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CRA can encourage more strategic coordination within communities as well as financial institutions

In this last of three notes on the Community Reinvestment Act (CRA), we look more closely at the fourth of NHC’s principles for successful CRA modernization. NHC believes that any new CRA regulatory regimen must:

  1. Increase investment in communities that are currently underserved;
  2. Benefit more low- and moderate-income (LMI) people, particularly people of color, who live in those communities;
  3. Ensure that CRA lending and investment does not lead to displacement of the very people it is meant to help; and
  4. Make both bank performance and government enforcement more transparent and predictable.

CRA regulations must balance often competing requirements of clarity and flexibility. This is an issue the framers of the CRA and previous efforts at regulatory change have had to struggle with. If the regulatory requirements are too proscriptive, then they won’t be flexible enough to allow banks to make strategic business changes within their framework. If they are too flexible, they won’t provide the clarity that banks need to incorporate the value of CRA treatment when making lending decisions. This inherent tension is made even more complicated by the diverse set of regulated entities that the CRA regulations must address.

Consistency of definition is a critical component for aligning various federal programs, tax incentives and regulatory requirements. Banks must have confidence at the time they make financing decisions and develop new financing products that these activities will receive CRA credit. This information is critical to the most successful element of the CRA’s regulatory structure, often referred to as the “thumb on the scale.”

Many types of community development investments are obvious, like the investment in LIHTC deals within CRA assessment areas, but others like unsubsidized affordable housing in low- and moderate-income census tracts require more clarification. For investments that do not fit into a uniform designation, a timely judgement should be delivered by the appropriate examiner that will be binding throughout the examination period and apply to similar investments presented to the same agency by the same bank.

Regulators must keep in mind that communities are complex ecosystems. One of the most important lessons learned over the past 40 years is that comprehensive community development strategies that address housing, small business investment and job creation are often interdependent. The CRA has provided significant help to disadvantaged communities but improvements must be made in how CRA can encourage more strategic coordination within communities as well as financial institutions resulting in a more holistic – and ultimately successful – approach to community development.

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