Under a 1977 law called the Community Reinvestment Act (“CRA”), federal regulators must regularly grade FDIC-insured banks on their efforts to invest in low-income neighborhoods within their service areas. The CRA also requires regulators to consider these grades when banks seek federal permission to open new branches and merge with other banks.
This is a critical mechanism not only for preventing modern lending discrimination, but also for combatting the long-term effects of historical redlining. Since poor CRA grades can hinder banks as they strive to expand, the CRA directly incentivizes private financial institutions to extend credit to historically underserved communities. As a result, the law generates hundreds of billions of dollars in annual lending for community development projects, like affordable housing, in low-income areas.
While the CRA applies to all FDIC-insured banks, it subjects them to three different levels of review based on size. Under current rules, the so-called “large bank” review process, which is by far the most rigorous, applies to institutions with more than $1.6 billion in assets. Over 500 total banks meet that threshold.
However, the federal government is now proposing to drastically shrink the total number of banks subject to each of the two highest levels of CRA review. According to reporting, if the rule is allowed to take effect, 800 total banks would drop to a lower compliance tier and only 86 total banks across the country—those with over $10 billion in assets—would be considered large banks.
Removing strict CRA oversight for hundreds of big banks will weaken their incentive to finance community development, significantly reducing the flow of funding to critical housing and revitalization projects in underserved neighborhoods across the country.
For more information, see the National Community Reinvestment Coalition’s resource on the proposal.