Keep the Community in the Community Reinvestment Act

In 2012, Lia Hirtz worked in the back of a liquor store in Burbank, Calif., kneading dough, preparing filling, baking tasty empanadas and dreaming of building a business. It wasn’t long before World Empanadas was earning $16,000 a month.

Lia was poised to grow, but she needed a walk-in freezer to keep up with rising demand. Bank after bank denied her a loan until she learned about Opportunity Fund, a Community Development Financial Institution.

Lia bought the freezer and grew her business. Then the dough really started rolling in. She now has 13 employees, more than $1 million in annual revenue and is a thriving part of Los Angeles’ vibrant food scene, catering to some of Hollywood’s biggest studios and stars.

Lia got the loan from Opportunity Fund thanks, in large part, to the Community Reinvestment Act, a federal law designed to encourage big banks to invest in the low- and moderate-income neighborhoods where they have branches. But the CRA is under governmental review and, unfortunately, facing proposals that threaten its ability to help small businesses like World Empanada. Unless there is a change in course, the success Lia enjoyed could become more elusive for thousands of fledgling entrepreneurs.

The CRA was passed in 1977 to address the issue of geographical, income-based, and/or racial discrimination in investments and services offered by banks and government agencies. It requires banks to invest in low-income neighborhoods where they operate in order to be approved for future branch openings, mergers and acquisitions.

To determine whether banks are meeting CRA standards, they are graded on an array of activities as well as input from groups in the communities they serve. One crucial way they can achieve their CRA goals is by deploying low-cost capital to nonprofit CDFIs such as Opportunity Fund, which then lend those dollars directly to underserved communities and small businesses.

This system has made the CRA remarkably effective. According to the National Community Reinvestment Coalition, it has spurred more than $6 trillion of investments in low- and moderate-income communities. Opportunity Fund alone has received over $70 million in CRA-motivated investments from banks, which in turn has allowed it to originate nearly $200 million in small business loans because the organization has a dollar-for-dollar leverage ratio of about $3 to $1 — meaning that for every dollar invested, three dollars are lent in the community.

But the partnerships between banks and CDFIs are in jeopardy. Changes proposed by federal regulators would weaken the CRA and could result in the loss of up to $16 billion in small business lending to low- and moderate-income areas over five years, according to a forecast by the National Community Reinvestment Coalition.

The most distressing proposal, called One Ratio, would remove the voices of community groups from the examination process in favor of installing a single quantitative metric. This change would incentivize banks to make a few large investments to reach their goals rather than investing in CDFIs and the small businesses they lend to and funding the thoughtful services advocated for by local groups to address the needs of marginalized communities. However mathematically simple, the One Ratio rule fundamentally undermines the purpose of the CRA: thoughtful, beneficial and robust community investments.

This review is an opportunity to modernize the CRA while retaining the heart of this incredibly effective law. Instead, the proposals on the table would limit loans to CDFI customers — largely women, people of color and immigrants who turn loans into small businesses that create jobs, provide valuable services and inject vitality into our communities across the country: people like Lia Hirtz and World Empanadas.

It’s time to improve the CRA, not weaken it.


Luz Urrutia is the CEO of Opportunity Fund, a leading Community Development Financial Institution with the largest portfolio of micro-business loans under management among nonprofit lenders in the nation.

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