Community Reinvestment Act affects borrowers and lenders

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Ask a Lender
July 12, 2017 | Updated September 26, 2017


Key Points

Potential Community Reinvestment Act partners

  • Disadvantaged community
  • Your business
  • Local bank
  • Nonprofits
  • Economic development organizations

Community development projects cover a range of efforts that aim to improve disadvantaged neighborhoods, create jobs, and generate sustainable economic growth in areas that have struggled historically.

Many businesses owners want to give something back to communities, to help improve disadvantaged neighborhoods while benefiting from a valuable business opportunity. Maybe pursuing that objective involves opening a call center or health clinic, or renovating a long-abandoned warehouse space into live-work lofts to rent. To accomplish these dreams, owners need financial help.

On the flip side, some businesses, and banks in particular, are morally and legally obligated to help communities. When you combine these forces, things can happen.

The Community Reinvestment Act of 1977 (CRA) supports economic growth and revitalization efforts in low- to moderate-income areas, referred to as LMI communities. Banks are required to meet the credit needs of the communities they serve, and there are specific reporting requirements for LMI communities. (Credit unions and some other financial institutions do not fall under CRA requirements.)

CRA basics

CRA passed as a response to institutional redlining, a discriminatory practice that denies loans and other services to businesses and residents in poor and minority communities.

For regulatory purposes, banks are divided into small, intermediate and large categories, based on total assets. Each category of bank must meet slightly different requirements under CRA, but in general, federal regulators examine banks using a community development test, which considers the number and amount of community development loans, investments and services provided by the lenders.

In simplistic terms, for example, banks must: offer loans to businesses, investors and homeowners; invest in nonprofits and organizations via partnerships and donations; and provide services in the region that can include serving on boards, teaching money management in schools or promoting entrepreneurial workshops.

What constitutes community development investments and activities are many and varied, and banks often have employees dedicated solely to CRA compliance and reporting. 

Of note: Reporting is required; lending, investing and offering services is not. Still, banks with poor CRA examination results that want to open or close a branch, or acquire another organization, may face CRA challenges from regulatory agencies that approve or deny such requests.

Business proposal

As a business owner who sees opportunity in entering into or expanding operations in a low- to moderate-income neighborhood, the main thing to understand is that you can’t just walk into a bank and say, “I’ll have one of those CRA loans.” There’s no such thing.

While most banks have community support programs, it’s unlikely that banks have “CRA lending/investment/services” as line items in the annual budget. Regardless, if you’re seeking funding, it behooves you to go into this financial ask as you would any other business loan. Get all your paperwork in order, draft a business plan, and estimate the financials. Rest assured, the bank will review your history and documents as if it’s any other loan, as well.

There are a few additional steps that can add to the chance of success, however. 

It’s a good idea to build relationships with lenders and nonprofit community groups that work in the area in which you seek to do business. Local chambers of commerce, economic development groups, community development financial institutions (known as CDFIs) and any nonprofits in your business sector are good places to start. These organizations are designed to help these communities and likely already have the information you’ll need. If the folks there don’t have the answers, however, they probably know someone who does.

Ensure your proposed business activities will affect a documented low- to moderate-income community. Disadvantaged areas are mapped out. Check with your new friends at the organizations listed above to make sure you’re pinned to the right spot. The U.S. Census Bureau also has search options to show you LMI metropolitan statistical areas.

Due diligence

It’s also a good idea to ask your new pals or search Census Bureau data on the area’s economics. Think about jobs, housing and transportation issues. Also ask about median incomes, rents/home-purchase prices, unemployment rates, and general economic outlooks. This helps you learn about the community’s current state and its needs, and the data can give you a basis for determining wages for employees and prices you’ll charge for your goods or services.

This information also can help when you talk officially with your lender. If you know the community’s economic affairs, you can better show the bank you have targeted plans to address those needs, and that may improve the chances for a loan.

Before you get too cozy with a bank, check the institution’s CRA score. This is public information and is fairly easy to find. Each institution is required to have their scores on public file. Check its website or just walk up to a teller and ask. A general internet search could get you there. Or check with the Office of the Comptroller of the Currency (OCC). Institutions with satisfactory CRA ratings are likely to be more open to the loan.

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