Community Reinvestment Act - Key Points, Regulatory Requirements & Enforcement

• By: Staff Editor
• Date: July 11, 2009

The Community Reinvestment Act of 1977 (CRA) provides a framework for financial institutions, state and local governments, and community organizations to jointly promote banking services to all members of a community. The Community Reinvestment Act is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound operations. 

In a nutshell, the CRA

• Prohibits redlining (denying or increasing the cost of banking to residents of racially defined neighborhoods), and
• Encourages efforts to meet the credit needs of all community members especially from the lower economic stratum.

Key Points

• The Community Reinvestment Act was enacted by the Congress in 1977 and is implemented by Regulations 12 CFR parts 25, 228, 345, and 563e.
• The CRA requires periodical evaluation of each insured depository institution's record, in helping meet the credit needs of its entire community.
• That record is taken into account in considering an institution's application for deposit facilities, including mergers and acquisitions.
• CRA examinations are conducted by the federal agencies that are responsible for supervising depository institutions: the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS).

Enforcement:

• The Community Reinvestment Act of 1977 seeks to address discrimination in loans made to individuals and businesses from low and moderate-income neighborhoods.
• The Act mandates that all banking institutions that receive FDIC insurance be evaluated by Federal banking agencies to determine if the bank offers credit (in a manner consistent with safe and sound operation as per Section 802(b) and Section 804(1)) .
• The law directs that the evaluation process should accommodate the situation and context of each individual institution.
• Federal regulations dictate agency conduct in evaluating a bank's compliance in five performance areas, comprising twelve assessment factors. This examination culminates in a rating and a written report that becomes part of the supervisory record for that bank.
• The law, however, emphasizes that an institution's CRA activities should be undertaken in a safe and sound manner, and does not require institutions to make high-risk loans that may bring losses to the institution.
• An institution's CRA compliance record is taken into account by the banking regulatory agencies when the institution seeks to expand through merger, acquisition or branching.
• The law does not mandate any other penalties for non-compliance with the CRA.

Regulations

• The same Federal banking agencies that are responsible for supervising depository institutions are also the agencies that conduct examinations for CRA compliance. These agencies are the

1. Federal Reserve System (FRB),
2. The Federal Deposit Insurance Corporation (FDIC),
3. The Office of the Comptroller of the Currency (OCC), and
4. The Office of Thrift Supervision (OTS).

• Implementation of the CRA by these financial supervisory agencies is enacted by Title 12 of the Code of Federal Regulations (CFR); Parts 25, 228, 345, and 563e with the addition of Part 203 as it relates to sections of the Home Mortgage Disclosure Act (HMDA).
• The Federal Financial Institutions Examination Council (FFIEC) coordinates inter-agency information about the CRA.
• In addition to the regulatory framework in place, each federal financial supervisory agency's Inspector General, performs regular audits on any regulatory changes made to see if the intended goals are actually being fulfilled.

Major Legislative Changes

Sources:

http://www.federalreserve.gov/communitydev/cra_about.htm
http://www.ffiec.gov/CRA/
http://www.ffiec.gov/CRA/history.htm
http://www.occ.gov/topics/compliance-bsa/cra/index-cra.html
http://en.wikipedia.org/wiki/Community_Reinvestment_Act