The Community Reinvestment Act (CRA), established nearly 50 years ago, requires financial institutions to address the needs of the communities in which they operate, particularly in low- and moderate-income (LMI) neighborhoods. This includes providing loans to small businesses with annual revenues under $1 million.
This initiative is undoubtedly commendable. However, fulfilling CRA requirements places considerable pressure on banks that operate manually to meet these needs.
Fortunately, advancements in banking technology now offer solutions to this issue. While lead-generation models have long been available to increase loan volume, the targeting mechanisms have obvious flaws. Recent innovations enable banks to reduce underwriting costs and effectively match the geographic filtering necessary for CRA credit.
Could this be the turning point for banks to address their CRA challenges?
Meeting CRA Goals Without Secondary Markets
Banks are typically assessed every three years to ensure they are CRA compliant, yet they continue to face difficulty in cost-effectively lending for CRA-eligible loans. The reasons are varied: They may not have a dedicated loan product or even team members skilled in this type of lending. Above all, the process is too manual.
Over time, investing in Community Development Financial Institutions (CDFIs) or Minority Depository Institutions (MDIs), which serve traditionally underserved markets, has become commonplace. These organizations supply loan volumes that fuel secondary markets; allowing banks to buy a portfolio that satisfies a CRA need using census-tracked designation.
While essential players in the lending ecosystem, these secondary markets present three main problems for banks:
- They are expensive to acquire (often as high as a 6-8 fee on top of loan value)
- They are potentially more risky due to the lack of clear visibility into the borrower quality or stringency in the underwriting process and
- It is more challenging to grow wallet share because banks initially lack a relationship with small businesses.
Isn’t there an easier way?
Concerns From All Corners of the Office
CRA lending is also a reputational imperative. While there are fines for non-compliance, banks are often just as fearful of gaining a poor reputation due to a substandard CRA rating.
The pain points are broad across the organization. CRA officers and compliance teams worry about meeting CRA targets and maintaining the bank’s reputation. Bank executives fear balancing growth with regulatory requirements. Lending teams worry about borrower acquisition, underwriting efficiency, and portfolio growth.
Yet progress remains stagnant as the processes stay the same: paper-based loan reviews, ensuring approved SMBs wait an excruciating two to three months for funding.
Over time, most banks have divorced the idea of satisfying their CRA requirement and supporting small businesses. They’ll say, “We have a team that meets CRA through secondary markets,” and “We have a team responsible for small business.” But banks can do both things in concert. They can acquire new SMBs, serve existing depositors, and do so with an acute focus on the types of loans that will enable CRA compliance.
It’s time to overcome this obstacle once and for all.
Connecting the Dots
The industry has reached an inflection point. Financial institutions that can harness technology in multifaceted and systemic ways will win customer loyalty, improve customer experience, and ultimately increase their overall competitiveness.
With technology, banks can now deploy excess deposits and acquire CRA relationships directly and naturally– making lending to small businesses cheaper, faster, and more efficient. By pairing targeted acquisitions (including geo matching on census tracts), pre-qualification of depositors, and policy automation, CRA lending is poised to become a growth opportunity, not a compliance burden.
There’s no need to reimagine an entire tech stack, but there’s also little time to waste. Small businesses are the lifeblood of the economy and need capital to continue serving Main Streets across America. It’s time to remove the excess barriers and let the capital flow where it needs to go.
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