Community Reinvestment Act (CRA)

Community Reinvestment Act is a law developed by the federal government to ensure that the credit needs of the low-to-moderate income communities are met by the financial institutions. The federal government has made it mandatory for banks to examine how well different companies fulfill their requirements and obligations toward the low-income communities. The federal bank agencies also take the performance rating of different financial institutions into consideration before granting them permission to expand, open a new branch, merge with an existing company, or acquire a new bank.

Before federal banks introduced the Community Reinvestment Act, banks and financial institutions in America did not accept the loan application of Black people. They denied loans to people living in the zones redlined by the federal government, thus making it nearly impossible for African-Americans and people from specific regions to get financial aid from banks.

How Does it Affect Your Mortgage Application?

The neighborhoods in America were also classified based on their assumed level of lending risk, depending on the information collected from a variety of sources, including but not limited to the appraisers, loan officers, real estate agents, and other parties. In fact, these areas were assigned a specific color, which would indicate the lending risk. The areas colored red, for example, were considered risky neighborhoods for lenders. These maps were developed using GIS (geographic information system). The biggest problem with these color-coding neighborhoods was that these people couldn’t get house mortgages and other types of loans to improve their financial condition.

Do you know 74% of the households that were colored red by the federal banking agencies account for low-moderate income groups in America? And, 91% of the regions colored green belong to the upper and middle-income groups with 85% of the population being White. As you may have guessed, the primary purpose of the community reinvestment act was to develop a law that fulfills the banking requirements of all customers that come from different communities — whether it is people belonging to low-income groups or high-income groups.

With the help of GIS, it has become possible for banks and financial institutions to identify the customers’ buying patterns and make decisions, like which customer is capable of repaying the loan if their loan application gets approved. These insights help banks determine which borrowers should be granted a loan irrespective of their color, race, and other factors that do not affect their ability to repay the borrowed amount.

Many economists and professionals involved in this industry have advised making the process less stringent and as relevant to the banking industry as possible. For example, currently, the federal banks calculate the performance ratings of the community banks based on their branch location, which shouldn’t be an important factor since a vast majority of people conduct online banking these days. Redlining refers to the process of denying loans to a specific community based on their race and ethnicity. Several other factors play a role when it comes to determining the eligibility of the community for loan repayment.