Latest Updates to the Community Reinvestment Act (CRA) Support Today’s Small Business Owners 

Nov 2, 2023

You may not have heard of the Community Reinvestment Act (CRA), but all small business owners who need access to capital should take a moment to learn about it. CRA has been around since 1977. In October 2023, the rules were updated for the first time since the 90s to fit the needs of today’s underserved small business owners

What is the Community Reinvestment Act? 

The Community Reinvestment Act is one of the most effective pieces of legislation to address systemic issues with access to capital. Originally, it was put in place to prevent redlining. Rules and benefits built into CRA encourage banks to lend to the entire community of borrowers and small business owners, including minorities and those in areas deemed “socially and economically distressed”. 

Why is CRA necessary? While some borrowers have the credit score, cash flow, and income to qualify for traditional loans, others do not and are considered “high risk”. But for less established borrowers to build a credit history, someone must provide them with credit.  

Several factors make it difficult for large and traditional banks to provide loans to small businesses, especially those in underserved communities:  

  • These businesses need loans in lower amounts that banks can’t offer efficiently  
  • Regulations prevent banks from lending to higher-risk borrowers  

To help overcome these challenges, banks often invest in community lenders like CDFIs, which are mission-driven and active in their local communities. When the bank’s investment dollars are lent responsibly to underserved communities, the bank receives “CRA credit”. 

While they are not required to earn CRA credits, the amount of lending a bank has done in underserved communities is taken into consideration when the bank applies for a charter, new branches, mergers, and other corporate activities connected to growth. 

New Changes to the Community Reinvestment Act 

CRA law has not been substantially revised since 1995. In May 2022, the major organizations that oversee bank activities—the Federal Reserve Board, the FDIC, and the Office of the Comptroller of the Currency (OCC)—suggested more changes to support more community engagement and financial inclusion. 

In October 2023, those changes were put into law. Here’s what they accomplish: 

  1. Adapt CRA to the prevalence of online lending, mobile banking, and branchless banking activities  
  1. Do more to encourage financial inclusion from banks by supporting bank activities with Community Development Financial Institutions (CDFIs) and Minority Depository Institutions (MDIs), and participation in Native Land Areas and persistent poverty areas 
  1. Increase clarity and consistency of CRA eligibility and metrics with more data-driven tools 
  1. Adjust CRA evaluations to take the bank’s size and type into consideration  

The bottom line is that CRA is one of the most impactful tools we have to open up equitable access to capital within the financial industry. These changes have evolved the program to increase that impact.