Stella J. Adams

English

Research Papers in Economics

Revisiting the CRA: Perspectives on the Future of the Community Reinvestment Act
167
T
he Community Reinvestment Act (CRA) was 
designed to correct market failures thirty years 
ago. The reimagining of CRA must address the 
remnants of twentieth-century market and gov-
ernment failures with twenty-first century solutions. Fi-
nancial institutions and regulators must revisit the intent 
of the CRA, which states that regulators are “to assess 
an institution's record of meeting the credit needs of its 
entire community [emphasis added], including low- and 
moderate-income neighborhoods, consistent with the 
safe and sound operation of such institution.”1 I proffer 
that the entire community includes racial and ethnic 
minorities, and the CRA should be expanded to address 
directly these underserved parts of the community.
Federal Reserve Chairman Ben Bernanke, in his 
remarks at the Community Affairs Research Conference, 
identified racial discrimination as the first of several 
social and economic factors that led to the enactment of 
the CRA. Chairman Bernanke stated that “the CRA itself 
focused on the provision of credit to low- and moderate-
income communities rather than on discrimination by 
race, sex or other personal characteristics. Legislation that 
addressed discrimination in lending explicitly included 
the Equal Credit Opportunity Act (ECOA)2 and the Fair 
Housing Act.”3 Bernanke stated that the purpose of the 
CRA was to “rectify market failures.”4 While the market 
failures of the 1970s involved access to credit in low-in-
come areas, the market failures of the twenty-first century 
fall along race lines. The new CRA should address the 
governmental and market failures associated with racial 
discrimination and racial market segmentation.
The ECOA and the Fair Housing Act were designed 
 Putting Race Explicitly into the CRA
Stella J. Adams
S J Adams Consulting
to address individual acts of discrimination, and while 
both include provisions to address disparate impact and 
systemic discrimination, they have failed to adequately 
address the market failures that perpetrate and perpetuate 
racial market segmentation and racial discrimination. This 
is best achieved by explicitly including race in the CRA, 
a change that would not require any new or enhanced 
legislative authority. In fact, §3608(d) of the Fair Hous-
ing Act states: “All executive departments and agencies 
shall administer their programs and activities relating to 
housing and urban development (including any Federal 
agency having regulatory or supervisory authority over 
financial institutions) in a manner affirmatively to further 
the purposes of this subchapter and shall cooperate with 
the Secretary to further such purposes.” 
Current market failures explain why upper-income 
African Americans in my hometown of Durham, North 
Carolina, are four times more likely to have a higher-
cost loan than whites with similar incomes.5 Market 
failures explain the fact that whites represent 55 per-
cent of the population in poverty but only 30 percent 
of the people living in neighborhoods of concentrated 
poverty, while three out of four poor African Americans 
and Latinos live in these neighborhoods. Market failures 
explain why one in ten African Americans live in neigh-
borhoods of concentrated poverty compared to one 
in 100 whites.6 Market failures explain why rural and 
urban communities share histories of disinvestment and 
spatial isolation and yet experience poverty differently. 
Any revisions to the CRA must address these failures 
directly and require financial markets to adopt correc-
tive measures. 
1   12 U.S.C. 2901.
2   15 U.S.C. 1691 et seq.
3   42 U.S.C. 3601 et seq.
4	 	Ben	S.	Bernanke,	“The	Community	Reinvestment	Act:	Its	Evolution	and	New	Challenges,”The	Community	Affairs	Reserch	Conference,	Fed-
eral Reserve Board, Washington, DC, 2007.
5	 	National	Community	Reinvestment	Coalition,	“Income	Is	No	Shield	Against	Racial	Differences	in	Lending	II:	A	Comparison	of	High-Cost	
Lending in America’s Metropolitan and Rural Areas,” Washington, DC, 2008.
6	 	Jason	Reece,	“Will	you	be	my	neighbor?	Housing	and	neighborhood	diversity	in	the	US,”	lecture,	February	19,	2008,	Kirwan	Institute,	Ohio	
State University; and Reece, “Race, Class, and Opportunity: Understanding the Convergence and Divergence of Race and Class in the US.,” 
lecture,	January	16,	2008,	Kirwan	Institute.	Both	at	http://www.kirwaninstitute.org/publicationspresentations/presentations/2008.php.Revisiting the CRA: Perspectives on the Future of the Community Reinvestment Act
168
Throughout American history there have been govern-
ment failures that have explicitly restricted access and 
opportunity for racial and ethnic minorities. In particular, 
the Home Owners Loan Corporation (HOLC) and the 
