This month marks the 38th anniversary of the Community Reinvestment Act (CRA). The CRA was enacted in October of 1977 to encourage financial institutions to better meet the credit needs of the low-income communities in which they operate. Despite it’s imperfections and the need to modernize the law almost forty years later, CRA has resulted in the provision of more than $1 trillion in loans, investments and services to minority and low-income households and neighborhoods. In many ways, my organization, Living Cities, is an outgrowth of the Community Reinvestment Act - so its ongoing influence in an ever-changing world has always been important to me. We were founded, as the National Community Development Initiative (NCDI) in 1991, by foundations and financial institutions who were trying to weave together CRA and the low-income housing tax credit (LIHTC), as they both came of age, to maximize the benefits for underinvested communities.
Ted Smith’s recent blog, with its focus on findCRA, an innovative web platform designed to simplify the process of collaboration between banks and community partners, made me really think about how technology is on the road to extending the spirit and impact of CRA in ways never imagined in 1977.
Expanding Access to Loans
Tools like findCRA can help even more deals become more visible to those seeking to comply with CRA.
findCRA, like other mainstream web platforms such as Craig’s List, acts like a market-maker. Those looking to borrow money for deals can post what they are looking for on the site and those looking to lend money can see all the possible deals. This sounds simple enough but it has the potential to be revolutionary for a number of reasons. First, few efficient markets like this exist anywhere in the country. In many ways, housing intermediaries built over the past thirty years, led by our long time partners, Enterprise Community Partners and LISC, were built to help fill this gap. They have long helped identify and structure deals for borrowers and then match them to CRA-regulated funders. But even they and their peer institutions don’t have the resources to be in every market and help on every deal. Tools like findCRA can help even more deals become more visible to those seeking to comply with CRA.
Intriguingly, findCRA could also be a pathway for tapping into the multi-trillion dollar, non-CRA regulated impact investor as well. With more and more high-net worth individuals looking for investments that provide a social and financial return but few, visible opportunities to do so, findCRA could become a channel for deals waiting to be crowd-funded by impact investors.
Expanding Access to Financial Services
While platforms like findCRA hold great promise for expanding access to loans from CRA-regulated and non-CRA regulated sources, the emergence of financial technology or FinTech may fill another long-standing CRA void – providing greater and more affordable access to financial services. The CRA examination of regulated financial institutions is actually comprised of three parts: a lending test, an investment test, and a service test.In fact, over the years, most CRA scrutiny and commitments revolve around lending and investment. Meanwhile, the gap in service provision for low-income people is enormous. For example, almost 10 million Americans don’t have a bank account. Americans deal with short term cash flow challenges by taking out more than $7.4 billion in payday loans a year with an average interest rate over 400%.
FinTech may finally make the type of products that low-income people need, accessible. What is FinTech? FinTech has become shorthand for “innovation in financial services”. In large part, the bundle of financial services that people and institutions often have secured from one provider, e.g., deposit accounts, investment advice and loans, through traditional structures, are being disaggregated and replaced with new technology-based processes, such as online peer-to-peer lending or robo-wealth advisors. Last year alone, $12 billion was invested by venture capitalists (up from $4 billion in ‘13) in FinTech related businesses. Most of these investors aren’t burdened by regulators, legacy IT systems and branch networks.
While the emerging FinTech industry is not focused on low-income people, a broad range of products that meet their most pressing financial needs, from deposits, payments and loans, are being developed. For example, PayNearMe makes it easy and convenient for people without credit cards to pay with cash for things like rent, car payments, utility bills, online purchases and more at a store in their neighborhood. Even is an online solution that helps people smooth out the highs and lows in their income and offers an alternative to payday lending. Kiva Zip is able to provide 0% interest, character-based loans of up to $5,000 for small businesses and entrepreneurs who are financially excluded and underserved by “crowd-funding” the capital online from individual.
The possibility of these types of new, affordable services being provided by CRA-regulated institutions to strengthen their performance on the CRA service test is one byproduct of this emerging industry. But, just as findCRA makes more deals possible, the availability of these products from non-CRA regulated institutions can only mean more low-income people will be able to benefit from these innovations.
Eight years after the Great Recession, and as CRA turns 38, the need for it and for credit and financial services for low-income people and communities has never been greater. With the right amount of investment and intentionality, technology can help extend the spirit and impact of CRA not just within its regulated institutions, but more broadly to investors and entrepreneurs worldwide.