Forty-three years ago, the Community Reinvestment Act (CRA) aimed to redress redlining by ensuring banks were serving their communities by lending to the people and businesses who were entrusting these banks with their savings. Although banking, community needs, and community finance have been transformed since then, CRA regulations have undergone a major update only once, in 1995. Bankers and consumer advocates agree that the regulations under the CRA, which has become a vital tool for supporting America’s low- and moderate-income (LMI) communities, are due for a refresh.
But a panel of industry experts, researchers, and consumer advocates speaking at a May 6 Urban Institute event urged the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC), which proposed comprehensive and dramatic changes to the regulations at the end of last year, to slow down, take a deeper look, and work with their colleagues at the Federal Reserve to propose a new set of regulations. The present system needs improvement in specific areas, but it works; regulators can take time to carefully consider the wide range of concerns raised in response to the proposed changes.
What experts say the OCC/FDIC proposal gets right
The five experts (PDF), in a discussion moderated by Ellen Seidman, agreed that the proposal’s most positive element was the greater clarity it provides both banks and their community partners on what counts for CRA credit. Krista Shonk, vice president for regulatory compliance policy with the American Bankers Association, said banks can be unwilling to risk investing in an innovative or responsive activity that serves community needs but that might not qualify for CRA credit. Under the proposed rule, the list of eligible activities would be significantly expanded, and banks could seek preapproval for an activity.
Panelists agreed the preapproval process and some of the expansions are positive but urged a shorter timeline for preapproval and greater attention to LMI communities’ needs in the expansions. Josh Silver, senior advisor for the National Community Reinvestment Coalition, noted that preapproving community development projects could facilitate partnerships between banks and community groups to tackle innovative and difficult projects responsive to community needs.
Buzz Roberts, president and CEO for the National Association of Affordable Housing Lenders, explained that, under current CRA rules, there has not been a consistently enforced policy on whether loans and investments for unsubsidized affordable rental housing—about 80 percent of the affordable rental housing stock in the United States—qualify for CRA credit. Clarifying that many of these transactions would qualify, at least in part, should remove a significant obstacle incentives to financing affordable housing, though other elements of the proposal could dilute or offset the incentive.
The panelists also recognized that the regulators had attempted to tackle internet, mobile, and branchless banking, as well as problems attracting needed CRA investments into areas with few or no bank branches. And they applauded the attempt to provide greater objectivity to evaluations and the intent to speed up CRA examinations and the release of exam results.
Potential problems with the proposal
But the five panelists found the negatives in the proposed rule outweigh the positives.
The metric used for assessing CRA compliance neglects community needs
The proposed rule changes the key metric for evaluating CRA performance from the number and share of loans made to LMI borrowers or in LMI census tracts to the share of deposit dollars on a bank’s balance sheet invested in CRA-eligible activities. If the total balance sheet dollars attributable to CRA constitutes 11 percent or more of most domestic deposits, and the bank’s lending passes (on a pass/fail basis only) other tests related to retail lending and community development, the bank presumptively earns an “outstanding” rating.
This balance sheet metric eliminates the focus on meeting the needs of LMI communities and people and distorts incentives, several panelists explained. Banks would be encouraged to look for the largest and easiest deals, rather than focusing on community needs. Silver pointed out that a bank could get credit for financing a football stadium in an LMI community while neglecting community needs near the stadium, such as affordable housing.
Mark Willis, senior policy fellow at New York University Furman Center, noted the proposed metric would even allow a bank to originate no new loans between exams and still pass the test. Willis suggested that savvy bankers would quickly figure out the best way to get to the right number, and with less attention to expanding access to credit for LMI borrowers and communities, specialized financing programs that focus on LMI borrowers and communities are likely to fade away.
There is no evidence of the proposed rule’s impact
The panelists also noted that the proposal includes no data that would help the public understand the proposal’s likely impact on banks’ performance and on their communities, thus inhibiting public comment on the proposal’s impact.
Laurie Goodman, vice president and codirector for housing finance policy at the Urban Institute, pointed out that much of the needed data does not exist, at least in the public domain, and it is also clear the regulators lacked the necessary underlying data.
Goodman attempted to assess the impact of the proposed rule on the industry, and she reported that the rule created astounding grade inflation. Under the current proposal, about 10 percent of institutions receive an “outstanding” CRA rating, and 82 percent are considered “satisfactory”; under the proposed rule, 84 percent of the institutions would receive an outstanding rating, with just 1 percent judged satisfactory.
Krista Shonk offered an apt metaphor: “It’s like a Rubik’s Cube. When you get one side fixed, you have undone all the work you did on the other side.” For example, expanding what counts for CRA credit and where it counts, moving to a balance sheet metric, and implementing pass/fail tests all have interrelated effects. But there is no evidence the agencies considered the combined effect of these changes.
It would result in a loss of public data
The panelists were also alarmed at the significant loss of public information proposed in the rule. Goodman noted the proposal eliminates any geographic disclosure of individual banks’ activities and aggregates activities of all banks at the county level. As a result, it would be impossible for anyone to see what a specific bank is doing in a specific community.
At the same time, banks would face a significantly increased burden with respect to the data they must report to regulators. Shonk said the putatively “streamlined” approach for reporting data would be more complex and expensive because banks would need to create a new system to report in a new way. She suggested that instead of a new reporting structure, banks should be able to leverage existing reporting structures, such as the Home Mortgage Disclosure Act.
Roberts summed up the conversation: the proposed rule threatens to increase burdens on banks without increasing access to lending in LMI communities or data for researchers.
A pandemic is no time to issue a split rulemaking
The panelists agreed that a split rulemaking would damage the parties the regulators were seeking to help. Shonk noted that banks regularly partner with each other to infuse capital into communities; inconsistent rules would be a barrier to these relationships and the capital infusions they provide.
Silver pointed out the confusion in the community that would result from different rules for institutions that look similar, arguing for “regulations that are uniformly rigorous, not porous and lenient.”
The panelists also pointed out that all stakeholders, including regulators, are heavily distracted responding to the COVID -19 crisis and do not have the capacity for the thorough analysis a revision and implementation a change of this enormity requires.
The five panelists agreed that the current CRA system, though flawed, is basically working. It needs revision to deal with branchless banking, industry consolidation, and a changing community-finance ecosystem. It would also be improved with more clarity as to what counts. But the experts all urged regulators to slow down, conduct an impact analysis or a pilot study of the rule, make the results publicly available, and repropose an evidence-based rule supported by all three regulators.