By Josh Silver, Vice President of Research and Policy
October 13, 2008

Cities can use the Community Reinvestment Act (CRA) as a powerful tool to promote economic development and affordable housing in their neighborhoods. CRA can also assist cities in mitigating the effects of the current foreclosure crisis.

Passed in 1977, CRA places an affirmative obligation on banks to serve credit needs consistent with safety and soundness. Federal agencies rate banks based on the quantity and quality of their loans, investments, and services offered to low- and moderate-income communities. Federal agencies also consider CRA performance when reviewing bank merger applications. CRA thus provides a powerful incentive for banks to respond to credit needs and work with a variety of stakeholders including cities in financing affordable housing, economic development, and community facilities.

Research has demonstrated the overwhelming benefits of CRA. The Federal Reserve, the Treasury Department, and Harvard University have found that CRA has encouraged banks to increase home lending to minorities and low- and moderate-income populations. Using publicly available data, NCRC concluded that banks made $513 billion in small business loans in low- and moderate-income neighborhoods from 1996 through 2006. Likewise, banks issued $344 billion in CRA-related community development loans in that same ten year time period.

Considerable evidence suggests that CRA has been effective in deterring banks from the riskiest loans. The Federal Reserve reports that 34.3 percent of loans issued by independent mortgage companies not covered by CRA were high-cost loans in 2005. In contrast, only 5.1 percent of bank loans issued in areas covered by their CRA exams were high-cost in that year. Expressed another way, banks have issued only about one quarter of the high-cost loans in recent years.

NCRC has assisted a number of cities in using CRA to leverage responsible lending for their neighborhoods. The City of Philadelphia requires banks that receive municipal deposits to issue CRA plans detailing the number of loans, investments, and services they will make to minority and low- and moderate-income communities. Philadelphia also contracted with NCRC to conduct two studies assessing the CRA and fair lending performance of banks receiving municipal deposits. NCRC’s studies documented that Philadelphia’s approach resulted in improvement in the banks’ CRA performance. Similar to Philadelphia, the city of Cleveland assesses banks’ CRA performance as one of the factors in awarding municipal deposits to banks. Cleveland has also negotiated hundreds of millions of dollars in CRA agreements, which commit banks to offer specified levels of loans, investments, and branches in working class and minority neighborhoods.

States along the west coast provide additional examples of collaboration between cities and banks in the context of CRA. The San Diego Reinvestment Task Force, a quasi public body with elected officials on their board, has negotiated CRA agreements with 10 major lenders that generated $19 billion in lending and investing in city neighborhoods from 1993 through 2005. The Task Force also spearheaded the creation of a Community Development Financial Institution (CDFI) called the Neighborhood National Bank that was financed by partner banks. In San Francisco, collaboration among the city, the San Francisco Federal Reserve Bank, nonprofit agencies, and lending institutions resulted in the creation of basic banking accounts designed to reach up to 10,000 consumers lacking accounts.

Cities would be well advised to build upon the models pioneered by Philadelphia, Cleveland, San Diego, and San Francisco to finance affordable housing and economic development. In addition, CRA can assist significantly in cities’ efforts to combat record levels of foreclosures. CRA exams reward banks for foreclosure prevention efforts including counseling, modifying loans, and investing in funds that finance loan modification. Cities should use this CRA incentive to engage banks in wide ranging foreclosure prevention efforts. NCRC can assist cities either by providing data analysis and/or technical assistance on CRA. For more information, contact NCRC at 202-628-8866.