The Community Reinvestment Act (CRA) was created to spur lending and open up greater access to capital in low-income and minority neighborhoods. Enforcement of the CRA often focused on product pricing, and practices whereby some banks encouraged minority borrowers into products with less favorable terms.
The question of access of low-income and minority neighborhoods to any credit, however, has become more acute since the subprime mortgage crisis, and now the U.S. Department of Justice (DOJ) has stepped up enforcement of CRA provisions requiring banks to adequately serve and lend to such neighborhoods. The Housing Section of the DOJ now has 20 lawyers working on lending discrimination issues, receiving referrals from bank supervisory agencies as well as conducting their own investigations.
The new enforcement efforts are mostly focused on whether banks are opening branches in the low-income and minority sections of their service area, and whether lending is being done through those branches. Regulators are wary of banks whose service area includes only a portion of a political subdivision, such as a city or county, and are no longer accepting banks that have branches solely in upper-income parts of their service area.
The sudden change in enforcement amounts to a paradigm shift in the regulatory standards. Bank behavior and lending patterns which never raised eyebrows before are now drawing fire from the DOJ—in some cases resulting in penalties reaching into the millions of dollars. Critics of the increased government pressure have noted that the efforts could potentially backfire, causing banks to shrink their local operations in some areas to the point that charges of lending discrimination would be unjustified, rather than enter low-income markets that often carry higher lending risks.
Nevertheless, stricter rules are the reality for the time being. Banks are recommended to review CRA compliance programs, since what was acceptable several years ago could now land them in trouble. Banks need to assess their lending patterns, to ensure that there is no case to be made that they are arbitrarily excluding low-income and minority neighborhoods, and ensure that loans are available to, and adequately marketed towards, customers within such neighborhoods.