Over numerous objections, the Office of the Comptroller of the Currency (OCC) recently finalized new Community Reinvestment Act (CRA) regulations [PDF]. The final regulations offer some improvements over the proposed rule but remain unsatisfactory because they substantially break the link between the statutory goal of meeting community credit needs and the regulations implementing the statute.
The statute is clear about the CRA’s purpose: “to encourage [banks] to help meet the credit needs of the local communities in which they are chartered.” But in the OCC’s final regulations, its treatment of retail lines of business puts bank convenience ahead of community needs.
The OCC’s new rule does not assess a bank’s local retail lending activity—mortgage, consumer, small business, and small farm lending—for how well it meets community needs unless the local retail lending line constitutes 15 percent of that bank’s total volume of originations from that retail line.
If two retail lending lines—say, single-family lending and auto loans—together constitute 85 percent or more of a bank’s total retail lending nationwide (as is the case for some large and small banks), that bank’s small business lending activity will not be evaluated locally (at the assessment area level) anywhere. This is the case even if a bank’s small business lending constitutes 30 percent of all small business lending by all banks in that assessment area.
Moreover, unlike the proposed rule, the final rule only requires that a bank be evaluated on two retail lines, exacerbating this problem. The dollar amount of CRA-eligible retail lending in all categories will count in the bank-wide metric, but there will be less evaluation of CRA-eligible retail lending in individual assessment areas.
To understand the importance of this issue, we looked at 2018 data on small business and small farm lending to understand how often a retail lending line of business that was important to a community constituted less than 15 percent of a bank’s national retail loan origination volume. Under the new rule, this lending would not be subject to the tests measuring how well that bank was serving that community in that line of business.
The new rule will no longer provide a robust assessment of local small business lending, even in the largest MSAs
This table shows the top 12 metropolitan statistical areas (MSAs) ranked by the number of small business loans originated in 2018, plus 7 MSAs where the OCC regulation would result in banks providing a high percentage of small business loans (more than 30 percent of the loans by loan count) not being evaluated for performance under the CRA. (Because we use 2018 data, only loans under $1 million count for CRA purposes; the threshold under the final rule is $1.6 million, likely resulting in an even larger proportion of loans bypassing evaluation because the banks more likely to be excluded by the 15 percent rule are the larger banks making the larger loans.)
In all communities, the number and dollar volume of loans that will no longer be tested is significant. In the New York City MSA, eliminating institutions where small business lending is less than 15 percent of total lending volume would mean that banks making 17 percent of small business loans, including 16 percent of small business loans in low- and moderate-income (LMI) communities, would not be evaluated on their small business lending in the community. This constitutes 30 percent of small business lending by dollar volume and 26 percent of LMI small business lending by dollar volume.
In some smaller communities, the results are even more dramatic. In the Worcester, Massachusetts, MSA, the total number of LMI loans that would be evaluated under the CRA would be cut by 33 percent, and the dollar volume of these loans would be cut by 64 percent. The volume of loans omitted is higher—sometimes much higher—than the dollar volume, which means the institutions that would no longer be evaluated in many communities are mostly large institutions, which are less likely to extend small-balance loans.
The new rule will no longer provide a robust assessment of small farm lending, even in areas where these loans are important to the economy
This table shows the same analysis for small farm loans, where the results are predictably more extreme.
For many banks, small farm lending constitutes far less than 15 percent of their retail originations, even though the loans are important to specific communities. Even in Indianapolis, the MSA with the most small farm loans, the 15 percent threshold would exempt from evaluation banks making 72 percent of the loans by loan count, 83 percent of the loans by dollar volume, 84 percent of LMI loans by loan count, and 81 percent of LMI loans by dollar volume. Thus, for most communities, small farm loans would not be covered by the retail lending tests, yet 29 percent of all farms are located in MSAs, accounting for 30 percent of total farm sales.
CRA regulations should ensure the goals of the CRA statute are aligned with its execution and should evaluate banks on the importance of the bank’s activities to the local community. Tying evaluation instead to the importance of the activity to the bank misses the point and ignores the fact that many activities constituting a small share of the bank’s business have an outsize importance to the bank’s community.