Community Reinvestment Act Under Revision

10 Jan 2018

A recent WSJ Article reports that the Trump administration is planning on revamping the 1977 Community Reinvestment Act (CRA), which requires banks to serve low-and-moderate income (LMI) neighborhoods and be evaluated for compliance. You can search the CRA ratings history of any bank here.

One of the inputs is the number of physical branches in LMI income census tracts. The WSJ suggested that this has led banks to open branches in financial district/downtown areas, which often are classified as LMI but have very few residents (article: Never Mind the Ferrari Showroom, Bank Regulators Say This Is A Poor Neighborhood). A tract in downtown San Francisco, for example, had 53 bank branches in a LMI tract with less than 2,000 total residents. These branches are probably not primarily serving LMI residents, but instead, office workers that live in other neighborhoods and use the downtown branches during the workday.

This is an interesting examples of well-intentioned but ultimately perverse incentives in regulation and I’m excited to see the proposed changes.