Community Dividend

Policy summit highlight: CRA changes create new bank category

Changes to the Community Reinvestment Act were a focus of a recent policy summit sponsored by Local Initiatives Support Corporation and the Federal Reserve Bank of Minneapolis.

Theresa Bauer | Community Affairs Intern

Published November 1, 2005  | November 2005 issue

At a recent policy summit sponsored by Local Initiatives Support Corporation and The Federal Reserve Bank of Minneapolis, representatives of many community development organizations gathered to learn about the newest changes affecting the industry.

Summit highlights included an analysis by Benson "Buzz" Roberts, senior vice president for policy at National LISC, of how proposed changes in the funding and administration of federal programs could impact low-and moderate-income communities; and an overview of major revisions to the Home Mortgage Disclosure Act by Jane Gell, managing counsel for industry and consumer issues at the Board of Governors of the Federal Reserve System. Comments and reactions were provided by a panel of local lending and community development leaders that included Dorothy Bridges, president and CEO of Franklin Bank; Elizabeth Ryan, director of housing policy in the City of Minneapolis Community Planning and Economic Development Department; and Hussein Samatar, executive director of the African Development Center.

In an additional presentation, Federal Reserve Bank of Minneapolis Vice President Kinney Misterek reviewed changes to provisions of the Community Reinvestment Act, or CRA. These changes were noted in the last Community Dividendand are discussed in more detail here.

The CRA was enacted in 1977 with a goal of encouraging financial institutions to meet the credit needs of their local communities, focusing specifically on low- and moderate-income (LMI) neighborhoods. The act underwent a major revision in 1995. To adapt to changes in the financial industry, the three federal banking agencies (the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation) have adopted new revisions to the CRA that took effect September 1, 2005.

The federal banking agencies apply performance criteria to assess how banks address the community credit and development needs of LMI areas. Under the previous CRA rules, small banks, or those banks with assets of up to $250 million, had to meet a five-pronged lending test. Large banks, or those banks with assets of $250 million or more, had to meet lending, investment and service tests. The latest CRA revisions leave the performance criteria for small and large banks essentially unchanged and expand the small bank category to create intermediate small banks,or those banks with assets of $250 million to $1 billion. The purpose of this change is to reduce the regulatory burden on midsized banks that previously had to comply with the rules and regulations for large banks.

Banks that fall in this new category are no longer required to collect and report CRA data for small business, small farm and community development loans. Under the new rules, intermediate small banks must meet two performance criteria: the existing, five-part lending test that applies to small banks; and a community development test, which combines community development loans, investments and services into one test. As one part of the lending test, intermediate small banks will be assessed on actions taken in response to consumer complaints.

Another major CRA revision discussed at the policy summit is the new definition of community development.The definition was expanded to include certain activities located in distressed nonmetropolitan middle-income geographies, underserved nonmetropolitan middle-income geographies, and designated disaster areas. The purpose of this revision was to expand the number of activities in rural communities that are eligible for CRA credit, given the overall lack of eligible LMI census tracts in these areas.

In order for areas to be classified as distressed,they must meet certain population-loss criteria, have poverty rates of 20 percent or greater, or have an unemployment rate that is at least 1.5 times the national rate. For areas to be classified as underserved,they must meet criteria related to population, density and location. The areas must be small enough and far enough away from a population center that they would likely have limited resources available for financing essential community needs, such as infrastructure for public safety and education. A listing of areas designated as either distressed or underserved is posted on the Federal Financial Institutions Examination Council's Web site at and will be updated annually. Designated disaster areasare classified as such by either the federal or state government.

Additional information about the CRA revisions is available at