By Anne Perrault and Aasha Rajani
As climate change increases the frequency and intensity of harmful weather events, and communities of color – who face the most significant risks from these events – struggle to finance repairs and measures to withstand future impacts, the Community Reinvestment Act (CRA) offers an opportunity to help.
Financial regulators in the coming weeks will embark on a broad inter-agency update of the rules for implementing the CRA, modernizing the rules and redefining the types of lending and investment that qualify for CRA credit. The last notable update to the CRA occurred in 1995, and much has changed in the 25 years since then—including threats posed by climate change that are further exacerbating existing inequities. Revisions must respond appropriately to these changes.
CRA Requirements and Implementing Rules Were Intended to Respond to Inequities
When President Jimmy Carter signed the CRA into law in 1977, it was passed in the context of decades-long policies that deprived majority-Black neighborhoods of credit and led to systematic disinvestment in communities of color. The government-backed practice of “redlining” low-income and majority-minority areas, purportedly based on risks to lenders, had significant racialized domino effects on homeownership, wealth, and community resilience that persist today. The relative inability of Black families to secure home loans left a significant homeownership gap between Black and white families – 43.1% compared to 74.4% – and, in turn, left Black families with less personal wealth. Disinvestment in redlined communities contributed to disrepair in housing and other infrastructure, increased exposure to health hazards and pollution, and decreased access to healthy food, green spaces, reliable transportation, and good schools.
A series of government interventions to address redlining policies began in 1968 with the Fair Housing Act, which outlawed discrimination in the sale, rent, and financing of housing. In 1977, the CRA aimed to encourage federally insured financial institutions (a category that includes most banks and credit unions) to meet the credit and lending needs of the local communities where the institutions were chartered. Though not considered a panacea by policymakers, the law was noteworthy insofar as it obligated banks to serve their communities.
The law requires federal banking regulators to assess the extent to which financial institutions are meeting the credit needs of the “entire community” – including low- and moderate-income (LMI) neighborhoods – while operating in a safe and sound manner, and to consider this record when deciding whether to approve an ‘application for a deposit facility.’ Rules implementing the law direct the banks to delineate the areas within which regulators will assess and rate the bank’s lending, service, and investment activities, and to draw these areas around the bank’s main offices, branches, deposit-taking ATMs, and loan locations. The rules further specify that CRA-related ratings must be considered when banks apply for charters, branches, mergers, and acquisitions among other things.
The CRA Has Not Met Its Potential, and Key Assumptions Have Been Upended.
Although lending to LMI families has increased since the CRA was enacted, it’s not clear how much of this increase is due to the CRA or to other factors – including better ways to predict and price borrower risk. More clear is that Black and other communities of color continue to face severe barriers accessing credit and other financial services.
Several key assumptions underlying the CRA and its implementing rules have been upended in the past decades, including the lay of the banking and credit-access landscape, the effectiveness of current approaches to delineating assessment areas and allocating credits, and the utility of the existing rating system. And climate change is creating additional challenges for CRA effectiveness.
This framework was clearly designed under the assumption that banks serve communities via branches. But banks are reducing the number of bank branches, and even going branchless, in response to technological innovations and online banking. As a result, an increasing number of areas lack physical bank branches to meet the credit needs of the local population. According to the Brookings Institute, from 2010 to 2019 the number of banks in majority-black neighborhoods decreased 14.6%, and majority Black census tracts are now less likely to have a bank branch than non-majority Black neighborhoods.
Even where branches exist, the current approaches to creating assessment areas around those branches and allocating points for activities often fail to ensure that LMI community needs – and particularly those of racial minorities – are met. One reason is that banks create these areas. While they are directed not to arbitrarily exclude LMI neighborhoods, it’s difficult to determine whether racial discrimination is occurring because racial demographics aren’t a factor in examinations. Moreover, heavy reliance on census tracts to direct lending can promote gentrification – too often, loans in LMI areas go to high-income individuals who do not otherwise need CRA-related benefits. A study in Washington DC found that two-thirds of the mortgage loans eligible for the CRA in the District went to higher-income borrowers living in low-income areas.
Additionally, the current CRA ratings don’t adequately reflect differences in how banks are serving LMI communities. The high pass rate – 98% of banks passed their CRA exams between 2005 and 2017 – doesn’t capture CRA-related benefits. This lack of nuance and distinction in performance evaluations affects a bank’s motivation to increase lending, investment and other services in LMI neighborhoods. Community groups have advocated for changes to reduce subjectivity in ratings and better incentivize bank action.
Climate Change Is Compounding CRA Challenges.
Climate change is compounding CRA challenges and highlighting its shortcomings. More specifically, climate harms are increasing credit needs in climate-vulnerable areas while simultaneously straining the abilities of banks to provide access to credit.
