Crusader at a Glance: The Community Reinvestment Act

The role and impact of banks in the Black community requires a complex examination of historical, social, and economic data. Historically, banks and financial institutions are not only providers of financial services, but also agents of economic development and social justice, in the battle against racial discrimination, community disinvestment and exclusion.

Black-owned banks were once a source of pride on the South and West sides of Chicago. Because of Jim Crow laws and the uncertainty of their social and political status, Blacks pooled their financial resources post-slavery, and worked to build strong banking, insurance, accounting, and other businesses to protest their self-interests.

But, with the rapid decline of Black-owned banks, in places such as in Chicago, where today only one such institution remains, African American consumers find themselves increasingly reliant on an array of financial predators. The “mainstream” banking industry appears as the only option for Black consumers to decide on where to deposit their money, access credit, secure mortgages, invest in their nonprofits, arts organizations, businesses, and jobs.

While Black-owned banks automatically understood the need for investment and reinvestment in African American owned businesses, cultural and social infrastructures, the pathway to acquiring the same level of commitment from mainstream banks has been an uphill battle, leading to charges of redlining, bias, discrimination, and intentional disinvestment.

The Community Reinvestment Act (CRA) is a federal law that was enacted in 1977 to combat such behavior. It was created to encourage banks and other financial institutions to help meet the credit needs of the communities where they operate, especially low- and moderate-income neighborhoods.

The law requires federal banking regulators to evaluate how well each bank fulfills its obligations to these communities and to consider these ratings when approving applications for mergers, acquisitions, branch openings, and other activities. The metrics measure meaningful engagement, but some believe mainstream banks skirt under the radar by engaging in the minimal acts of compliance, such as volunteerism and low-dollar scholarships or donations to local community groups or churches.

CRA ratings are listed as “Outstanding,” “Satisfactory,” “Needs to Improve,” or “Substantial Noncompliance.” A “bad” rating can have a negative impact on the banks and their targeted communities by preventing of opening new branches, incurring fines and penalties. The more egregious cases could warrant criminal prosecution. Poor ratings also reduce the availability of credit, investment, and financial services for working-class and predominantly Black and Latino neighborhoods.

In Illinois the treasurer reviews ratings under CRA to assess an institution’s commitment to its community. The treasurer is authorized by law “to consider a financial institution’s record and current level of financial commitment to its local community when deciding whether to deposit state funds in that financial institution,” according to the office of Treasurer Mike Frerichs.

CRA ratings of “satisfactory” or “outstanding” are deemed sufficient to allow the deposit of state funds. During a review period, banking institutions are required to demonstrate in writing evidence of its community engagement and financial investments.

When implementing state community reinvestment laws, states also use information from federal regulators, such as mortgage, small business, and small farm data, or consider violations of federal laws in their review of a financial institution’s reinvestment performance.

According to a Crusader review of publicly available documents on the Office of the Comptroller’s website, banks can receive good ratings by making donations to non-profits and other community institutions in its service areas; allowing employees to serve in volunteer capacities at non-profits; sponsorship of community-based events, and other marketing and engagement programs servicing low-income, Black, Latino, Asian and other marginalized populations.

Banking while Black” (BWB) is a term that refers to the discrimination and harassment that Black people face when they try to access financial services or conduct banking transactions, including being falsely accused of fraud or having police called on them while accessing services. In addition to blatant discrimination, BWB can take the additional form of being denied loans, mortgages, credit cards or being charged higher fees or interest rates. Such practices lead to a number of Blacks being among the “unbanked;” people who rely on alternative (and often predatory) financial services to meet their needs.

According to a recent study from the Brookings Institute, “access to capital for individuals and business owners is uneven and based on race. The racial wealth gap remains significant. In 2019, the median net worth of a typical white household, $188,200, was 7.8 times greater than that of a typical Black household, $24,100,” the group reported. “At a local level, there are stark contrasts in access to credit for African Americans: Interest rates on business loans, bank branch density, local banking concentration in the residential mortgage market, and the growth of local businesses are markedly different in majority Black neighborhoods.”

In October 2023, federal regulators updated the CRA to address the systemic racial discrimination in banking. However, advocates said the change didn’t go far enough to end persistent acts of redlining within the industry. Redlining is an illegal practice in which lenders avoid providing credit services to individuals living in or seeking to live in, communities of color because of the race, color, or national origin of the residents in those communities.

“While we are proud of our efforts in steering the final CRA rule…, we can’t help but feel deeply disappointed by the final rule as it does not align with the statute’s anti-redlining heritage,” Rise Economy CEO Paulina Gonzalez-Brito said in a statement. “This final rule is a significant oversight and underscores the pressing need for a state-specific response to bridge the gaps in coverage and objectives.”

Rise Economy also contended the final rule fell short of expectations as it misses several important opportunities, including failure to incorporate race in any meaningful way into the CRA framework. “Regulators’ decision to combine community development lending and investment tests may discourage banks from investing in affordable housing projects through the use of Low-Income Housing Tax Credits (LIHTC),” Gonzalez-Prito said. “The rule (also) failed to prioritize bank branches in low-to-moderate-income communities of color and to make it harder for merging banks to close branches in those neighborhoods.”

These concerns, as expressed by banking advocates across the country, have led to a flurry of reforms being implemented at both federal and state levels, by local lawmakers.

To further address discrimination and disinvestment in Illinois, on March 23, 2021, Governor JB Pritzker signed into law the Illinois Community Reinvestment Act and hailed it as a historic victory for low-income communities. Illinois became the second state with an oversight system to ensure that residents are justly served by all three major segments of the mortgage lending market: state-chartered banks, state-chartered credit unions, and state-licensed mortgage companies.

The largest banks in Illinois with most branches are Chase Bank with 293 offices, BMO Harris Bank with 179 offices, U.S. Bank with 167 offices, Fifth Third Bank with 162 offices, PNC Bank with 149 offices, Huntington Bank with 138 offices and Bank of America with 124 offices. The city of Chicago has the most with 65 banks and 513 offices.

Out of the 444 banks, only 10 had ratings of “needs to improve” and two had ratings of “substantial noncompliance.” These 12 banks represent about 2.7 percent of the total number of banks in Illinois.

The US Department of Justice announced the Combating Redlining Initiative, in 2021. Hailed as “the Department’s most aggressive coordinated enforcement effort to address redlining,” the agency partnered with U.S. Attorneys’ Offices, federal financial regulatory agencies, and state Attorneys General offices to enforce federal fair lending laws that prohibit redlining, including the Fair Housing Act and the Equal Credit Opportunity Act.

Last month, the Consumer Financial Protection Bureau (CFPB) published a new analysis on state CRA laws, highlighting how states ensure financial institutions’ lending, services, and investment activities meet the credit needs of their communities. The report examined the laws of seven states (Connecticut, Illinois, Massachusetts, New York, Rhode Island, Washington, West Virginia) and the District of Columbia, and found that many of those states adopted laws similar to the CRA in decades following the 1977 passage of the landmark federal anti-redlining law.

“The financial market has changed considerably since the passage of the Community Reinvestment Act, and nonbanks are now capturing a large share of the mortgage market,” said CFPB Director Rohit Chopra. “States have responded by creating reinvestment obligations for mortgage companies and have tailored state reinvestment requirements to meet the needs of their local communities.” Read the report, State Community Reinvestment Acts: Summary of State Laws.

This report is made possible by the Inland Foundation and the Balm Leavell Foundation.