Creating a Scorecard for the CRA Service Test: Strengthening Banking Services Under the Community Reinvestment Act

The significant number of families in the United States who do not have a bank account, or who use “fringe” financial institutions like payday lenders to meet their basic credit needs, have captured the attention of policymakers in recent years. While advances in technology and new public funds have created opportunities for banks to serve lower-income markets, many banks have been slow to reach out to potential new customers. The Community Reinvestment Act (CRA) service test could provide important incentives for banks to serve “unbanked” and “underbanked” populations, but an analysis of almost 2,000 CRA examinations conducted over the last five years reveals anomalies in service test scores, and suggests that subjective and varying criteria are used to assess bank performance on the test.

During their 2002 review of the CRA regulations, policymakers and regulators should strive to strengthen the service test. A series of reforms to make the test more performance-based would eliminate “grade inflation” and facilitate the development of profitable new markets and products that could encourage banks to reach out to underserved populations. 


Despite the longest economic expansion on record during the 1990s, 10 percent of all American families—including 25 percent of African-Americans and Hispanics, a quarter of all families with incomes under $20,000, and nearly half of all families moving from welfare to work—have no bank accounts. Without bank accounts, families often pay high fees to check-cashing services and other “fringe bankers” to conduct basic daily financial transactions. Banking status also has profound implications for families’ long-term self-sufficiency and access to a broader set of financial services. Low-income people with bank accounts are more than twice as likely as their unbanked counterparts to hold savings or have a home mortgage, and are six times as likely to own a credit card.

But having a checking account is not the same as using credit wisely. Nationwide, millions of “underbanked” families who do have checking accounts, but live from paycheck to paycheck, frequently pay a high price when conventional banks are either unwilling or unable to meet their acute credit needs. The vacuum in consumer credit created by the withdrawal of most mainstream lenders from the small loan market is being filled largely by a growing number of companies offering high-cost “payday loans”—one- to two- week cash advances on a portion of the borrower’s paycheck. Because of their short terms, triple digit interest rates, and ease of access, payday loans are turning financially fragile families into chronic debtors.

In a recent book, Savings for the Poor, (Brookings, 1999) Michael Stegman discusses how technological advances and public policies—particularly the delivery of government benefits through electronic funds transfer (EFT) and the creation of individual development accounts (IDAs) to help lower-income families build assets—have combined to create new market opportunities for financial institutions to profitably serve unbanked and marginally banked populations. Yet despite the dramatic cost-cutting potential of electronic banking and the availability of public funds for basic account and financial education programs, many banks have been slow to reach out to potential new customers.

The 1977 Community Reinvestment Act (CRA), originally enacted by Congress to combat credit “redlining” in low- and moderate-income neighborhoods, includes a “service test” that could provide powerful incentives to financial institutions for improving retail banking services for low-income unbanked and underbanked families who have difficulty accessing the types of financial services they need. But due to inadequacies in its implementation, the test has fallen far short of its original promise. Our statistical analysis suggests that pressure to help institutions earn satisfactory overall CRA ratings may serve to boost service test scores for “borderline” banks. Creating a more objective scorecard for measuring performance under the CRA service test could reduce grade inflation and increase banks’ responsiveness to the needs of the banked and underbanked.