The Community Reinvestment Act of 1977
What is the Community Reinvestment Act?
The Community Reinvestment Act was established to encourage banks and financial institutions to help meet the credit needs of the communities in which they operate. This act aims to help low and moderate-income individuals, businesses and neighborhoods by giving them opportunities to attain credit through safe and affordable banking practices. To make sure depository institutions are actively trying to meet the needs of their community, the federal bank regulatory agencies periodically assess banks and financial institutions on the quality and amount of investments they make that benefit their community.
Guidelines for Investing Under the Community Reinvestment Act
Investing under the Community Reinvestment Act can be confusing, but investors in Equalize funds can be confident to earn CRA credit for their investments by virtue of the design and implementation of our strategies that follow the specific guidelines of the Act. Under these guidelines, an activity qualifies as a Community Development investment if it serves one of the following purposes: affordable housing, community services targeted to low-and moderate-income (LMI) individuals, promotion of economic development, or revitalization or stabilization of LMI geographies.
CRA evaluations are scaled to the size of the institution. Small Banks are evaluated on such basic lending attributes as loan-to-deposit ratios, percentage of loans in the institution’s assessment area, geographic distribution of loans, lending to borrowers of different income levels, small businesses and farms, and responses to CRA-related complaints. Intermediate Small Banks use the Small Bank criteria plus a Community Development Test, which considers the number and amount of community development loans, investments and services. Finally, Large Banks use the same criteria but formalize them into three areas: a Lending Test, an Investment Test and a Services Test. At all levels, the regulators evaluate not only the number and amount of loans, but also the innovativeness and complexity of qualified investments, as well as the responsiveness of these investments to community development needs.
Benefits for Financial Institutions Who Invest in the CRA
Banks who comply with investing in the Community Reinvestment Act and maintain a Satisfactory or Outstanding CRA rating can receive benefits and special recognition. Maintaining a high CRA rating is in the best interest of your bank because it leads to satisfaction of regulators and can provide positive marketing opportunities for the bank in the communities it serves.
Expanding their Depository Institutions
Financial institutions with high CRA ratings can get approval to expand their financial institutions. These approvals can be for mergers, establishing new charters, acquisitions, branch openings, and deposit facilities. If you are a bank, and in some cases a credit union, looking to expand your operations, it is important to make sure you have and maintain a strong CRA program.
Frequency of CRA Examinations
Depository institutions are subject to review of their CRA program and investments. These examinations occur around every three years for financial institutions with a Satisfactory or Outstanding rating.
Maintaining a Strong CRA Program at your Institution
Financial institutions with strong CRA programs have an easier time scoring high on evaluations. This means investments are made strategically to maximize the benefit for the community while also supporting the CRA. An excellent way to start a strong CRA program is to look for opportunities to increase lending in your community. For example, Equalize Capital offers two funds, focused on affordable housing and small businesses, which are ingenious, innovative and designed for the needs of financial institution investors that meet the guidelines of the Community Reinvestment Act. These two funds can also help diversify your investments and enhance your CRA credit.
Internal leadership of CRA programs and initiatives is important for successful results. The CRA officer or bank manager in charge of the program needs to set and communicate clear goals for CRA performance and the steps to accomplish this goal. These goals must be measurable to assess how your bank is doing. The Community Reinvestment Act can have some grey areas, but by sticking to guidelines and making a plan for your program that includes unique CRA offerings can help your bank’s score.
Financial Institution CRA Rating
There are four CRA ratings that your financial institution can receive after an evaluation: outstanding, satisfactory, needs to improve, and substantial noncompliance. Achieving an outstanding rating is challenging but not impossible. For example, a bank with high-quality and diverse investments has a high chance of scoring well on evaluations. Conversely, lower scores are received if there aren’t enough investments or if the investment guidelines aren’t met and maintained.
CRA Credit Investment Opportunities
The Equalize Community Development Fund (the “Fund” or “EQCDX”) is a non-diversified, closed-end interval fund that invests primarily in U.S. Small Business Administration (“SBA”) 504 First Lien Loans.
American Home Opportunity Mortgage Fund
The American Home Opportunities Mortgage Fund (“AHOMe”) is a Fund designed for the needs of institutional investors seeking attractive yields from a portfolio of residential mortgage loans made to a deserving, yet underbanked community of borrowers. The Fund will buy and hold Individual Taxpayer Identification Number “ITIN” residential mortgages made to individual mortgage borrowers.