What your bank’s CRA rating says about their lending practices
A designation applying only to banks, an outstanding CRA rating is the highest achievable evaluation earned from the Federal Financial Institutions Examination Council (FFIEC), a body of five regulating institutions in the banking industry.
CRA stands for Community Reinvestment Act, enacted in 1977 as a response to redlining, where banks would determine certain neighborhoods (usually occupied by people of color) to be undesirable to make loans in, thereby cutting off capital to these communities. The act was created to incentivize banking institutions to both provide for their surrounding communities, including those low-and-moderate-income neighborhoods, and to do so with secure and responsible banking practices. Banks who have achieved an Outstanding CRA rating are not only extremely efficient and reliable banks, but also actively seek to provide for all individuals in their neighboring communities.
The CRA defines underserved investment areas, which typically lack banking options. Banks are required to do a certain amount of lending in these areas, as well as lending to people with different incomes and businesses of varying size. Banks with an Outstanding CRA rating not only meet these investment and lending requirements but exceed them. “Outstanding” banks actively attempt to make credit available to those underserved populations and provide personal service to individuals in their community, as well as invest significantly in community development projects.
The Community Reinvestment Act mandates that every bank’s CRA evaluation is available to the public, making the lending practices of banks more transparent and more easily understandable to those who may not know how to interpret banking statistics. Anyone can look up a bank’s CRA rating on FDIC.gov and have at least an indication of whether they’re serving all parts of the communities in which they’re located.
The tiered rating system is used for every bank, with considerations made for banks with fewer assets or limited focus. Moderate and large banks are regulated more strictly, as they have more flexibility with lending that comes with having more capital.
Some would argue that CRA regulation limits banks, or that forcing banks to make loans in low- and moderate-income neighborhoods doesn’t necessary guarantee that these loans are helpful. However, without some regulations ensuring mega banks make significant loans in underinvested areas, they would be made far less often.
Under the current national administration, the CRA is in danger of being deregulated, which would make it much harder for people in low-income neighborhoods to receive. Pressure from bank lobbyists to “modernize" the CRA, such as their suggestion to give CRA credit to banks for “financing infrastructure projects and teaching people how to handle money, not just lending to poor people,” is dangerous, because this kind of lending is vital to slowing growing wealth inequality. The CRA makes sure that banks are incentivized to get capital and loans to those who need it most, which is why the Community Reinvestment Act, and your bank’s CRA rating, are so important.
Learn more at https://www.ffiec.gov/cra/, or look up your bank’s CRA rating here.