John Moon

English

Research Papers in Economics

FEDERAL RESERVE BANK OF SAN FRANCISCO
Community Development INVESTMENT REVIEW 50
CRA Modernization and Impact Investments
John Moon
Federal Reserve Board of Governors
B
ank regulators are currently reviewing public comment on the Community Rein-
vestment Act (CRA) to determine what regulatory changes, if any, might be made 
to this law that has served as a pillar in the community development field. In its 
first iteration, the CRA addressed the fundamental challenge of inputs – simply 
getting capital and financial services into low- and moderate-income (LMI) areas. In its 
second iteration after several major changes, the CRA focused on how to better measure 
activities that improve communities. In what may be its third iteration, the CRA must focus 
on measuring outcomes and impact; in other words, to what degree has CRA-motivated 
lending and investing successfully improved communities? 
CRA-motivated banks and the rapidly growing social impact investments field have over-
lapping and complementary objectives and challenges. On one hand, this nascent social 
impact investments movement faces similar challenges that the early community develop-
ment movement faced, such as creating intermediaries, building a supportive ecosystem, 
establishing a track record, and creating the right assessment tools. On the other hand, the 
social impact investments movement is on the cusp of becoming a standard bearer through 
the sheer size of its potential investment activities (estimated to be $500 billion within the 
next ten years), its intellectual and innovative vibrancy, and the growing professionalism of 
this field. The potential challenge and opportunity for the community development industry 
will be to realign itself to tap these new funding sources by adapting to shifting investor 
expectations for impact-based outcomes. Similarly, the CRA must also adapt to this poten-
tial funding shift within the community development industry. 
CRA History
A lack of lending in LMI communities stemmed largely from discriminatory practices 
and the perception of excessive investment risk in these areas. In the mid-1930s, banks iden-
tified geographic regions as high-risk and, as a matter of bank policy, did not lend in those 
“red-lined” regions. In 1961, the “Report on Housing” by the U.S. Commission on Civil 
Rights documented bank practices of requiring higher down payments and rapid amortiza-
tion schedules for African Americans, in addition to blanket refusals to lend in certain areas. 
The Community Reinvestment Act was passed in 1977 in response to worsening economic 
conditions in urban areas, and to redress lending practices whereby financial institutions FEDERAL RESERVE BANK OF SAN FRANCISCO
Community Development INVESTMENT REVIEW 51
accepted deposits from households in their local communities but did not lend or invest in 
those very communities.1 
Congress instituted a quid pro quo for access to the Federal Reserve discount window 
and FDIC insurance by requiring financial institutions to provide services and capital to 
underserved markets. In its 30-year history, the CRA has achieved its goal of increasing capital 
access to LMI and underserved communities. According to some studies, the changes made in 
the mid-1990s to make CRA more transparent coincided with an increase in annual lending 
commitments from $1.6 billion in 1990 to $103 billion in 1999.2 According to a study by 
Harvard’s Joint Center for Housing, the CRA expanded access to residential mortgages for 
lower-income  borrowers.3  Another  study  concluded  that  the  CRA  has  been  effective  in 
helping to overcome market failures and reduce discrimination at a relatively low cost.4 
Although the CRA is a critical regulatory tool in promoting the flow of capital to LMI 
areas and in supporting the community development industry, the CRA has not kept pace 
with the significant changes within the financial services industry. Bank consolidation and 
the growing dominance of national banks along with the impact of technology have made 
the notion of serving local markets where banks take deposits seem outmoded. With the 
growth of securitization, non–CRA-regulated financial institutions were able to penetrate 
LMI communities with lending products. In 1990, non–CRA-regulated institutions origi-
nated 17 percent of mortgage lending. By 1993, at its peak, non–CRA-regulated institutions 
originated 40 percent of mortgages. Many industry observers suggest that these non–CRA-
regulated institutions maintained a competitive advantage over CRA-regulated banks in orig-
inating loans, many of which were subprime, to LMI individuals because of the relative lack 
of supervisory scrutiny. At the same time, the emergence of other non–CRA-regulated, non-
bank financial service products such as pay-day loans, check cashing services, remittances, 
and other potentially predatory products also proliferated in LMI communities. As a result, 
the challenge for the community development field has changed since CRA was enacted 
