Changing Business Practices: The Community Reinvestment Act

One well-known model of business-nonprofit collaboration has been the cooperation of American financial institutions and community-based organizations in promoting and financing the redevelopment of disadvantaged areas. Foundations have played an important role throughout the process.

Financial institutions have a special incentive not typical of most businesses: The Community Reinvestment Act of 1977 requires them to demonstrate that they extend credit fairly throughout all the areas where they do business. Community groups often help financial institutions find sound credit opportunities in poorer sections of their market area. In return, the community groups may enlist the institutions’ expertise in helping developers and nonprofit organizations design financially viable projects. Since CRA was passed, funders, grantees, and bankers have developed new methods of finding and preparing borrowers, new kinds of mortgages, and new provisions in the national mortgage-capital markets to fuel this branch of lending. Foundation-funded research and innovative programs by lenders and their corporate foundations have led to dozens of new ways to meet the law’s mandates and extend credit — by now hundreds of billions of new dollars — into poorer communities.

For years before the passage of the Community Reinvestment Act of 1977, community organizations had protested the scarcity of bank branches, loans, and financial services in poor neighborhoods. Urban historians and economists had demonstrated a pattern of bank “redlining” in such neighborhoods — that is, simply refusing to do business there — over many decades. Although banks formally opposed the Act at the time (and many continue to do so), some bankers privately recognize the practice of redlining as a classic market imperfection: Most banks will not willingly invest in low-income communities unless they are sure their competitors will do the same. Regulation, though almost always unwelcome in any industry, is the only way to ensure that end.

A grantmaker who supports community development organizations in such partnerships explains the value of business collaboration this way:

“The sheer mass of the problem [of deteriorated urban communities] is far too great for philanthropy to solve, even if a huge percentage of philanthropic wealth were devoted to this one issue — which it isn’t going to be. The private capital markets are vastly bigger than all of philanthropy combined, and they have more expertise to offer this field than foundations could amass anywhere else. And anyway, poor neighborhoods don’t want to be charity cases, they want a fair chance at participating in the normal economy like everyone else. Now, banks wouldn’t exactly be tripping over each other to capture this part of the market, obviously. For that, we needed federal regulation. But once that happened, foundations took the opportunity to help their grantees acquire the skill to work effectively with the lenders. With our help they created more and more opportunity both for their communities and for the lenders’ regulatory compliance. Over a couple of decades, they have made things happen that are far beyond what philanthropy would ever have been capable of.”

When a few members of Congress mounted a major challenge to the law more than a decade after its passage, banks and a few others supported the repeal effort, but the anti-CRA forces were not nearly so unified or strong as they had been in 1977. Subsequent efforts to repeal the Act still arise from time to time, so several grantmakers have found it prudent to support research and publicinformation projects to document what CRA has achieved.

Takeaways are critical, bite-sized resources either excerpted from our guides or written by GrantCraft using the guide's research data or themes post-publication. Attribution is given if the takeaway is a quotation.

This takeaway was derived from Working with the Business Sector.