Climate change is increasing the frequency and intensity of extreme weather-related events. And it is making physical risks – risks that these events will physically impact assets – less predictable, more severe, and more likely. A recent NOAA report catalogs that in 2021 alone there were 20 climate-related weather disasters with losses exceeding $1 billion each in the United States. It notes that such events were unusual in the past but are becoming “the new normal”:
It is concerning that 2021 was another year in a series of years where we had a high frequency, a high cost, and large diversity of extreme events that affect people’s lives and livelihoods—concerning because it hints that the extremely high activity of recent years is becoming the new normal. 2021 marks the seventh consecutive year (2015-21) in which 10 or more separate billion-dollar disaster events have impacted the U.S.
It is crucially important for communities to have access to credit for climate mitigation and resilience measures, and even more so for communities impacted by redlining. The legacy of redlining and its contribution to subpar infrastructure in redlined areas leaves these areas with heightened vulnerability to climate-related harms. Recently updated flood maps reveal that, in two-thirds of states, minority neighborhoods shoulder more undisclosed flood risk than the state average. One expert explains, “While the primary consequence of red-lining was to undermine the ability of Black families to generate cross-generational wealth . . . it also left them deprived of local infrastructure investment—and disproportionately exposed to the very flood impacts that now again threaten the availability of home loans.” Additionally, the redline-related wealth gap now also reduces the financial capacity of LMI communities to pursue mitigation, resilience, and adaptation measures.
While climate change is increasing the need for credit, it is also further challenging the abilities of banks to provide access to credit in climate-vulnerable areas. Although the CRA encourages banks and savings associations to help meet the credit needs of the communities in which they are chartered, it directs these institutions to do so only in a “safe and sound” manner. Safe and sound measures in this context include withholding or increasing costs for risky lending and investments. Such measures have been termed “bluelining.”
Community banks are particularly constrained as the realities of climate change are colliding with their geographically rooted nature. They can’t easily move or shift their assets; they exist to serve particular communities and particular needs. Analyses also reflect that community banks are particularly important for the home mortgage needs of LMI communities. For many community banks, the largest proportion of their assets include not only mortgage loans but also other loans that are highly vulnerable to climate change. As noted by nonprofit sustainability organization Ceres:
Based on their local expertise, community banks tend to focus on a few key sectors, such as residential mortgages, commercial real estate (CRE), small business financing, and agricultural sector loans. Given this focus, community bank loan portfolios are more exposed to the physical risks of climate change….
These are the very assets the CRA was enacted to support for local communities. Ceres observes there “are already examples of climate-related disasters that have fundamentally impacted the safety and soundness of community banks and credit unions.” With more limited measures to manage climate-related risks, community banks would benefit most from activities that reduce climate change impacts, including activities that reduce emissions.
Principles That Promote Outcomes for LMI Communities and Communities of Color Should Guide Revisions.
In light of these realities, we offer a few broad principles and recommendations for regulators as they craft new rules.
First, banks should receive CRA credit based on meaningful outcomes for LMI individuals and communities – particularly climate-vulnerable LMI individuals. Banks should be awarded higher impact scores under the CRA for their efforts to support climate change-related mitigation, resilience, and adaptation measures for these communities. And large banks, including branchless banks, should be incentivized to provide such support in areas beyond their home offices, branches, and ATMs. The CRA should also indicate that safety and soundness risks associated with lending and investment in support of climate resilience and adaptation for underserved communities will be assessed with more leniency, so long as the activities follow well-designed policies and procedures.
An optimal route to ensuring that mitigation, resilience, and adaptation measures are effective for LMI communities is to incorporate requirements for greater bank engagement with these communities – including through increased measurable outreach to communities and greater attention to and credit for Community Benefits Agreements (CBAs). Through the process of creating such agreements, banks can become more aware of community needs and benefits, and communities can become better informed of available opportunities and create more robust resilience and adaptation plans.
Finally, regulations should recognize that, for banks to “meet the credit needs” of local communities, they must also reduce the ways they contribute to the challenges that climate-vulnerable communities, particularly LMI communities, face accessing credit. More specifically, regulators should consider reducing credit points to banks that provide significant financial support for fossil fuel-related activities given that these financed emissions are not only increasing physical risks communities face, but also heightening community barriers to credit through reduced credit ratings and fewer local banks.
Forty years ago, the CRA was a welcome attempt to address financial inequities that had been created by discriminatory practices. It hasn’t, however, lived up to its potential. And climate change is leaving LMI communities with even greater need for, and challenges to, accessing credit. To ensure that LMI communities – particularly communities of color – secure the credit they need, financial regulators updating CRA rules should revisit old assumptions and respond to the urgent realities of climate change.