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Community Reinvestment Act

What is the Community Reinvestment Act?

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The Community Reinvestment Act was designed to make money available to underserved areas. Banks took deposits in low-income areas, but they did not make many loans in those areas. Congress passed the Community Reinvestment Act to encourage lending, home ownership, and business expansion.

Evolution

In the 1960’s and 1970’s, lawmakers noticed that banks were not offering favorable loans to low-income communities. Banks argued that the borrowers in those areas were higher risk borrowers who they did not want to serve, and that it was difficult to evaluate creditworthiness with traditional credit scoring tools. Lawmakers and activists argued that the banks were discriminating or 'redlining'.

The Community Reinvestment Act was passed so that banks would have an incentive to do more business in these previously ignored areas.

Since the Community Reinvestment Act came into being in 1977, it has been updated several times.

Community Reinvestment Act Evaluation

In order to prove they don’t discriminate, banks keep records showing their lending activity. If they show that they lend freely in low-income areas, they get a better ‘rating’. The bank’s Community Reinvestment Act rating is important in gaining favor with regulators regarding mergers and bank expansion.

Community Reinvestment Act and Mortgage Crisis

Those who favor less regulation blame the Community Reinvestment Act for causing the 2008 mortgage crisis. They argue that banks were prodded to lend to subprime borrowers, and that a larger number of homebuyers helped fuel a housing bubble (which lured more buyers into the bubble).

Those who defend the Community Reinvestment Act argue that it was actually a lack of regulation that caused the mortgage crisis. They also state that loans made as a result of the Community Reinvestment Act are not the problem loans that brought down the economy.

Depending on your views and your sources of information, there are plenty of arguments to back either position. See below for a few opinions on the pros and cons of the Community Reinvestment Act:

Community Reinvestment Act Critics

Community Reinvestment Act Defenders
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