Federal Housing Administration (FHA) established public 
policies that contributed to racial market segmentation 
and racial segregation. 
HOLC institutionalized redlining through its rating 
system developed allegedly to identify risk associated 
with making loans.7 HOLC established four categories of 
neighborhood quality with the lowest category reserved 
for African American neighborhoods and color-coded 
red. The HOLC gave the highest rating to neighborhoods 
that were “new, homogenous, and in demand in good 
times and bad” and specified that these neighborhoods 
were to be occupied by “American business and profes-
sional men.” Although HOLC did not invent this system, 
it did place the full faith and credit of the United States 
behind the practice.
For decades, the FHA adopted HOLC ratings and 
the policies and practices that denied access to afford-
able mortgage products to African American borrowers. 
The FHA Underwriting Manual (1939) was crafted by 
Frederick Babcock, who wrote in his influential text-
book The Valuation of Real Estate (1932) that "most of 
the variations and differences between people are slight 
and value declines are, as a result, gradual. But there 
is one difference in people, namely race, which can 
result in a very rapid decline. Usually such declines can 
be partially avoided by segregation and this device has 
always been in common usage in the South where white 
and negro populations have been separated.”8 Babcock 
believed that "among the traits and characteristics of 
people which influence land values, racial heritage and 
tendencies seem to be of paramount importance. The  
aspirations, energies, and abilities of various groups in the 
composition of the population will determine the extent 
to which they develop the potential value of the land.”9 
If only Babcock’s influence had ended with the FHA. 
Unfortunately, he is considered a seminal figure in the 
academic and practical application of real estate ap-
praisal practices.10 While African American veterans re-
turning from World War II benefited from the education-
al benefits associated with the GI Bill and established 
the foundation of today’s African American middle class, 
Babcock’s influence denied them access to VA loan pro-
grams established under the Serviceman’s Readjustment 
Act of 1944.11 
The FHA and VA loan programs made homeowner-
ship more than just a dream for the majority of Ameri-
cans. Between 1934 and 1969, the home-ownership rate 
increased from 44 percent to 63 percent.12 During this 
same period, less than one percent of all African Ameri-
cans were able to obtain a mortgage.13 During this period, 
the opportunity to create transgenerational wealth through 
homeownership was denied to minority households. As 
a result, white non-Hispanic households currently have 
a median net worth of $79,400, including home equity, 
compared to $7,500 for African American households.14
Thus, government failures encouraged and contrib-
uted to the racial wealth divide and the negative conse-
quences it has had on my neighbors and my neighbor-
hood. These decisions have benefited the majority at the 
expense of my community. This structural racism is a part 
of our national subconscious. Men like Babcock laid a 
foundation constructed on racial animus that has perme-
ated our markets in ways that are as deadly and invisible 
as carbon monoxide. 
Sadly, as we face the current mortgage credit crisis, 
we are repeating history through the adoption of “de-
clining market” policies, the redefinition of credit risk in 
ways that continue the racial segmentation of our credit 
markets, and the assumption that the crisis was caused 
by providing access to credit to minority communities. 
The explicit inclusion of race in the CRA offers us 
an opportunity to correct these government and market 
7   K. T. Jackson, Crabgrass Frontier: The Suburbanization of the United States (New York: Oxford University Press, 1985).
8	 	Frederick	Babcock,	The	Valuation	of	Real	Estate	(New	York:	McGraw-Hill,	1932),	91.
9	 	Ibid.,	86.
10   N. Miller and S. Markosyan, “The Academic Roots and Evolution of Real Estate Appraisal,” Appraisal Journal, 71(2) (2003): 172–84.
11   38 U.S.C. §§ 3451. 
12   D. S. Massey, “Origins of Economic Disparities: The Historical Role of Housing Segregation,” in Segregation: The Rising Costs for America, 
ed. J. H. Carr and N. K. Kutty (New York: Routledge, 2008), 39–80.
13	 	Reece,	lectures	at	Kirwan	Institute,	2008	(see	note	6).
14	 	G.	W.	Domhoff,	“Power	in	America:	Wealth,	Income,	and	Power,”from	Who	Rules	America?	Available	at	http://sociology.ucsc.edu/whorulesa-
merica/power/wealth.html.Revisiting the CRA: Perspectives on the Future of the Community Reinvestment Act
169
failures, and would allow us to do more than just reduce 
the concentration of poverty and spatial isolation in 
