In 1977, Congress wanted to make sure commercial banks fulfilled their commitment to serve all communities in America, regardless of income level. “A public charter conveys numerous economic benefits,” said William Proxmire, then head of the Senate Banking Committee, “and in return it is legitimate for public policy and regulatory practice to require some public purpose.”

Under the Community Reinvestment Act, banks are periodically examined for how well they provide lending and investment to low- and moderate-income (LMI) neighborhoods where they take deposits. Since its enactment, 97 percent of all banks examined have received a “Satisfactory” or “Outstanding” grade, according to the Congressional Research Service.

And yet lending and even basic financial services remain hard to come by for the poor. In the Federal Deposit Insurance Corporation’s most recent survey, over one in four American households have either little or no access to traditional banking. Fully 93 percent of all bank branch closures from 2008-2013 happened in low-income neighborhoods, which has dramatic effects on the availability of small business loans. Poor people without access to credit turn to predatory payday lenders that trap them in a cycle of debt.

What’s the disconnect here? How can practically every bank get a satisfactory rating for lending to LMI communities for almost 40 years, yet serious problems with lending to the poor persist?

The problem is that regulators implementing the Community Reinvestment Act have not kept pace with innovations the banking industry uses to get out of its commitments. “Regulators have not been scrutinizing the purported CRA-eligible activities to the extent we need,” said Kevin Stein of the California Reinvestment Coalition. In fact, some of those activities, far from helping low-income residents get a leg up, are actively harmful, but banks aren’t downgraded for such pursuits.

The CRA includes several perfect conditions for banks to game the system. No one agency oversees the law: The FDIC, the Federal Reserve and the Office of the Comptroller of the Currency all separately conduct examinations on different banks. These regulators do not mandate lending quotas. They subjectively assess a range of activities banks engage in, from maintaining bank branches to investing in capital projects in LMI neighborhoods to holding financial literacy sessions to offering remittance services.

All these are tied to a particular “assessment area,” with the conceit that communities where banks take deposits should see that money reinvested with their citizens. But banks that take deposits over the Internet do not have a CRA requirement. They receive deposits from across the country and lend them out wherever they please. As Internet banking evolves, this leaves a larger segment of deposits outside the law.

Regulators award credits to a bank for its eligible activities, and then compute an overall CRA rating: Outstanding, Satisfactory, Needs to Improve or Substantial Noncompliance. No financial penalties are attached to a bad rating; the only consequence is that they are taken into account when banks apply for mergers and other actions that require regulatory approval.

Banks get credit for lending and investment in their assessment area, but for the most part don’t get demerits for activities that harm those communities. For example, banks fund payday lenders, having provided nearly $5.5 billion in lines of credit over the past several years.

Big banks also write loans to institutional investors who purchased over 130,000 distressed single-family homes to convert into rental properties, which tenants report have significant maintenance problems and poor customer service. Yet these practices that damage poor communities do not factor into a bank’s overall CRA score.

Because these loans go toward activity in LMI neighborhoods, advocates suspect that banks try to get CRA credit for them.

The California Reinvestment Coalition is particularly frustrated that banks could be getting CRA credit for lending money to investors who then evict low-income tenants from the properties they buy.

In areas across California with rent-controlled apartments, investors can buy a building, invoke a state law called the Ellis Act, and kick out all existing tenants, converting the building to luxury housing. Wealthier families move in under a relationship called Tenancy in Common, a form of homeownership where they purchase a share of the building. Over 10,000 tenants have been displaced by this strategy since 1997, according to the advocacy group Tenants Together.

In 2009, Circle Bank of Marin County, California, loaned a speculator named Kaushik Dattani $1.3 million to purchase a building in San Francisco, and he promptly used the Ellis Act to evict four families from rent-controlled units. When the California Reinvestment Coalition contacted the FDIC about this “displacement loan,” the regulator replied that the bank would probably get CRA credit, because the loan was located in the Mission District, an LMI area. In subsequent discussions with CRA regulators, no agency denied such credit could be given, and expressed concern about the practice.

More recently, First Republic Bank made 13 displacement loans to investors that kicked out poor families and converted the buildings into luxury condo units.

On August 18, community activists protested at First Republic’s headquarters. “Banks who lend to speculators are not investing in our community,” said Martiza Osorio, a tenant facing a First Republic-financed eviction from her home of 50 years. “They are helping remove people from it.”

First Republic vowed to stop lending to investors that seek to invoke the Ellis Act. “On our loan applications, we will now ask each borrower whether the loan is intended to be used to repurpose the property,” the bank said in a statement.

Paulina Gonzalez, executive director of the California Reinvestment Coalition, wonders whether the system is enforceable. “How will First Republic enforce that policy later if the investor breaks their promise?” The organization planned to meet with the bank to discuss further details, and pressure numerous other banks engaged in the same practices.

There are other problems with the officials who are supposed to regulate the CRA. They often have stronger relationships with the banks they regulate than the LMI communities impacted by their practices. They have no mechanism to decipher whether a loan in an LMI neighborhood benefits or harms the community. They use limited and subjective judgment in issuing grades, based not on community credit needs but how banks fare relative to their competitors. As a result you get 97 percent of the industry getting a passing grade, reminiscent of Garrison Keillor’s Lake Wobegon, where all the children are above average.

Regulators are scrutinizing CRA implementation right now, part of a re-evaluation under the 1996 Paperwork Reduction Act. Typically bankers use this review to encourage cancellation of “burdensome” regulatory requirements. But advocates, who attended public hearings on the review, want regulators to update the outdated implementation of the law. “We want to focus on how the CRA can be implemented in a way that achieves its promise,” said Kevin Stein. “We think CRA is incredibly important, it has made a difference. We need it to make more of a difference.”

Caption: Protesters outside the downtown San Francisco headquarters of First Republic Bank on August 18, 2015.