Community Resilience: Climate Adaptation and the Community Reinvestment Act (CRA)

Community Resilience: Climate Adaptation and the Community Reinvestment Act (CRA)

INSIGHTi
Community Resilience: Climate Adaptation
and the Community Reinvestment Act (CRA)
August 20, 2021
Climate change has become an increasingly salient topic among financial regulators and in the economic
development and public policy arenas more general y. In particular, some climate-related disasters and
long-term effects are likely to contribute to macroeconomic stress with broad implications for the
financial sector and the economy as a whole. For example, extreme heat events could stymie economic
productivity and output; natural disasters may induce economic shocks that threaten financial stability;
and uncertainty about climate-related events and policies may inhibit certain economic activities.
In response to the increased frequency and severity of disasters that the scientific community has linked to
climate change, Congress and federal agencies have sought to minimize risk through resilience
investments. Resilience activities—also cal ed pre-disaster hazard mitigation, or “adaptation” activities
(see CRS In Focus IF11827, Climate Change: Defining Adaptation and Resilience, with Implications for
Policy)—are receiving increased federal and public attention amid the growing perceived threat from
climate change to the global economy and society. The federal government uses a variety of tools—
including grants, loans, and tax incentives—to promote community and economic development, which
includes investments that may address the risks of climate change and promote climate-related
community resilience.
One tool designed to address credit availability may have the ancil ary benefit of promoting climate
resilience. The Community Reinvestment Act (CRA) is used to incentivize banks to make certain loans
and community investments in low- and moderate-income (LMI) neighborhoods. Given how the CRA is
currently implemented, it may result in some amount of those loans and investments going to projects that
increase climate resilience. This Insight considers how the CRA can encourage bank lending to climate-
related resilience investments.
Background on the Community Reinvestment Act
Federal banking regulation may indirectly play a role in addressing climate risks through the CRA. The
CRA (P.L. 95-128, 12 U.S.C. §§2901-2908) was developed to encourage banks to meet the lending needs
of their communities—including LMI neighborhoods—that often receive less market attention and
investment than other communities. Three bank regulators implement and enforce the CRA: the Federal
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Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the
Currency (OCC). These bank regulators award CRA credits when banks participate in certain qualifying
activities, which are ultimately transformed into performance ratings. Such ratings are taken into account
when banks apply for branches, mergers, and acquisitions, among other things. CRA-qualifying activities
include providing loans, investments, and service contributions within banks’ designated assessment
areas, which include any LMI areas (e.g., census tracts that have median incomes under 50% of the area
median income and 50%-80% of area median income). For more information, see CRS Report R43661,
The Effectiveness of the Community Reinvestment Act and CRS In Focus IF11865, Implementation of the
Community Reinvestment Act by the Office of the Comptroller of the Currency.
Intersection of Climate Resilience Activities and CRA
Over the years, the federal bank regulators have shown increased interest in the role of banks in disaster
recovery and pre-disaster hazard mitigation, including climate resilience. The bank regulators, however,
general y award CRA credit for eligible activities that benefit LMI individuals or community
development to be consistent with statute, rather than for al climate-friendly projects. Nevertheless, some
CRA eligible activities could incidental y improve climate resilience.
 An analysis commissioned by the Federal Reserve Bank of San Francisco found that
since 1998, 57% of disaster-impacted counties have census tracts where banks may
receive CRA credit. The banking regulators have stated that banks may receive
consideration for CRA credit when participating in activities “consistent with a bona fide
government revitalization or stabilization plan or disaster recovery plan.” In other words,
post-disaster recovery activities, pre-hazard mitigation activities, and climate resilient
investments that also meet additional criteria, such as the bona fide test and community
development obligations under the CRA, may be eligible for CRA credit.
 The OCC, the Federal Reserve, and FDIC issued a joint list of examples of CRA-eligible
lending activities in 2016 that included loans “to finance renewable energy, energy-
efficient, or water conservation equipment or projects that support the development,
rehabilitation, improvement, or maintenance of affordable housing or community
facilities.”
 In 2020, the OCC updated an il ustrative list of qualifying CRA eligible activities and
included green projects and climate resilience in LMI communities, provided those
projects reduce the utility costs or otherwise maintain affordability of LMI housing.
Bank financing activities that facilitate community-level climate resilience projects may already be
eligible for CRA credit if they meet the abovementioned criteria.
Broadening the CRA?
Certain climate resilience investments are viable CRA-eligible activities. However, whether CRA should
be broadened to support federal policies that would encourage disaster planning at the state and local
levels while addressing climate-related issues is debatable. On the one hand, broadening CRA eligibility
to include any climate resilience loans and investments arguably may dilute the original intent of CRA,
which focuses on promoting credit availability to LMI individuals and community development. On the
other hand, bank financing for disaster mitigation efforts that address climate-related disaster events, such
as extreme heat preparedness and mitigation measures, may benefit LMI communities indirectly even
when a bank has made a climate resilience loan to a non-LMI borrower. Given the perceived benefit to
LMI communities, bank regulators have al owed lending for disaster recovery and eligible preparedness
activities to be eligible for CRA credit.

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Author Information

Michael H. Cecire
Darryl E. Getter
Analyst in Intergovernmental Relations and Economic
Specialist in Financial Economics
Development Policy

Disclaimer
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