The Community Reinvestment Act in the Age of Fintech and Bank Competition

28 Pages Posted: 2 Jan 2020

See all articles by Diego Zuluaga

Diego Zuluaga

Cato Institute - Center for Monetary and Financial Alternatives

Date Written: July 10, 2019


The Community Reinvestment Act (CRA) requires banks to lend to low- and moderate-income (LMI) households in the areas where they take deposits. But it has become obsolete.

We have serious reservations as to whether any regulatory agency could have the wisdom necessary to administer such a system to the maximum benefit of competing economic interests. — Robert Bloom, acting Comptroller of the Currency, March 28, 1977

When the CRA came into force in 1977, banks were the main source of loans for home buyers and small businesses, and restrictions on bank branching posed a high barrier to competition. Today’s competitive environment is much changed. The removal of branching restrictions has allowed banks to expand and consolidate — leading to a 77 percent increase in the number of bank offices since the CRA’s passage. Furthermore, a growing share of mortgage and small-business lending now comes from financial institutions that are not subject to the CRA. In fact, LMI borrowers represent a larger share of these institutions’ borrowers than they do for banks, which are subject to the CRA.

Conversely, mounting evidence suggests the CRA is either ineffective or damaging. Before the financial crisis, community groups touted the act’s influence in lowering lending standards. Empirical research also shows that banks’ risk taking increases ahead of their CRA evaluations — contravening the CRA’s requirement that lending be consistent with bank safety and soundness. In cases where CRA lending is not riskier, evidence suggests that banks may be “skimming the top” — lending to high-income residents of low-income communities, thus meeting their regulatory mandate but failing to reach the people the CRA intends to help.

There is a strong case for repealing the CRA in favor of alternative policies that better achieve its goals. It would be a mistake to expand the CRA to cover online (fintech) lenders and credit unions, which already serve LMI borrowers as well as, or better than, many lenders that are subject to the act. If the CRA remains in place, its regulations should change to allow banks to trade their CRA obligations in order to encourage lender specialization and efficiency.

Keywords: Community Reinvestment Act, CRA, LMI, Bank Lending, Fintech, Lender Union, Credit Union

JEL Classification: G00, G1, G2, G20, G21, G24, G28

Suggested Citation

Zuluaga, Diego, The Community Reinvestment Act in the Age of Fintech and Bank Competition (July 10, 2019). Cato Institute Policy Analysis, No. 875, 2019, Available at SSRN:

Diego Zuluaga (Contact Author)

Cato Institute - Center for Monetary and Financial Alternatives ( email )

United States

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