Established in 1934, the Federal Housing Administration (FHA) was designed to revive the struggling home construction industry and set lending standards. However, these standards also included discriminatory practices such as redlining, which significantly hindered wealth-building opportunities for people of color.

In response, the Community Reinvestment Act was introduced around 40 years later to address and rectify the damage caused by redlining and promote fair lending practices. This important legislation is part of a broader set of laws aimed at advancing fair housing.

What is the Community Reinvestment Act?

Enacted by Congress in 1977, the Community Reinvestment Act (CRA) was designed to tackle the issue of redlining and encourage banks and thrifts to meet the borrowing needs of the communities where they operate, including low- and moderate-income neighborhoods. The CRA was updated in 2023 to better reflect the current banking environment.

Prior to the CRA, many banks were reluctant to provide loans to individuals with low or moderate incomes and often practiced redlining, denying loans to people and businesses in certain areas. This practice left many inner-city neighborhoods without access to capital for wealth building and community improvements.

The CRA does not mandate that banks lend to borrowers who cannot afford credit; instead, it incentivizes banks to expand credit opportunities in underserved areas. The law also does not impose specific lending quotas or requirements for originating a certain number of loans in any given area.

How the Community Reinvestment Act works

The Community Reinvestment Act (CRA) primarily applies to FDIC-insured institutions, which are categorized as large, intermediate, or small banks based on their asset size, as well as limited-purpose banks. It also covers banks within the Federal Reserve System and thrifts.

Under the CRA, federal regulators assess whether banks are effectively addressing the needs of low- and moderate-income borrowers through “community development activities.” These evaluations are generally conducted every three years, though smaller banks may be reviewed less frequently. The results of these assessments influence decisions related to branch openings, mergers and acquisitions, and charter applications.

The agencies responsible for overseeing CRA evaluations are:

  • The Board of Governors of the Federal Reserve System
  • The Federal Deposit Insurance Corporation (FDIC)
  • The Office of the Comptroller of the Currency (OCC)

How CRA ratings work

The Federal Reserve, FDIC, and OCC evaluate banks and provide a written performance assessment, assigning a CRA rating of 1 to 4:

  1. Outstanding
  2. Satisfactory
  3. Needs to Improve
  4. Substantial Noncompliance

How does the CRA apply to me?

The CRA aims to support low- and moderate-income communities, which are defined as follows:

  • Low-income: Median household income is below 50% of the area median income (AMI) for the metro area or the state AMI if outside a metro area.
  • Moderate-income: Median household income is between 50% and 80% of the AMI for the metro area or the state AMI if outside a metro area.

AMIs are determined through Census data.

Banks engage in CRA activities in various ways, from providing mortgages or other loans to individuals in these income brackets to financing projects such as affordable housing developments or mixed-use properties.

In Conclusion

If you’re planning to buy a home or invest in property, the Community Reinvestment Act might benefit you indirectly. Speak with your mortgage loan officer to see if you qualify as a low- or moderate-income borrower and to learn about the loan types you might be eligible for.