CRA and financial literacy: What banks need to know

There’s been a major reworking of the Community Reinvestment Act (CRA), which charged banks with extending credit to low- and moderate-income neighborhoods (LMI) – areas that had been “redlined” or previously excluded from the support of the banking system.

Within a wide array of changes, financial education will become a more significant element of CRA exams.

After a long road to passage, the final new-look CRA officially takes effect on April 1, 2024. Most compliance targets come due in 2026 and 2027, but the size of the regulation, at some 1,500 pages, means that banks should be diligent in preparing from day one.

As for the financial-education piece, the rule states that large banks will be tested not just on the broad category of “services” for 40% of their exam grade, but 10% of that grade will be determined by a test devoted exclusively to “community development services.” Read more on qualifying bank sizes, loan models and other factors that impact enforcement.

In effect, the amended CRA also adds new categories that may earn credit in terms of community development, including “financial literacy.”

Few community banks leap at the opportunity to shoulder fresh compliance burdens, but the updated CRA has the potential to spur the growth that banks are hungry for already.

The new CRA is clearer on activities that matter

The updated CRA also amends the type of activities that qualify as community development, revising what constitutes affordable housing and economic development, as well as adding new categories. Banks will now be credited for activities in:

• Affordable housing (with necessary clarifications for unsubsidized and mixed-income housing);
• Economic development that supports small businesses and small farms (mostly evaluated under the retail lending test);
• Community supportive services;
• Revitalization activities (with significant changes from current regulations);
• Essential community facilities;
• Essential community infrastructure;
• Recovery activities in designated disaster areas;
• Disaster preparedness and climate resiliency activities;
• Activities with minority depository institutions, women’s depository institutions, low-income credit unions, and Treasury-certified community development financial institutions;
• Financial literacy; and
• Qualifying activities in Native land areas.

In addition to quantifying these activities, the regulating agencies will evaluate the impact and responsiveness to community needs for institutions engaging in them. This may privilege certain activities over others.

Educating customers about financial matters can be an enormous help in ticking necessary regulatory boxes on a CRA exam or in getting certified as a CDFI and yet financial wellness training can do so much more.

Consumers desire better money management skills

Firsthand knowledge of your customer’s financial goals is critical when designing an effective financial education program. According to Plinqit’s State of Savings Report, the vast majority of Americans (91%) said that they are saving for something specific. The most popular savings goals fell into three buckets:

• 43% emergency funds
• 43% travel
• 42% paying off debt

With better financial wellness education, customers have fewer regrets about the dollars they’ve spent and are equipped to make better progress toward their goals. Financial literacy can foster a win-win for community banks and their customers. Account holders save more and manage their finances more actively. This leads to more deposits and behaviors that benefit the bank’s bottom line.

Meet consumers where they already bank

Financial education may be a popular concept, but execution remains a challenge. Until recently, financial education by banks took the form of seminars held in local libraries or at branches.

With branch closures continuing apace, especially in LMI neighborhoods, consumers have less access to in-person financial education. Fortunately, many financial institutions are re-imagining financial education through new delivery modes, such as online apps and other digital offerings.

A tech-savvy approach to financial education makes sense, given the trend lines. Today, for instance, nearly nine out of ten (87%) individuals say that they use their banking app once a month or more, according to the Chase Digital Banking Attitudes Study conducted in November 2022.

The BAI Banking Outlook: 2024 Trends report tells us that bank customers expect to use digital channels for 65% of their transactions by 2026, although they’ll include branches in the mix for higher-touch demands.

Add in the recent news that Intuit has shut down Mint, its personal finance management app, and it’s pretty clear that consumers are primed to need the kind of resources, education and know-how that banks have in spades.

Standalone personal finance apps have often struggled to monetize, as was the case with Mint. However, thanks to established digital banking channels, transaction data and robust product offerings, banks are in the perfect position to provide financial wellness tools and educational resources that make a meaningful impact on customers.

You can provide the education and the tools

Even if you’re feeling daunted about complying with the revised CRA, the stars are aligned when it comes to meeting community development goals and delivering financial education.

What the CRA requires in terms of promoting greater financial literacy aligns perfectly with the best interests of banking at large and the consumers. Financial wellness is much more than a ‘feel-good’ concept. There is a symbiotic relationship between banks and their customers. The better educated your customers are about their finances, the more successful they will be. And well-informed customers lead to thriving financial institutions.

In the end, when bank customers make educated choices and grow their own wealth, financial institutions grow their deposits and their financial futures, too.

Kathleen Craig is Founder and CEO of Plinqit.