, we’ll give you a deal only for Fresno, and we can give you a letter that the regulatory agency will recognize and accept.’ That has worked great to bring in smaller banks that can’t do it on their own.”

The effect on tax credits has been “really significant over time,” says Geno. “Where banks need LIHTCs, they are highly motivated and there has been a lot of overbidding – well over a dollar in California. It’s a less risky vehicle and they have the tax credits: a win-win. On the flip side, areas that are not CRA hotbeds – not driven by bank expansion plans – lose out.”

On the Contrary
A contrarian view to the generally positive reaction is voiced by Edward J. Pinto, Resident Fellow at the

American Enterprise Institute and Co-director of AEI’s International Center on Housing Risk. “CRA has a couple of general problems,” he states. “If you rate lenders compared to their peers, you end up chasing your tail.” And he challenges the idea that CRA requirements can always be done according to safe and sound lending practices. “It’s very easy to take undue risks with bad consequences. Imposing CRA standards means more leverage and looser lending.”

And he does tie the 2008 financial crisis in part to CRA. “CRA was the training wheels for sub-prime,” Pinto contends. “Every lending bank started with a large CRA involvement, and when banks were looking for other banks to acquire, they looked for CRA experience. There are a lot of unintended consequences that come out of this. Combine it with affordable housing goals and all of the push by government policymakers, pushing leverage, and you have to ask the question: Is leverage the problem, rather than the solution?”

The Digital Age
Given that CRA was conceived and instituted before the advent of the digital age, there has been criticism that Internet-based institutions without physical branches or local footprints are not subject to the same scrutiny as traditional banks. How does one define “community” in a virtual world?

“I would like to see CRA reinterpreted so that as the world changes, various solutions can be incentivized through CRA,” says Geno of VOA.

“I believe there will be a need at some point to look at CRA and reassess,” KeyBank’s Likes comments.

Wides agrees, “If a bank has been responsive to the community development needs in its assessment area, it can receive CRA consideration for community development activities in the broader statewide or regional areas that includes the bank’s assessment area.”

Disparate Impact
Then there is the question of whether CRA dovetails with last year’s Supreme Court decision on Disparate Impact and Inclusive Communities (See Wrestling With Disparate Impact, p. 14) or is in conflict with it and HUD’s subsequent Affirmatively Further Fair Housing (AFFH) initiative, as some critics have suggested. In other words: Does CRA’s mandate for banks to invest in economically disadvantaged communities take away from lower-income individuals’ opportunities to relocate to so-called “high opportunity” neighborhoods?

“It remains to be seen,” says Geno. “My own personal concept is that moving people around is unfair to communities of color. They’ve built relationships and want to be beneficiaries of these investments that they’ve waited for so long.”

Votta “can argue it both ways. I think there is a need [for AFFH], but I worry about taking money out of traditionally underserved or underinvested areas.”

Likes thinks the court decision and CRA “go hand-in-hand for the most part,” and Thielen “sees no conflict.”

Nor does Wides. “CRA is very accommodating of the principles surrounding AFFH. CRA does not look at where the affordable housing is, as long as it’s serving those who need it.”

Bliss sees it as “harmony among higher-order concepts in this industry. Today, fair lending and CRA are not two sides of the same coin; they are the same side. There is nonpartisan support; it helps low- and moderate-income constituents and seniors; for-profit and nonprofit developers and is a direct offset on our federal tax liability. That’s an ecosystem that works for everyone.”