More than 40 years ago, Congress adopted the Community Reinvestment Act to ensure that banks would serve everyone in the areas where they do business, regardless of race or class. Now, the Trump administration is considering how it might reform this long-controversial law.
There’s reason for concern about the administration’s intentions. Done right, though, an update could actually be a good idea.
Together with the Equal Credit Opportunity Act and the Fair Housing Act, the CRA was designed to address a market failure: Racial and other prejudices can prevent financial institutions from pursuing profitable business. It requires banks to make efforts to lend, invest and serve customers in lower-income communities (which remain disproportionately black and Hispanic). The evidence is mixed, but on the whole it suggests that the law has boosted credit without harming safety and soundness.
Nonetheless, the law leaves a lot to be desired. The CRA demands compliance only from traditional deposit-taking banks, putting them at a disadvantage to the non-bank lenders that account for an increasing share of mortgage and business loans.
The Treasury should stick to its stated aim of improving the CRA. Apply the law to all relevant lenders, conduct assessments in areas where those lenders actually do business, and publish examination reports that identify specific community-development investments, to show where the money is going and how it is being used.
Banks alone can’t reverse the effects of racism, and shouldn’t be asked to. But the credit disparities that made the CRA necessary haven’t gone away.