6 things banks, community groups want in next phase of CRA reform

April 4, 2021 4:40 PM

WASHINGTON — Biden administration regulators are widely expected to abandon last year’s much-criticized rule from the Office of the Comptroller of the Currency modernizing the Community Reinvestment Act, and effectively start over on CRA reform.

But even though regulators such as the Federal Reserve have pinpointed aspects of the OCC’s approach that they oppose, the rule also contained several uncontroversial measures with wide support that could help serve as a foundation for a joint CRA framework backed by all the banking agencies.

Community groups and their allies in Congress objected to how CRA investment in low- to moderate-income communities across the country would be scored and incentivized under the CRA rule. For their part, banks objected to substantial new data and recordkeeping requirements that would be used to make the OCC framework work and urged the agencies to harmonize their different approaches.

Since September, policy analysts have largely shifted their attention to the Fed’s plans for CRA reform after the central bank published an advance notice of proposed rulemaking outlining an alternative approach. But the Fed’s plan is also somewhat complementary to what the OCC finalized.

Before the Fed issues a more formal proposal, regulators have to sort through roughly 600 public comments on the ANPR. While the general reception of the Fed’s plan seems warmer than the reactions to the OCC rule, many commenters pointed to some notable elements of the OCC approach that they want to see preserved in a new rulemaking process.

Here are six features that many if not all stakeholders want to see in a final CRA rulemaking approved by the agencies.

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Credit for activities outside CRA assessment areas

One significant change originally proposed by the OCC that commenters to the Fed appeared to support is allowing banks to get credit in their CRA exams for investments and other activity outside their assessment areas, which are now limited to physical branch networks.

The OCC framework finalized last spring would give banks the ability to receive credit for qualifying activities in so-called CRA deserts, including Native American areas and other underserved communities.

In a 2018 op-ed published by American Banker, former Comptroller of the Currency Joseph Otting said a big drawback of longstanding CRA regime is it disincentivizes banks from focusing resources in those areas.

“As a result of how the CRA regulations have evolved during the last 40 years, I have also seen how the limitations of these regulations can restrict lending and lead to investment deserts that CRA activity often fails to reach by preventing banks from receiving consideration when they want to lend and invest in communities with a need for capital,” Otting said.

Some community groups and consumer advocates were initially leery of the idea, arguing that the change could enable banks to seek out CRA projects outside their actual communities that were easier or more profitable. But in response to the Fed’s ANPR, the Center for Responsible Lending backed the idea with certain parameters, writing that regulators “could also provide CRA consideration for lending and investing in census tracts that are majority people of color outside of assessment areas, just as the Board is considering for Federal Native Areas (such as Federally Designated Indian reservations) and other underserved areas.”

The Bank Policy Institute concurred in its own letter to the Fed, urging regulators to create a framework that allows banks to receive CRA credit outside of their branch networks. Such an approach “avoids exacerbating CRA hotspots, encourages activities in underserved areas, and fosters predictability and stability in evaluations,” the trade organization wrote.

Use of geographic deposit data in assessment areas

Under the OCC rule, banks with more than 50% of their deposits coming from outside their branching network must set up new deposit-based CRA assessment areas. But the industry objected in part because of the data requirements inherent in that approach. In 2020, the American Bankers Association urged the OCC to “re-evaluate the concept,” saying banks would need to be able to account for the physical address of every single depositor.

But responding to the Fed’s request for comment this year, the ABA struck a slightly different tone, signaling an openness to the fundamental idea behind deposit-based assessment areas — albeit cautiously. “While we do not advocate deposit-based assessment areas for all banks,” the nation’s largest bank trade association wrote, “it would be appropriate for an updated CRA regulation to maintain some nexus between a bank’s CRA obligation and its collection of deposits.”

“Digitally-focused and branchless banks simply are not analogous to brick and mortar bank branches for which existing assessment area regulations were designed,” the ABA wrote. “Furthermore, over the years, new funding mechanisms have evolved that allow banks to generate deposits without marketing to specific customers or communities, which further lessen the geographic ties on which CRA has historically been based.”

For community groups, the data requirements are a no-brainer. “Rigorous ratings, performance measures, assessment area definitions and data collection are necessary if CRA is to increase meaningfully access to credit and capital to communities of color, LMI neighborhoods, Native American reservations and other underserved areas and populations, including older adults and people with disabilities,” the National Community Reinvestment Coalition wrote in its comment letter to the Fed.

Examples of qualifying CRA projects

Among banks, one of the most popular elements of the OCC’s reform was the development of an “illustrative list” of acceptable CRA activity.

The list provided a thorough but non-exhaustive inventory of the kinds of activities that are most likely to receive CRA credit. Examples include mortgages to low-income individuals, low-cost education loans, loans to nonprofits providing low-income housing, financing for a charter school serving LMI children, contributions to food banks, and loans to nursing facilities.

Since the idea was first introduced, banks have repeatedly lauded the agencies for providing clear guidance and transparency on this part of the framework.

