Community Reinvestment Act may have unintended effects on banks

The Federal Reserve recently announced changes to the Community Reinvestment Act (CRA), outlining new regulations for banks depending on their size. While the reforms encourage banks to better meet the lending needs of lower-income populations, there may be some unintended effects.

Jacelly Cespedes, assistant professor in the Carlson School of Management, has studied the CRA and its revisions over the last four decades. Cespedes can speak to what the new changes mean for banks and consumers.

Jacelly Cespedes, PhD

“Lawmakers passed the CRA in 1977 to reduce discrimination in lending and combat the effects of redlining. The law encouraged banks to meet the credit needs of low- and moderate-income areas. Since then, there have been several revisions to the CRA.

“The latest CRA revision, which goes into effect in 2026, expanded the geographical area in which lenders must extend loans to low-income communities. Instead of just focusing on areas where the banks have branches, it will include areas where the banks are lending online without a physical location. Additionally, large and intermediate banks will be subject to stricter performance tests, which means it may be harder for banks to achieve satisfactory or outstanding ratings.

“Any regulation is going to have distortionary effects that will affect the behavior of institutions or individuals. The newest CRA changes will create more of a burden on intermediate-sized banks, which have assets between $600 million and $2 billion. According to my research from past CRA reforms, when the burden is too high, banks have more incentive to be strategic and slow their growth, and that strategic behavior hurts the community. For example, banks close to the $600 million threshold may start approving fewer loans to stay small and reduce regulatory costs, which could hurt small businesses and lead to less innovation in an area. Ultimately, the CRA changes will hold institutions more accountable but may have unintended consequences on banks’ lending behavior.”

Jacelly Cespedes is an assistant professor in the finance department at the Carlson School of Management. Her research expertise includes corporate finance, household finance, financial intermediation, and FinTech.