Quantitative Performance Metrics for the Community Reinvestment Act: How Much Reinvestment Is Enough?

Since the passage of the Community Reinvestment Act (CRA) in 1977, regulators have grappled with the question of how best to evaluate a bank’s performance in meeting the credit needs of its communities. This article contributes to the debate on how to determine a bank’s CRA rating by presenting an analysis of which activities are currently reported as fulfilling a bank’s CRA obligation. Using data on mortgage, small business, and community development lending, investment, and service activities from performance evaluations (PEs) released in 2011 and 2016 for all banks in California, the article answers three questions. First, what are the inconsistencies in what is reported across PEs, and how do they complicate efforts to develop a single metric of CRA activities? Second, how do banks’ CRA-motivated loans and investments vary by markets and economic cycles? Third, to what extent are these loans and investments aligned with the intent of CRA? The results suggest that regulators should focus on reorienting the exam toward giving credit for the loans and investments that promote community development, rather than moving to a single metric based on dollar volumes that could incentivize banks to do less—or even worse, to do harm.