neighborhoods of color. It would allow us to create op-
portunities for building real transgenerational wealth for 
minority families while protecting our nation’s competi-
tiveness in the global economy.
We have become painfully aware over the past few 
months that we live in a global society and the deci-
sions we make have external costs and benefits far 
beyond our shores. If the United States is to remain 
globally competitive as we transition from the industrial 
to the information age, we cannot afford to leave com-
munities of color behind. We must adopt strategies that 
will enable these communities to compete in the global 
marketplace by providing them with access to the capi-
tal they need for wealth creation and wealth retention 
in this new environment. Through a reimagining of the 
CRA, this can be accomplished through the support of 
both short-term and long-term strategies and market-
based solutions. 
Policy Proposals
The CRA should explicitly reward financial institutions 
that aggressively engage in investments in minority wealth 
creation and minority neighborhood development.
Doing so would provide opportunities for all mem-
bers of the community, and would begin to close the ra-
cial wealth divide that was created by twentieth-century 
government and market failures. We can close the divide 
by investing in programs that promote wealth creation, 
educational attainment, and sustained employment for 
minorities. Examples of these kinds of investments that 
promote wealth creation include: affordable home-
ownership programs; scholarships for higher education; 
work-study matching funds; paid internships for students 
attending historically black colleges and universities; and 
jobs that provide a living wage.
In addition to supporting minority wealth creation, 
this new twenty-first century market must support and 
empower minority neighborhoods with investments 
in neighborhood-based initiatives. Examples of these 
kinds of investments include: support for neighborhood 
redevelopment; the creation of neighborhood anchors 
such as major retail and grocery stores; financing hous-
ing and infrastructure; brownfield and vacant-property 
development; and support for minority small businesses 
with technical assistance, affordable loans, and equity 
investments.
Through the CRA, we can promote public/private 
partnerships that encourage integrated and inclusive 
communities. These partnerships will develop initia-
tives that provide technical and public assistance in the 
design, packaging, and financing of neighborhood-based 
projects. These partnerships will promote employment 
opportunities for local residents and provide subcon-
tracting opportunities for local minority and other 
community-based firms. The CRA can also be used to 
measure the extent to which banks do business with 
minority vendors, contractors, and professionals.
Explicitly including race in the CRA allows us to 
determine when, where, and how to effectively struc-
ture market interventions to correct past market failures. 
It allows us to develop strategies that challenge racial, 
social, and economic stratification by including a com-
mitment to develop robust markets in minority com-
munities. We must use the CRA and other public policy 
tools to correct market failures that support racial market 
segmentation and to create sustainable markets that are 
not dependent on the rationing of credit based on the 
observationally distinguishable characteristic of race. 
Stella Adams is the founder and CEO of S J Adams 
Consulting.  Her focus has been on the elimination of 
predatory lending, support for community reinvestment, 
and education of communities about fair housing and 
fair lending issues. Ms. Adams’ activism gave impetus to 
the passage of the North Carolina Anti-Predatory Lend-
ing bill, signed into law in 1999.  Ms. Adams has testified 
before Congress on many occasions and is the recipient 
of the 2006 Individual Achievement Award of the Inter-
national Association of Official Human Rights Agencies, 
the 2005 Civil Rights Award granted by the National 
Association of Human Rights Workers, the 2004 HUD 
FHEO Pioneer Award for her work in fighting predatory 
lending, and the 2004 National Fair Housing Alliance 
Fair Lending Advocacy Award. Ms. Adams also served on 
the Federal Reserve Board Consumer Advisory Council 
(2005-2008), which advises the Board on the exercise of 
its responsibilities under the Consumer Credit Protection 
Act.  Ms. Adams is a member of the board of directors of 
the National Community Reinvestment Coalition and the 
National Association of Human Rights Workers. 

Putting race explicitly into the CRA

http://www.frbsf.org/publications/community/cra/putting_race_explicitly_cra.pdf

Putting race explicitly into the CRA

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