Already, the Federal Reserve has said it plans to produce its own list of illustrative activity. But a core question lingers over just how thorough the list will be. Between the OCC’s proposed and final rule, for instance, the number of acceptable activities grew considerably and now stretches 19 single-spaced pages. Some analysts have speculated the Fed will likely prefer a more restrained list of acceptable activities.

Extra incentives for certain kinds of CRA activities

To make CRA scoring less subjective, the OCC rule included new weights — or multipliers — that attempt to increase the impact of certain projects on a bank’s overall score. For example, bank dollars that benefit an area deemed by regulators to be a “CRA desert,” or activities that a bank undertakes with a minority- or women-owned depository institution, can provide a numeric boost to a CRA grade.

While community groups feared that so-called multipliers could water down bank obligations — by incentivizing institutions only to look for projects that boost their scores — banks appear open to their use in the CRA reform framework that’s ultimately pursued under the Biden administration.

The ABA, in its comment letter to the Federal Reserve, recommended that “CRA activities outside of a bank’s assessment area receive a multiplier or be assigned a high impact score to offset the extra effort that will be required to make community development loans and investments in these locations.”

Consumer advocates, on the other hand, remain skeptical. Still, even though the Center for Responsible Lending wrote that any incentive offered to banks should be limited, the group said it supported the ability of banks to receive CRA credit when investing in community development financial institutions or minority depository institutions outside their official assessment areas.

“We are supportive of the Board’s proposal to allow CRA credit regardless of whether [community development financial institutions] or MDIs are located in a bank’s assessment area. However, banks should not be permitted to achieve an outstanding rating simply due to this factor,” the CRL wrote. “We do not want to incentivize a bank that is on the low-end of its own lending obligations to LMI communities and communities of color to achieve an outstanding rating because they invest in a CDFI or MDI.”

Range of possible CRA grades

One of the CRA changes offered by the Federal Reserve in its policy outline was to simplify the grading system by reducing the possible grades for banks by one category — to a total of four.

Under the current framework, banks receive one of five component scores for each of the CRA's various subtests, such as community development and retail lending. The five possible grades are: “outstanding,” “high-satisfactory,” “low-satisfactory,” “needs to improve,” and “substantial noncompliance.” The Fed proposed to reduce the number of possible scores by combining the “high-” and “low-satisfactory” grades into a simpler “satisfactory” rating.

However, community groups and consumer advocates alike appear to prefer the grading system’s scores stay the same, which the OCC’s final rule largely preserved. According to the National Community Reinvestment Coalition’s comment letter to the Fed, the granularity between high- and low- satisfactory scores “reveal more distinctions in performance rather than producing a distorted ratings distribution that inaccurately indicates that the vast majority of banks perform in the same stellar manner.”

The Center for Responsible Lending agreed, writing that retaining five separate ratings “would help motivate the lagging banks to improve.”

“For example, if a bank receives a rating of Low Satisfactory on a subtest instead of High Satisfactory, it would be more likely to seek improvements in its performance,” the group said.

Buy-in from all the regulators

If there is one thing that just about all stakeholders want, it boils down to three words: interagency joint rulemaking.

Without support from the Fed or the Federal Deposit Insurance Corp., the OCC made the choice last year to issue its rule unilaterally, raising the possibility of a different CRA framework for national banks compared to the rest of the industry. But that was arguably the most controversial element of the rule.

Just about everyone wants the prudential bank regulators to modernize the CRA in the same way and, ideally, at the same time. In a public comment letter responding to the Federal Reserve’s CRA reform outline, the ABA, which had previously pleaded with the OCC, FDIC and Fed to work together on a rule, wrote that the alternative “would yield undesirable results that would be contrary to the objectives of the modernization effort and would undermine the longevity of any final rule.”

For a moment last year, it looked like regulators might get two-thirds the way there when the FDIC joined the OCC’s proposed rulemaking in January 2020. But after then-Comptroller Otting and the OCC published a final rule on their own in May, the public was left to wonder whether and how the agencies would be able to reconcile their differences.

Now, with the Biden administration in power, chances are about as good as they’ve been that regulators may be able to put their differences aside, though they’ll likely need to start the rulemaking process over.

Officials including FDIC Chair Jelena McWilliams and Fed Chair Jerome Powell have voiced support for the agencies’ harmonizing their approaches.

“I would hope that the agencies will come together and have a uniform application of the new CRA framework for all our entities, whether national bank, FDIC bank or" Federal Reserve-supervised state bank, McWilliams said in March. A month earlier, Powell told lawmakers, “There is an opportunity for a harmonized rule among the agencies.”

Other stakeholders say regulators should take additional steps to ensure a future CRA framework can remain effective for as long as possible. (The regulation has only been updated one other time since the law was created nearly 45 years ago, in 1995.)

The National Community Reinvestment Coalition, for instance, wrote in response to the Federal Reserve’s CRA reform outline that whatever regulators come up with “must also build in periodic updates to the rule,” adding that regulators should consider updating CRA scoring thresholds every few years to determine whether banks’ grades capture “distinctions of performance or are inflated.”