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Modernizing the Community Reinvestment Act—a proposed new rule



  • The Community Reinvestment Act (CRA), a 1977 law designed to promote financial inclusion by requiring banks to provide services to low- and middle-income communities, has not been significantly updated in decades and in particular does not support electronic banking services.
  • Supervised by the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency; while agency reform efforts have historically been hampered by a lack of coordinated efforts, they eventually resulted in a joint reform proposal.
  • The proposed modernized CRA would finally grant banks credit for online banking, stratify the assessment process based on a bank’s size and activity, better define eligible activities, and significantly increase data collection and reporting of certain banks.


The Community Reinvestment Act (CRA) was passed by Congress in 1977 to prevent banks from denying loans or general banking services to people in low-income areas, a practice known as “redlining.” The CRA is therefore the foundation for financial inclusion initiatives that underpin the provision of banking services to segments of the population that banks might otherwise deem unprofitable. The ARC architecture is also extremely important for banks, as performing well in the annual assessment leads to rewards in the form of “points” that banks can “spend” on desirable activities such as issuing new charters, opening new branches, relocating branches, consolidating, and engaging in mergers and acquisitions. For more information on the CRA, see the introduction to the American Action Forum here.

Three financial regulators oversee implementation and enforce compliance with the CRA: the Federal Reserve (Fed), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC). ARC compliance applies to all FDIC-insured depository institutions, including national bank holding companies, savings associations, and state-chartered banks. Any (effective) reform of the ARC requires at least the implicit buy-in of the three agencies; a a major reform effort in 2019, led by the OCC under then-chairman Joseph Otting and joined by the FDIC, was stalled by a lack of Fed support. the work by the agencies on this proposal does not appear to have been wasted, however, since for the first time since 1977 the three regulators issued a proposed regulations which modernizes the CRA, adapting the statute to an era of mobile and online banking, improving the transparency of the rating process and, most importantly, updating a bank’s “rating area” to include more than just physical geography around brick and mortar branches.

The need for reform

Despite the importance of the assessment, the ARC has not been significantly updated since its implementation and does not reflect the development of online banking at all (as written at Originally, the CRA didn’t even consider between states banking). As banks expand their range of internet banking services, CRA is becoming more redundant – and this redundancy is actually hurting some banks, like Ally, that operate solely online. Even today, banks are judged on the services they provide to vulnerable populations within a given “assessment zone,” the geographic region around a physical branch.

Under the current implementation, CRA compliance assessments rely on repairers having physical physical locations as a link. Specifically, an assessment domain is considered be the “geographical areas where the bank has its head office, branches, ATMs and the surrounding geographical areas in which the bank originated or purchased the majority of its loans”. By this definition, the assessment excludes lending that occurs online, which excludes banks that conduct lending practices partially or fully online. For example, Ally, the only fully online bank in the United States, is headquartered in Detroit, but receives No credit for a fair loan as it only works online. In addition to not giving banks the credit or rating they deserve, this misdefinition of the rating area may force banks to reduce their services to certain communities because they know it will make no difference when CRA compliance review.

CRA regulators currently don’t look at the percentage of loans a bank makes to low- or middle-income customers, but rather the raw numbers – how many and how much. This measure essentially shifts the goals of banks based on their size, as it is almost impossible to compare a global bank to a community bank when it comes to the number and dollar value of loans they issue.

The evaluation mechanism is also curiously ill-defined. Based on interviews and no discernable metrics, the banks have no idea of ​​the rating process, or the reason for receiving a particular rating. Even the ratings themselves (“excellent”, “substantial”) are not defined. The assessment process itself is costly and time-consuming, and this compliance burden hits smaller banks harder and acts as a deterrent to new market entrants.

The proposed rule

The joint proposal identifies five “key elements» that the regulatory agencies put forward as drivers of modernization:

  • Expand access to credit, investment, and basic banking services in low- and middle-income communities.
  • Adapt to changes in the banking industry, including internet and mobile banking.
  • Provide more clarity, consistency and transparency.
  • Tailor ARC assessments and data collection to the size and type of bank.
  • Maintain a unified approach.

If implemented as proposed, the updated CRA update the assessment domains approach, the bank’s assessment framework, and requirements for record keeping, data collection, and disclosure.

Update the assessment domains approach

While the proposal retains the traditional focus on geographic rating areas around physical bank branches, federal regulators would for the first time require, in addition, banks to be rated in areas where they offer a concentration of mortgage lending. and small businesses. loans. A large bank, for example, would delineate retail loan assessment zones where it has an annual lending volume of at least 100 home mortgages or at least 250 small business loans in a geographic area for two consecutive years. The proposal also includes nationwide assessment that would allow banks to receive ARC credit for any qualifying community development activity, regardless of location, “although the focus is on performance in facility-based assessment areas”. The regulators also propose to maintain an illustrative and non-exhaustive list of eligible activities and, in doing so, to better define what counts as eligible activities, including the provision of affordable housing and investments in climate resilience.

Update the bank assessment framework

Under this new proposal, federal regulators would for the first time stratify CRA-targeted depository institutions by size and business model. Existing and new tests will be classified into four new groups – a retail loan test, a retail services and products test, a community development finance test and a community development services test. Large banks will be assessed on all four tests. Intermediary banks would be assessed only against the retail lending test and the pre-existing community development test. Smaller banks would be assessed solely on the pre-existing community development test.

In addition, federal regulators propose to provide banks with significantly greater transparency and consistency in the process of assigning ARC ratings after assessment. Performance scores would be obtained on measurement-based tests using a series of weighted averages. Regulators have warned, however, that the new proposal will likely be “raise the barfor outstanding and satisfactory grades, suggesting that the new tests are designed to be more difficult than the existing framework.

Update record keeping, data collection and disclosure requirements

Data standards would be revised to improve the quality of the assessment process through a set of standardized benchmarks. In addition to improving the quality and consistency of existing data requirements, the agencies propose that large banks will need to collect, retain and report additional data, including large and costly data requests, including on usage mobile and online banking services, as well as requiring these banks to disclose information on the race and ethnicity of borrowers.


Significant research and years of development have resulted in a proposal for ARC that finally reflects the reality of modern banking. While maintaining a focus on physical bank branches in underserved neighborhoods that are the heart of ARC, federal regulators are proposing to allow banks to additionally receive credit for business in areas in which they operate. and nationally. The proposal will transform the opaque and erratic assessment process into a consistent and repeatable metrics-based approach that will be tailored to the size and activities of the banks it covers. The new proposal is the weakest in suggested new data collection and disclosure requirements that will impose significant costs, particularly on larger banks, as it is not clear that this increased compliance burden will necessarily produce better outcomes for underserved communities. At the very least, however, the efforts of regulators will bring ARC into the 21st century, incentivizing banks to lend to communities that need it most.