The Community Reinvestment Act (CRA) was enacted in 1977 for a simple purpose: encouraging banks to invest the deposits they receive from communities in those communities. The CRA was a response to overt redlining and the tendency of banks to make loans where they were most profitable, regardless of community needs.

The intervening 43 years have seen major changes in banking—nationwide banks, bank consolidation, and internet banks. Banks have made progress toward meeting community credit needs, but a strong CRA is still important to the vitality of America’s low- and moderate-income (LMI) communities.

Regulators, the banking industry, and community advocates all agree that with well-conceived regulatory changes, the CRA could be more effective. CRA regulations have undergone major revision only once, in 1995. In December 2019, the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) proposed dramatic changes in the regulations. The comment window is short—comments are due March 9, 2020—and the intent is to finalize the proposal this year.

Speaking at the Urban Institute on January 8, Federal Reserve System Governor Lael Brainard outlined a different proposal that would also dramatically change the CRA. She set no timetable for reaching a final rule, stressing that “it’s more important to get the reforms right than to do them quickly.”

Some elements in the Federal Reserve proposal are not yet clear, such as how to count small business and small farm loans, the geographic range of loans and investments in community development financial institutions that count, the scope of assessment areas, and how much bank- and location-specific data will be made available to the public.

But it’s clear that regulators don’t agree on how to improve the CRA and the timetable for doing so. In this post, we outline the major similarities and differences between the two approaches and raise concerns that the OCC/FDIC rule could undermine the intent of the CRA.

Both approaches propose a significant change: A metric-based system

Historically, CRA evaluations have not been metric based, so banks have not known how much they need to do for a “satisfactory” or “outstanding” rating. No system exists for advance qualification of proposed activities—a particular problem for larger, multiyear, multipartner community development activities. Infrequent exams and lagging exam reports mean a lack of effective feedback on what counts and how much is enough.

In response, both the OCC/FDIC and the Federal Reserve agree that modernization requires a metric-based approach, although their proposed metrics differ:

• The OCC/FDIC proposal monetizes all activities and rolls them all into an “overall metric” comparing everything, including retail lending, community development activities, and services, to a bank’s retail domestic deposits on a bank-wide basis.
• In contrast, the Federal Reserve believes that community development lending and retail lending should not be aggregated and that services should be evaluated qualitatively based on their community impact, rather than by monetizing hours spent.

The FDIC/OCC rule could result in significantly less willingness by banks to do difficult, or smaller, projects.

In addition to regulator disagreement over whether the community development and retail lending activities can be aggregated and whether services should be monetized, disagreement also arises on how much the metrics should be customized.

Citing variability in community needs and the business cycle’s impact on lending needs and opportunities—and the consequent safety and soundness implications of a fixed or lagging metric—the Federal Reserve’s metrics would be tailored for community needs and the business cycle, as well as a bank’s size and business strategy.

Community development is measured similarly, but qualifying activities differ

Community development lending has been measured based solely on originations in a year. Both the OCC/FDIC and the Federal Reserve are proposing that community development activity, including multifamily lending, be measured by the loans and investments on a bank’s balance sheet. This decision to measure loans and investments on banks’ balance sheets would eliminate the incentive to make short-term loans and roll them over, a flaw with the current CRA approach.

All the regulators agree that greater clarity, including a process for prequalification, is needed to determine which community development activities would count. However, we have significant concerns with the OCC/FDIC approach.

The OCC/FDIC proposal greatly expands qualifying activities, likely meaning less lending and investment would focus on the needs of low- and moderate-income households and communities. For example, under the OCC/FDIC approach, financing for large-scale infrastructure projects that would benefit a wide range of communities, or lending to hospitals and other large institutions that similarly serve broad families, would count, as would “qualified opportunity funds… that benefit low- or moderate-income–qualified Opportunity Zones.”

The Federal Reserve favors a definition more tailored to the statute’s focus on LMI community needs while recognizing the need to give special attention to activities that revitalize and stabilize targeted areas.

Major differences arise in the treatment of retail lending

Both the OCC/FDIC and Federal Reserve would employ a series of retail lending tests in each assessment area, but they differ in their approaches:

• The OCC/FDIC metric would be based primarily on the dollar value of retail loans on a bank’s balance sheet (with a small credit given to loans sold).
• The Federal Reserve’s metric would be based on the number of retail loans originated; no credit is given for loans already on the balance sheet.

Thus, the differences primarily center on whether to use the dollar value or number of loans and the treatment of retail loans on the balance sheet. In addition, the OCC/FDIC proposal, but not the Federal Reserve proposal, would evaluate assessment area activity by comparison to assessment area deposits, rather than solely by comparison to the number of LMI families or small businesses, or industry retail activity in the assessment area.

Beyond these important differences, we do not know whether the Federal Reserve would follow the OCC/FDIC’s lead with respect to other changes. These include increasing the size of small business and small farm loans and establishments, a change that could discourage lending to truly small businesses and farms. It’s also unclear whether the Federal Reserve would adopt the OCC/FDIC’s proposal to eliminate credit for mortgage loans to non-LMI borrowers in LMI census tracts, which is a positive dimension of the OCC/FDIC proposal.

Regulatory reform must be grounded in evidence

The CRA plays a vital role in direct investing in LMI communities and in building a broader ecosystem of economic opportunity in these areas.

We don’t yet know the full scope of the effects of the OCC/FDIC’s or Federal Reserve’s proposed changes, but as currently proposed, the OCC/FDIC proposal’s diminished focus on the needs of LMI communities and people could substantially undermine many of the statutory requirements of the Community Reinvestment Act and result in less available capital for low- and moderate-income communities. The Federal Reserve proposal appears to be on better footing, but there are still many unanswered questions.

Regulatory modernization must be grounded in fact and analysis. Although the Federal Reserve analyzed years of historical data to arrive at their emerging proposal, they have not publicly released the data.

It’s unclear whether the OCC/FDIC did a similar analysis, as they have released nothing, and in fact are just now asking for “bank-specific information” that would enable the agencies to assess the impact of their proposal. This is especially troubling because the OCC/FDIC rule is at the final stage for public comment.

Much is at stake in this rulemaking.  Data and analysis must be made publicly available on a timetable that allows communities, the industry, and policymakers to predict the likely impact of regulatory change and to comment meaningfully. This is essential if the CRA is to continue supporting both the health of our communities and the safety and soundness of the banking system—the balance the statute set out 43 years ago.