Community Reinvestment Act and Mortgage Rates

I inquired with three lenders about financing for a new home. Two of the rates being quoted are the same but the one is half a point lower than the other two. When I questioned the lender about this, he said the reason the rate is so much lower is because as a first time homebuyer the home I'm buying is located in an area of town that falls underneath the Community Reinvestment Act therefore I qualify fo a lower rate. This sounds to good to be true. Is this true?

3 Answers

True indeed!

The Community Reinvestment Act encourages banks with brick and mortar establishments to construct creative financing programs to aid areas that the government classifies as low or moderate income zones.  If a home falls in one of these designated census tracts, it would be eligible for discount financing without regard to the income of the applicant.

The incentives to the bank are tremendous for offering these discount programs.  Having an " excellent CRA rating" allows banks to acquire other financial institutions or open branches in areas they did not have a presence in.  It also allows the bank unfetterd access to the federal reserve discount window to supplement it's borrowing needs without relying soley on depositors.  Having less than an excellent CRA rating creates many problems for the bank, and substantially more federal oversight.

Any potential homebuyer should check out the federal financial institutions examination council's geocoding website located at:  Use this site to input the address of any potential owner occupied home purchase to see what the income of that census tract is.  If it falls in a low/moderate income zone you will always get better rates by contacting banks that service that area.

My understanding of the Community Reinvestment Act (CRA) is that is was implemented to stop redlining and provide reasonable terms for financing in areas that were/are considered problematic for any number of reasons - but usually in regards to low-to-moderate- income. Redlining occurs when a bank dictates terms based on geography (think of circling an area on a map with a red pen). This is illegal, and one cannot discriminate based on location.

Here is a link that outlines CRA: there is some dispute to its credibility however you will find plenty of reference links at the bottom of this link's page.

I do not believe that the CRA requires lenders to offer better terms to these individuals otherwise it would be reverse redlining if there is such a thing. If you get a better rate simply because of where you live, that is geographical discrimination, and is considered illegal.

I do not believe that the CRA would be responsible for the lower rate. it is possible that he has a lower rate than the other lenders, however the reason for this could be anything. Not as greedy, planning a bait and switch, has not included all pricing add ons, or is pricing out on a shorter lock period. The lender he is using could have a smaller mark up margin than his competitors on the Mortgage Backed Securities (MBS), or he is held in a higher tier status thereby granting him better rates than the competitors, the list goes on.

If he has a rate that is a full half a point lower than the other two, I would request a formal approval and lock confirmation proving that one you are approved for this loan, and two the rate he is quoting you is locked, and you can close by the lock expiration. If he can provide this to you (the lock confirmation and lender approval) in writing than I would look to close quickly, and be happy.

Yes this is true.

The Community Reinvestment Act ( CRA) was enacted by Congress in 1977 to encourage banks to lend more in their whole-market area, rather than in the wealthier neighborhoods -- a practice known as “ redlining.”  The government will grant certain tax breaks (which can be worth millions of dollars) to banks that qualify and that make more funds available in certain areas.

In an effort to ensure that banks fund enough loans in these communities, the buyer of the property will receive an enticement. This is done by discounting the interest rates on certain programs and/or by giving borrowers a credit (which can be as high as $3000) toward the purchase.  

Now, I know what you’re thinking:  “This is for neighborhoods that are run-down, with boarded-up homes, high crime rates, drive-bys and drug dealers on every corner!”  That’s not entirely true.  While those neighborhoods might qualify, there are plenty of middle- and higher-class properties that qualify for the CRA.  In fact, in Chicago where I'm located, the majority of these properties are located in Cook County -- which includes every kind of neighborhood possible.

The CRA actually has three criteria, based on three census tracts, for a property.  The property or buyer has to meet only one of the following criteria in order to qualify:

  • The property must be located in a neighborhood where the income is determined to be low or moderate (The majority of the CRA loans that I do are not in this category.);

  • The buyer must earn less than the HUD median income for that area;

  • The property must be located in an area where the majority of the population is minority -- as long as the tract minority is greater than 50.0%, the property qualifies (This constitutes the majority of the loans that I do because of the diversity of Cook County.).

CRA bonuses are available nationwide if you work with the right Lender. While certain lenders have their own censu data that they use to check to see if you qualify. You can visit and enter in the homes address to get a good idea if it would qualify. Always verify this information with your lender as well.