Banking on a Curve : How to Restore the Community Reinvestment Act

The federal government’s primary financial-regulatory tool for combating wealth inequality is broken. Intended to push banks towards deeper engagement with lower-income and minority communities, the Community Reinvestment Act (CRA) of 1977 has failed to meaningfully reduce the prevalence of “banking deserts” across lower-income communities or to reduce the racial wealth gap. As regulators circulate a proposed overhaul and the prospect of generational reform appears within reach, there is a danger that the CRA’s current moment in the sun will pass without the law being substantially improved. This Article argues that the roots of the CRA’s problems are supervisory: bank examiners have severely skewed CRA examination scores to presume success in community lending. The Article documents, for the first time, the extreme grade inflation in examinations, with 96 percent of banks receiving one of the top two ratings. Given the persistence of underinvestment in lower-income and minority communities, that result beggars belief.As a corrective, banks should be graded on a curve, with a certain percentage of institutions slotted in most grade categories—including, importantly, the categories that prevents banks from pursuing new business opportunities. This reform—which, to maximize its effectiveness, should be enacted in tandem with a collection of other measures designed to discourage regulatory arbitrage—would enable the CRA to fulfill its promise: to expand access to credit, spur investment in overlooked areas, and combat racial inequities through the financial system