from one of access to credit to the availability of fair and quality credit. 
The Rapid Growth of Social Impact Investing
The rapid growth of social impact investing, with its emphasis on delivering impact, is 
1	 	The	CRA	affirms	the	obligation	of	federally	insured	depository	institutions	to	help	meet	the	credit	needs	of	their	
communities,	including	LMI	areas,	in	which	they	are	chartered.	To	enforce	the	statute,	the	four	federal	regulatory	
agencies	examine	banking	institutions	for	CRA	compliance,	and	take	this	information	into	consideration	when	
approving	applications	for	new	bank	branches	or	for	mergers	or	acquisitions.	
2	 	National	Community	Reinvestment	Coalition	CRA	Commitments	(Washington,	DC:	NCRC,	September	2007).	
Availabe	at	www.community-wealth.org/_pdfs/articles-publications/cdfis/report-silver-brown.pdf.
3	 	William	Apgar	and	Mark	Duda,	"The	Twenty-Fifth	Anniversary	of	the	Community	Reinvestment	Act:	Past	
Accomplishments	and	Future	Regulatory	Challenges"	FRBNY	Economic	Policy	Review,	9	(June	2003):	169-91.	
Available	at	http://www.newyorkfed.org/research/epr/03v09n2/0306apga.pdf
4	 	Michael	S.	Barr,	"Credit	Where	It	Counts:	The	Community	Reinvestment	Act	and	Its	Critics,"	New York 
University Law Review	80	(May	2005):	513-652.	Available	at	http://www.law.nyu.edu/journals/lawreview/issues/
vol80/no2/NYU202.pdf'FEDERAL RESERVE BANK OF SAN FRANCISCO
Community Development INVESTMENT REVIEW 52
poised to be an evolutionary step in providing capital to intermediaries and firms that spur 
social innovation. A recent Monitor Group report states, “using profit-seeking investment 
to generate social and environmental good is moving from a periphery of activist investors 
to the core of mainstream financial institution,” with a potential market size of $500 billion 
within the next decade.5 Socially motivated investors (retail and institutional) are actively 
seeking to invest in funds and enterprises that tackle social challenges such as early childhood 
education, environmental sustainability, workforce development, and a range of other activi-
ties that create social value. These investors expect some balance between financial and social 
return, or what is often referred to as “double bottom line” returns. 
Of the many elements needed to build this marketplace, a key one is standards that 
measure social return so investors can gauge the relative impact of their investments. Indeed, 
several tools have been developed to measure social impact in recent years. Leading examples 
include the Rockefeller Foundation’s Impact Reporting and Investment Standards (IRIS) 
system that brings together social enterprises to develop a common framework to capture 
impact. Another is the Global Impact Investment Rating System, an international platform 
similar to the services provided by ratings agencies such as Standard and Poor’s and Morning-
star. Within the community development field, the Opportunity Finance Network’s CDFI 
Assessment and Rating System, or CARS, and the National Community Investment Fund’s 
social performance metrics were developed to address the desire to track impact. 
The CRA, however, continues to focus on bank actions, such as the number of mortgages 
closed in LMI areas or the number of small businesses funded, rather than the impact of these 
loans. Indeed, a common refrain at many of the recent public hearings on the CRA is that 
it overemphasizes activity tracking and does not adequately recognize or encourage activi-
ties that have significant community impact. Mark Willis, who once headed the community 
development and CRA departments at a large national bank, offered this critique: 
While the addition of such qualitative criteria as innovation, complexity, 
responsiveness, and Performance Context were intended to allow for more 
nuanced judgments, the reality has been disappointing. Quantitative tests 
tend to dominate the exam process perhaps because examiners either lack 
the authority to give qualitative factors the appropriate weight or because 
they  naturally  gravitate  toward  quantifiable  measures  that  are  easier  to 
defend…. The results have been that projects that have great community 
impact may not go forward simply because a bank will not receive credit 
sufficient to justify the effort required.6 
5	 	Monitor	Institute,	“Investing	for	Social	&	Environmental	Impact:	A	Design	for	Catalyzing	an	Emerging	Industry	
(San	Francisco:	Monitor	Institute,	2009),	3.	
6	 	Mark	Willis,	“It’s	the	Rating,	Stupid:	A	Banker’s	Perspective	on	the	CRA.”	In Revisiting the CRA: Perspectives 
on the Future of the Community Reinvestment Act	(San	Francisco:	Federal	Reserve	Banks	of	Boston	and	San	
Francisco,	February	2009).FEDERAL RESERVE BANK OF SAN FRANCISCO
Community Development INVESTMENT REVIEW 53
The social impact investment movement is positioned to address this problem and influ-
ence how the community development industry might track its impact. Effective efforts 
to measure social impact for investors may be driven, in part, by the lure of significant 
new funding for the community development field. For example, the Calvert Foundation is 
