Buffalo-based M&T Bank announced Tuesday morning the Federal Reserve Board of New York awarded them with a coveted “Outstanding” rating based on Community Reinvestment Act criteria. How hard is that to get? Should customers take this into account?

The bank announced their rating on Tuesday morning, adding that they have earned an “Outstanding” rating for every CRA exam since the exams began. What does this mean?

What it means is that M&T Bank does a good job of lending in the community in which it is chartered — in this case, Buffalo. The Community Reinvestment Act came out of the mid-20th century practice known as “redlining”, where banks would systematically declare nonwhite and mixed-race neighborhoods to be unsafe for lending. At the same time, people of color were barred from moving to other neighborhoods, through official and unofficial methods.

Discrimination Created Need for CRA

The Community Reinvestment Act sought to reward banks for not being discriminatory in this fashion, but the way that the law is enforced, banks cannot be punished except for when banks attempt to acquire another lending institution — if they’ve been naughty instead of nice, regulators can prevent them from expanding.

It is in banks’ best interest to comply with the Act, not only in case they want to acquire another bank, but also because lending within their footprint should, in theory, serve to grow wealth within their footprint. Noncompliance, on the other hand, cannot get a bank shuttered.

So far, only 11 banks have gotten the coveted Outstanding rating from the Federal Reserve Board from exams done this year. Many more have gotten “Satisfactory” this year: 111 to be exact. And only two got “Needs to Improve”; none got “Substantial Noncompliance” so far — phew!

It’s a small sample, but according to these numbers only 8% of all banks examined got an Outstanding score on the exam, and this number is down over the past few years.

In 2006, before the Great Recession, 27 of 243 banks examined earned the highest rating. That’s 11%. Same goes for 2010, only 11% (31 of 276) earned that rating. A decade ago, in 2000, 18% of banks examined earned that distinction.

Fewer Outstanding Banks These Days

The trend is sharp downwards, which goes along with the larger trends we’ve seen in consumer lending. Banks have tightened credit standards, meaning that low-income households and people with lower credit are the first to feel the pinch. While the CRA doesn’t expect banks to make risky loans, it seems likely that the tightening of credit standards has made it so that fewer banks are being quite so generous with poorer communities within their footprint.

So, back to M&T, that’s an impressive feat especially considering they are based in Buffalo. It’s one of the poorest big cities in the United States, along with Cleveland and Detroit. These are not easy places to extend credit, one would think. But actually looking at Federal Reserve CRA ratings, the only Cleveland bank examined (Shorebank Cleveland in 2003) earned an Outstanding, as did two of three Detroit banks (Comerica and Bank One Michigan, 2006 and 2001, respectively).

To contrast, San Francisco has no Outstanding CRA banks (by FRB standards), and neither does San Diego.

Perhaps because few financial institutions call these downtrodden cities home, and bigger banks headquartered elsewhere have little incentive to lend to poor urban communities outside of their footprint, these banks stand out because they are the only ones around with incentive to lend. Perhaps not. It is interesting that poorer cities seem to produce more ‘Outstanding’ banks than wealthier cities.

As to whether this matters for you as a customer is up to you. It is nice to think that your deposits do go back to your community in some way. This is part of the appeal of credit unions. But if you can’t see yourself joining a credit union but still care about your community’s wellbeing, then Community Reinvestment Act scores are perhaps a good place to start.

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