Quantity, quality, or both? Explaining investment test scores in federal community reinvestment act examinations

<title>Abstract</title> Banks and thrifts are major actors in the affordable housing and community development arenas. They are often relied on to invest in low‐income housing tax credits and other projects as well as provide operating support. Banks and thrifts are explicitly encouraged to invest in such activities by the Community Reinvestment Act's (CRA's) Investment Test. Regulations require examiners to consider both quantitative and qualitative criteria in determining a large bank's Investment Test rating. The qualitative criteria are particularly important for organizations seeking investments for projects that are more innovative or complex or that offer less than stellar financial returns. An analysis of CRA performance evaluations reveals that, of the two qualitative criteria, only responsiveness to needs has a significant impact on Investment Test scores. Moreover, controlling for investment activity leads to higher Investment Test scores for larger banks. Implications for CRA policy and implementation are discussed.