The 1977 Community Reinvestment Act (CRA) was enacted to encourage depository institutions to meet their communities’ credit needs, including areas where low- and moderate-income (LMI) residents live.

There has been a recent chorus of support for modernizing CRA, or at least the regulations under the statute. In August 2018, the Office of the Comptroller of the Currency (OCC) issued an Advance Notice of Proposed Rulemaking (ANPR) (PDF), seeking stakeholder comments on how CRA regulations should be modernized to more effectively serve community needs, evaluate activities more consistently, and provide greater clarity about CRA qualifying activities.

To help ground any new regulations in solid evidence, we analyzed 2016 data about CRA lending and submitted these results as a comment letter in response to the ANPR.

We were interested in how the five different types of lending related to banks’ CRA compliance. Our analysis revealed two surprising facts:

• Although single-family mortgage lending is the largest lending category by banks, small business lending, at less than one-third of the dollar amount, composes the largest category for CRA purposes by far.
• Community development lending is almost as large as single-family mortgage lending for CRA purposes.

Small business lending dominates CRA compliance

While one might assume that the 5.4 million single-family loans valued at $914 billion go a long way toward helping banks meet their CRA requirements, the 7.5 million small-business loans valued at just $256 billion do more. 67 percent of small-business loans qualify for CRA compared to 12 percent of single-family loans (table below).

The disparity results from the different ways small-business and single-family loans qualify for the CRA:

• A small-business loan must be less than $1 million and within a bank’s assessment area to qualify for CRA but is not required to be made in an a LMI area.
• For a single-family mortgage to qualify for the CRA, however, the loan must be made to an LMI borrower or within an LMI area and within a bank’s assessment area. And while 75 percent of single-family mortgage lending is within bank assessment areas, only 12 percent of single-family mortgage lending, by dollar volume, is to LMI borrowers or in LMI census tracts within those assessment areas.

The 7.5 million small-business loans are not homogenous (table below):

• The 10 largest banks made 5.8 million small-business loans in 2016, representing 78 percent of the total loan count and 45 percent of the dollar volume.
• Why is the loan count and the dollar volume so concentrated among the top 10 institutions?  Many of these loans are actually credit cards given to small businesses: three of the largest credit card issuers (Citibank, American Express, and Capital One) have smaller average loan sizes than other large lenders that are less dominant in the credit card business (PNC and BB&T). (CRA data measures and includes the entire line of credit on a credit card, not just the drawn amount.) 
• Although 67 percent of the loans by dollar volume are within assessment areas, many of these qualifying small-business loans are made in high-income tracts within those areas. A relatively low percentage—24 percent by dollar volume, 22 percent by loan count—within the assessment areas are made within LMI census tracts (the LMI share is similar inside and outside assessment areas).

We know small business lending plays a vital role in economic development, but small business lending includes a mix of activities, including traditional loans and credit cards, to both low- and high-income communities. The appropriate definition of small business lending is a topic raised by the OCC’s ANPR and is worthy of discussion.  

Community development loans and the CRA

The other surprising fact we found is that the 26,397 community development loans, valued at $96 billion, pack almost as big a punch as the 3.5 million single-family loans for CRA compliance purposes. Again, the way community development loans qualify for CRA compliance makes the difference—nearly all of the $96 billion of community development loans count toward CRA versus just $108 billion in single-family lending.

The data show that community development lending has benefited from the CRA’s existence and is critical to its success.

• Community development lending is done by all the banks we had data for, large and small, although banks under $1.216 billion in assets in 2016 are not required to report their CRA lending; we included those for which we had data.
• The 10 largest banks compose only a little more than 21 percent of the complying loans by number of loans (39 percent by dollar volume).  
• And while the total number of community development loans has been relatively constant from 2000 to 2017, the dollar volume has increased considerably as the average loan size has increased (figure below). This trend suggests that banks are increasing their commitment to community development lending.

Any reassessment of the CRA should start with a close examination of the data. Our examination reveals that a more robust discussion about how small-business loans should count toward CRA is appropriate, given the amount of CRA credit banks receive for credit card and small business lending in high-income tracts. And any reassessment should note that community development lending should remain a central part of CRA.

A quick look at our methodology

For our analysis, we used Home Mortgage Disclosure Act (HMDA) data and the Federal Financial Institutions Examination Council's (FFIEC) loan files. We used 2016 data, as the 2017 FFIEC files had not been released when we began our analysis. We did not look at investments, which are also a consideration for CRA, because of insufficient data. For mortgage lending, we matched HMDA lending by institution, by tract, and with the CRA files created by the FFIEC.

The latter gave us information on assessment areas. Because we insisted on an exact name match, we did not capture all CRA files. For table 1, we applied the inside-assessment-area percentage on the files we captured to the HMDA data. 

For small business and small farm lending, the FFIEC loan files contain, for each CRA reporter, the number and dollar amount of lending, cross-tabulated by census tract and information about whether the loan is in the reporter’s assessment areas. For community development loans, the FFIEC files contain only the number and dollar volume of the loans. We captured all available information in these categories.