Introduction
Nowadays, there are many laws and regulations regarding the banking system, lending, and the financial structure of the United States. They include reforms to improve the country’s credit climate and increase investment opportunities. One of these laws was CRA (Community Reinvestment Act), adopted in 1977. To evaluate its effectiveness, one needs to identify what impact it had on the banking system in terms of lending. Thus, the analysis will be accomplished on the example of three areas and their neighborhoods, namely Arkansas, California, and Boston. Moreover, the degree of influence and results of the law will be compared both for the 1990s and for modern times.
Main body
The main goal of the government of any country is to improve the standard of living of its citizens, and the most important aspect is the financial spectrum. For example, in 1977, the US government passed a CRA, the purpose of which was to improve the quality of credit systems (Handler & White, 2019). Precisely speaking, the law aimed to encourage lenders to issue mortgages to families with low or moderate incomes (Kolb, 2018). In a certain area, the needs of local communities in credit resources had to be satisfied, which became the main tool for promoting social responsibility (Kolb, 2018). In other words, the law improved credit and investment conditions for the poor population, which opened up new opportunities for them.
Further, monitoring the progress of implementation and the quality of communal investment programs was to be carried out. According to the law, this task was to be accomplished by a local government agency, which was to be attached to the territory of each bank (Kolb, 2018). Thus, the law provided not only the development of the credit system itself but also the creation of monitoring departments. It was significant as quality and progress control are integral to financial changes and structures. Moreover, one created ratings on the performance of banks in terms of activity in the field of social investment. If the bank’s indicators were not at the forefront, the population and communities had reason to believe that the bank was insolvent.
Talking about the impact of this law on the banking system in general and in the Arkansas, California, and Boston neighborhoods, one may notice a variety in results. Since the law was adopted against the background of other regulations and acts that also concerned the financial system, one cannot determine the extent of changes without the adoption of this law. However, during the 1990s, low- or middle-income areas of Arkansas, California, and Boston saw an increase in homeownership rates (Mees, 2018). Accordingly, this positively impacted the banking system, as there was an influx of mortgage receipts. Moreover, due to the improvement of the credit sector, the indicator of small business development increased, which in the future formulated more taxes payouts.
Furthermore, statistically essential results of studies on the degree of increase in the mortgage activity of banks turned out to be associated with the action of CRA. Banks in the neighborhoods of Arkansas, California, and Boston with leading CRA criteria ratings had a large share of the mortgage lending market in the designated territories (Mees, 2018). However, it led to some negative consequences for the banking system in the 90s. Banks with medium or low CRA ratings, respectively, had a smaller proportion of the mortgage market. Consequently, some banks faced bankruptcy, which led to the cessation of their activities.
Besides, the conclusion of the CRA agreement by lenders led to an increase in targeted lending in the community. However, the control committees reduced lending activity, while mortgage consultations increased their indexes. The overall analysis of the data showed that, in general, the CRA had a positive influence on the banking system in the communities of Arkansas, California, Boston, and throughout the country. It was formulated by stimulating low- and middle-income borrowers, which led to unfreezing a new spectrum of clients.
Speaking about the impact of the CRA law today, it is constituted by amendments and improvements to the act’s provisions, the last of which were adopted in 2021. The main goal is to refine the law by making its principles more transparent and accessible to a wider community. In other words, new mechanisms are emerging to reach more people and communities, both from poorer neighborhoods and those with average wages. Thus, the impact on the banking system is still positive today, which is formulated by the inflow of new capital due to new client bases.
Conclusion
To conclude, one has identified that there is mixed evidence of the impact of the CRA on banking in communities of Arkansas, California, and Boston. Generally, the act has a positive impact on the banking systems both in the above-mentioned neighborhoods and in all states. It is constituted by the influx of capital and new communities and the improvement of the investment and credit climate in the 90s. However, one also managed to find out that some banking systems faced the problem of lack of mortgage activity due to the rating criterion of CRA. Today’s influence is formulated by improving the principles of the law, which also promotes an influx of clients and communities.
References
Handler, J. F., & White, J. D. (2019). Hard labor. Routledge.
Kolb, R. W. (2018). The sage encyclopedia of business ethics and society. Sage.
Mees, C. (2018). Participatory design and self-building in shared urban open spaces: Community gardens and casitas in New York City. Springer.