|
What is the Community
Reinvestment Act?
The Community Reinvestment Act (CRA)
was passed in 1977 as a result of grassroots organizations like
Iowa Citizens for Community Improvement who were concerned that
banks were not making loans in low and moderate income areas --
a practice known as redlining.
The CRA is intended to encourage banks to
help meet the credit needs of their communities, including low and
moderate income neighborhoods and people. Banks are periodically
evaluated on their CRA performance. Their record is then taken into
account in considering a bank’s application for such things
as opening a new branch, merging or acquiring other banks.
The Community Reinvestment Act and ongoing
pressure from grassroots groups has resulted in billions of dollars
being reinvested in older neighborhoods throughout the country and
a growing understanding among lenders of the benefits of making
loans in areas previously ignored.
What
is Redlining?
At the height of the depression in the early 1930’s, banks
were extremely reluctant to make loans for housing. A typical loan
required a 50% down payment and had to be paid within 5-7 years.
In 1934, President Roosevelt created the Federal Housing Administration
with the goal of creating thousands of new jobs in the construction
industry by encouraging home ownership.
But fears about possible defaults of federally
insured loans caused the devastating practice of redlining. A massive
inventory was initiated to evaluate all residential areas in the
nation. Surveyors looked for any signs of decay or neglect that
might indicate a neighborhood was in decline or for any minorities.
This included not only African Americans, but also Jewish immigrants
and “foreign born whites” such as Poles and Italians.
A single home could cause the entire area to be declared unfit for
mortgage insurance.
Maps were created and graded on a scale
from A to D.
- “A” areas were green and
included new or recently built homes. Mortgage lenders were encouraged
to offer the maximum available in these areas.
- “B” areas were blue and considered
to be good neighborhood but a little frayed around the edges.
Mortgage lenders were advised to make loans at 10%-15% below maximum
amount available.
- “C” areas were yellow and
were typically older neighborhood with housing styles that might
be “out of fashion”. Mortgage lenders were encouraged
to be careful about making loans in these areas.
- “D” areas were red and were
considered to be struggling for survival. Surveyors characterized
these areas as having an “undesirable population”
or an “infiltration of an undesirable population”.
Mortgage lenders often refused to make any loans on properties
in these neighborhoods.
The term “redlining” came about
from this practice. |
