Creating A Scorecard For The CRA Service Test

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.