How to Earn CRA Credit for Financial Institutions

The Community Reinvestment Act (CRA), a 1977 federal law, aims to encourage federally insured financial institutions to help meet the credit needs of the communities where they operate, with a specific focus on low- and moderate-income (LMI) neighborhoods. The CRA was established to address historical lending disparities, such as redlining, which systematically denied credit access to certain areas based on perceived risk rather than actual creditworthiness.

For financial institutions, demonstrating a strong commitment to the CRA is important for regulatory compliance and community reputation. Federal banking agencies periodically evaluate institutions on their performance in serving these communities. An institution’s CRA record is a significant factor in regulatory decisions, particularly when reviewing applications for mergers, acquisitions, or branch openings. This framework promotes equitable access to credit and broader economic opportunities within diverse communities.

Qualifying Activities for CRA Credit

Financial institutions earn Community Reinvestment Act (CRA) credit by engaging in activities that benefit their assessment areas. These activities generally fall into three broad categories: lending, investment, and service. Each type contributes to an institution’s overall CRA performance evaluation.

Lending Activities

Lending activities encompass a variety of loans designed to meet community needs. This includes home mortgage loans to low- and moderate-income (LMI) individuals or for properties in LMI areas, which can support homeownership. Loans for affordable housing projects, whether for construction or rehabilitation, also qualify, especially if they are likely to be inhabited primarily by LMI individuals.

Institutions also earn credit for small business and small farm loans. A small business loan generally refers to an original loan amount of $1 million or less, or loans to businesses with gross annual revenues of $1 million or less; recent updates may expand this to businesses with revenues up to $5 million. These loans are considered qualifying activities even if the business is not in an LMI area, as long as it is within the bank’s assessment area. Small farm loans, typically $500,000 or less for agricultural purposes, also contribute to CRA performance.

Community development loans are another lending component, supporting a wide range of initiatives. These include financing for affordable housing, community services like childcare, and economic development projects that create jobs or stabilize LMI areas. Loans to non-profit organizations, Community Development Financial Institutions (CDFIs), or governmental entities for community development purposes also qualify. Such loans help revitalize distressed areas or support essential community facilities.

Investment Activities

Investment activities generate CRA credit primarily through direct or indirect support for community development. This can involve equity investments in CDFIs, which are specialized financial institutions focused on community development, or grants to non-profit organizations working on affordable housing and economic development. Investments in projects eligible for Low-Income Housing Tax Credits (LIHTC) or New Markets Tax Credits (NMTC) are common examples. Financial institutions may also receive credit for purchasing state and municipal bonds that specifically fund affordable housing or other community development initiatives.

Investments in organizations that promote economic development, such as Small Business Investment Companies (SBICs) or Rural Business Investment Companies (RBICs), are recognized. These entities finance small businesses, contributing to job creation and economic growth in communities. Investments in facilities that provide community services to LMI individuals, including youth programs, healthcare facilities, or homeless shelters, also count towards CRA performance.

Service Activities

Service activities involve providing financial and non-financial services that benefit LMI individuals and communities. This includes offering financial literacy programs, credit counseling, and homeownership counseling to help individuals manage their finances and access credit responsibly. Providing technical assistance, such as management advice, to non-profit organizations or small businesses engaged in community development also qualifies.

Institutions can also earn credit by making their financial services more accessible within LMI areas, such as maintaining branches and ATMs in these communities. Employee involvement, like serving on the board of directors for a community development non-profit, also contributes to CRA service performance. Supporting workforce development and job training programs for LMI or unemployed individuals further demonstrates a commitment to community well-being.

Demonstrating CRA Performance

Financial institutions demonstrate their CRA performance through evaluation processes conducted by federal banking agencies. Assessment methods are tailored to the institution’s size and business strategy. These methods include a streamlined assessment for small banks, a two-part test for intermediate small banks, and comprehensive lending, investment, and service tests for large banks.

Lending Test

The Lending Test evaluates an institution’s record of helping to meet the credit needs of its assessment area. Examiners analyze the volume and number of loans, their geographic distribution across different income levels, and their distribution among borrowers of various income levels and businesses of different sizes. This includes a review of community development loans, noting their complexity and innovativeness. For smaller banks, this test also considers the loan-to-deposit ratio and the percentage of loans made within their assessment area.

Investment Test

The Investment Test assesses an institution’s qualified community development investments. Key factors include the dollar amount of these investments, their innovativeness, and their complexity. Regulators also consider how responsive these investments are to identified credit and community development needs within the assessment area.

Service Test

The Service Test evaluates the accessibility and availability of an institution’s retail banking services. This involves examining the distribution of branches, particularly in LMI geographies, and the effectiveness of alternative delivery systems like ATMs and online banking. Examiners also assess the provision of community development services, such as financial literacy programs or technical assistance, and how these services respond to community needs.

Throughout the evaluation, a “performance context” is established, which considers the institution’s capacity, business strategies, and local economic conditions. This context helps examiners understand the opportunities and challenges the institution faces in serving its community, allowing for a fair assessment. Public comments received by regulatory agencies or the institution regarding its CRA performance are also a factor.

Ultimately, the goal is to demonstrate that activities primarily improve circumstances for LMI individuals or revitalize their neighborhoods. Institutions must maintain thorough documentation, including data on loan originations, community development activities, and service initiatives. This evidence, combined with the performance context, allows regulators to determine how effectively the institution is meeting its CRA obligations and assign a rating (Outstanding, Satisfactory, Needs to Improve, or Substantial Noncompliance).

Reporting and Maintaining CRA Compliance

After undertaking qualifying activities and documenting performance, financial institutions engage in reporting and compliance processes. Large banks, generally those with assets exceeding an annually adjusted threshold, are required to report specific data to federal regulators. This annual data submission includes information on small business loans, small farm loans, and community development lending.

Public File

Institutions must also maintain a detailed public file, accessible to anyone upon request. This file contains key information, such as the public section of the institution’s most recent CRA Performance Evaluation, a list of its branches and banking services offered, and any written public comments received about its CRA performance, along with the institution’s responses. This file must be updated regularly to ensure current information is available.

The CRA public file also includes a notice indicating where the CRA Disclosure Statement can be obtained online. If an institution receives a less-than-satisfactory CRA rating, the public file must include a description of its efforts to improve performance, updated quarterly.

CRA Examinations

Regulatory agencies, including the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency, conduct periodic CRA examinations to assess compliance. The frequency of these examinations varies based on the institution’s asset size and its prior CRA rating. For example, large banks with a “Satisfactory” or “Outstanding” rating are typically examined every 24 months, while small banks with similar ratings might be examined every 48 to 60 months. Institutions with lower ratings face more frequent reviews.

The examination process typically involves several phases. It begins with pre-examination planning where examiners gather information and request specific documents. This is followed by a thorough review and analysis of the institution’s compliance management system and the integrity of its reported data. Finally, examiners communicate their findings, providing a Report of Examination that outlines strengths, weaknesses, and ultimately assigns one of four possible CRA ratings: “Outstanding,” “Satisfactory,” “Needs to Improve, ” or “Substantial Noncompliance.”