Research Paper

Quantitative Performance Metrics for CRA: How Much “Reinvestment” is Enough?

September 27, 2019

Authors Carolina Reid

Current Themes

Quantitative Performance Metrics for CRA in red text over grey background

Download PDF

Overview

This policy brief by Carolina Reid, Assistant Professor at the Department of City and Regional Planning and Faculty Research Advisor at the Terner Center for Housing Innovation, explores the complexities of evaluating the Community Reinvestment Act (CRA) activities using quantitative performance metrics. The paper investigates the challenges and potential benefits of adopting a metric-based framework to assess the CRA activities of banks, emphasizing the need for a balanced approach that considers both quantitative and qualitative aspects of community reinvestment.

Key Message

The paper highlights the complexities involved in adopting a purely quantitative approach to evaluating CRA activities. While a metric-based framework could bring greater clarity and objectivity to CRA ratings, it also poses significant risks. The analysis of performance evaluations (PEs) reveals substantial inconsistencies in data reporting and evaluation periods, which complicate the development of a standardized metric. For instance, variations in how assessment areas are defined and the inclusion of different types of loans and investments can lead to disparities in CRA ratings.

Moreover, a shift towards quantitative metrics may undervalue the qualitative aspects of CRA activities, such as partnerships and innovative community development initiatives that do not easily translate into dollar amounts. The findings suggest that CRA ratings are influenced by the volume of loans and investments relative to bank size, but this relationship is sensitive to market conditions and economic cycles. Banks operating in high-cost markets with robust community development infrastructures tend to perform better on CRA evaluations, potentially exacerbating disparities between different regions.

To modernize CRA effectively, regulators should focus on improving data collection and standardization, ensuring that CRA activities align with the statute's intent to support low-income communities. This includes considering the needs of emerging areas with persistent poverty and incentivizing banks to engage in meaningful community development projects. A balanced approach that incorporates both quantitative and qualitative measures will better capture the diverse ways banks contribute to community reinvestment, fostering a more inclusive and effective CRA framework.