Updating the Community Reinvestment Act to promote special purpose credit programs could improve equity in credit and lending.
When Congress enacted the Community Reinvestment Act (CRA) in 1977, it sought to address one of the remaining gaps in Civil Rights Era laws: neighborhood-level discrimination.
Prior laws, such as the Fair Housing Act and Equal Credit Opportunity Act (ECOA), instituted important antidiscrimination protections at an individual level, yet the laws did not prohibit banks from denying access to credit and capital based on neighborhood-level demographics as a determinant of risk. The CRA created an enforcement mechanism through which banks are required to lend and invest in the same communities from which they take deposits, including low- and moderate-income (LMI) communities, within the bounds of safe and sound banking practices.
In addition to directing mortgage and small business lending to LMI individuals and communities, the CRA has encouraged banks to invest hundreds of billions of dollars in community development capital annually. These investments have provided increased access to affordable housing, education and job opportunities, community centers, and other essential products and services benefiting LMI people and places.
Yet the CRA persists with a fundamental fault: its colorblind evaluation approach that uses income as a proxy for race.
In the 45 years since this anti-redlining law was enacted, racial disparities and segregated neighborhoods have endured. The legacy of slavery and ongoing racial discrimination have created deeply embedded structures of inequity that will continue to replicate unjust outcomes unless intentionally countered. Antidiscrimination protections are necessary to guard against explicit racial discrimination yet alone are also insufficient to address the structural racism embedded in society.
Given the historic and ongoing disparities in access to credit based on race and ethnicity, particularly in the Black community, an affirmative race-conscious analysis is an essential component of reinvesting in the entire community. The CRA statute does not explicitly mention race but it does require regulators to assess a financial institution’s record of “meeting the credit needs of the entire community, including low- and moderate-income neighborhoods.” So, although the regulators are explicitly required to examine activities in LMI neighborhoods, they are not precluded from also incorporating a race-conscious perspective when evaluating a bank’s CRA activity in the entire community.
Research from the National Community Reinvestment Coalition and Relman Colfax PLLC provides an in-depth analysis of the constitutional authorities allowing federal regulators to embed race-conscious evaluations in CRA regulations. There are numerous ways in which the CRA can and should be updated to address racial discrimination in access to credit. For example, the CRA can incorporate an analysis by race when designating assessment areas and evaluating a bank’s responsiveness to local needs, just as it already requires an analysis by income.
Special purpose credit programs (SPCPs) are another practical tool that can advance race-conscious capital allocation within an antidiscrimination framework.
SPCPs were authorized in ECOA, a 1974 civil rights law that prohibits discrimination “on the basis of race, color, religion, national origin, sex or marital status, age, receipt of public assistance benefits, and exercise of rights under the Federal Consumer Credit Protection Act.” A provision in ECOA allows creditors to establish SPCPs that will benefit “a class of persons who would otherwise be denied credit or would receive it on less favorable terms.”
Although SPCPs are an essential tool to advance equitable access to credit for historically excluded groups, they have gone underused since their authorization in the 1970s. Private financial institutions have not widely embraced SPCPs. To encourage their creation, eight federal agencies recently issued a statement to remind creditors of their ability to establish SPCPs and reiterate the legality of such programs.
In the absence of bank action to create SPCPs, other mission-based lenders such as community development financial institutions (CDFI) have used SPCPs to create highly effective products and services targeted at disadvantaged populations and are leading the field by demonstrating the ability to develop, implement, and manage such programs successfully.
In 2021, the Low Income Investment Fund (LIIF), a national nonprofit CDFI, launched an SPCP, the Black Developer Capital Initiative (BDCI), in partnership with the National Affordable Housing Trust. BDCI features a loan product from LIIF that provides Black-led affordable housing development firms with early-stage capital at highly favorable and affordable interest rates so that the developers can move housing projects forward and support their business growth. Lack of access to affordable capital is a well-documented challenge facing Black borrowers, and LIIF’s BDCI capital product fills an essential gap in the market.
Products and services such as BDCI are precisely the type of activity necessary to begin repairing deeply embedded racial inequities, and CDFIs are currently leading the financial services industry to demonstrate the value and impact of such programs. Still, additional incentives and enforcement may be necessary to encourage more traditional financial institutions to embrace SPCPs, either by creating their own SPCPs or partnering to support SPCPs managed by CDFIs and other mission-based lenders.
As prudential banking regulators work toward the first major rewrite of CRA regulations in 25 years, regulators can provide explicit direction that SPCPs are an essential tool that banks can use to meet their CRA obligations. This is a small but important step to codifying the connection between the CRA and SPCPs and embedding the use of SPCPs as a practical way to encourage and enforce financial institutions’ obligation to deliver capital to communities of color.
SPCPs are not a panacea for all shortcomings in current CRA regulations, but they do reflect an underused opportunity to drive more affordable, accessible capital to communities of color. The mutually reinforcing opportunities between the CRA and SPCPs should not be overlooked.