raising funds from institutional and retail investors through the sale of its Community Invest-
ments Notes, with proceeds invested in Community Development Financial Institutions 
(CDFI) intermediaries. Through this channel, Calvert’s managed assets have nearly doubled 
in just four years, in spite of the economic recession. These new impact investors seek measur-
able social impact and, to further tap these funds, the community development industry will 
need to develop a common framework to report impact to this new investor class. 
As bank regulators contemplate potential changes to the CRA regulations, consideration 
should be given to how the CRA could align itself with this likely shift to impact-based 
measurement and reporting. It is beyond the scope of this paper to make specific detailed 
recommendations, but it is critical to bring stakeholders together to share ideas that may 
lead to potential breakthroughs. The following are some ideas about potential benefits and 
opportunities:
•  Admittedly,  creating  a  standard  set  of  impact  measurements  is  inherently  diffi-
cult, but doing so could spur, or at least complement, the broader use of standard 
metrics by social impact investors. CRA could work hand-in-glove with the impact 
investing world, but this would require much more cooperation and coordination 
than currently exists. For example, CRA could require banks to use some aspects 
of evolving impact measures, such as IRIS, GIIN, CARS, etc. It might also provide 
carrots to "opt-in" to some of those measuring systems. Conversely, impact investors 
could use CRA data and ratings to help capture community impact. In other words, 
the two communities could place expectations on each other that would help bring 
their worlds together in action, a world they already share in terms of their goals of 
improving the lives of low-income individuals and communities.
•  The benefit of this partnership cannot be overstated. The impact investment world 
could supercharge the role that foundations have traditionally played: as sources of 
capital for higher risk/higher reward strategies to solve problems of poverty and disin-
vestment. Banks, on the other hand, are not in the experimenting business (and for 
good reason); they are in the system building business. When concepts are proven 
by high risk capital, banks can enter the marketplace with their size, reach, expertise, 
and systems and make what seemed almost impossible (lending to charter schools, 
homeless shelters, innovative small businesses, green retrofits, community clinics) 
into something that is routine. Banks are uniquely positioned to provide the sheer 
size of investment necessary to make the comprehensive and systemic changes that 
struggling communities need. Identifying the right incentives via the CRA would be 
an important first step. FEDERAL RESERVE BANK OF SAN FRANCISCO
Community Development INVESTMENT REVIEW 54
•  Getting the incentives right so that the CRA can evolve to encourage innovation 
requires that these incentives are in line with those of the impact investment world. 
Right now, the focus on numbers (outputs) ranks the same as an investment in a 
targeted mortgage-backed security and a high-risk/high-reward investment in an inno-
vative charter school experimenting with wrap-around services to keep low-income 
children reading at grade level. A new regime that captures outcomes would reward 
the latter more, and create incentives for banks to become better partners with the 
impact investing community that cares about these innovative strategies.
Conclusion
As CRA modernization is considered to better reflect the significant changes within the 
financial services sector, there should be equal consideration of the new landscape of the 
community development sector. The growth of social impact investments and their potential 
influence could begin to change how the community development sector acquires capital. 
Many promising innovations are already taking place, such as greater access to retail investors 
who are interested in placing capital into double-bottom-line investments. Of the various 
investment criteria that these new investors will require, social impact will be a key deter-
minant, and organizations must be positioned to provide such reporting. In addition to 
the obvious benefit of bringing more money into community development finance, social 
metrics will also provide the necessary feedback for community developers to ensure that all 
investments in low-income communities are spent in the most efficient way. The CRA could 
be an important catalyst to forming this marketplace, or it could be a relic of a bygone era of 
community development investments. 
John Moon is a senior community affairs analyst at the Federal Reserve Board of Governors, where he 
focuses on community development finance and investment matters. 

CRA modernization and impact investments

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CRA modernization and impact investments

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