WASHINGTON — Federal bank regulators moved forward on their major rewrite of the Community Reinvestment Act to wide applause from unusual bedfellows: banking trade organizations and community groups.
The nearly 700-page overhaul of the anti-redlining law is decades in the making, especially after the Trump-era failed bid to rewrite it. The CRA hasn’t been updated since 1995, and new technologies have substantially changed how banks do business since then.
Thursday’s proposal is meant to modernize and strengthen the CRA, adding new assessment areas based on where some banks lend instead of where they have physical branches, regulators said. And banks could face tougher CRA examinations, but they’d have more clarity on what kind of activity the regulators would credit.
Belying the tricky politics and partisan gridlock that have plagued CRA into the Biden administration, that tradeoff received mostly positive feedback from banking and community groups alike in the initial round of reaction.
The end of grade inflation for banks
The examination and rating process will likely get harder for some banks, policymakers noted alongside the release of the CRA proposal.
Acting Federal Deposit Insurance Corp. Chairman Martin Gruenberg, for instance, said that the proposal will “raise the bar for CRA performance on the retail lending test in order for a bank to earn an outstanding or high satisfactory rating.”
That’s further clarified in the proposed rulemaking: Regulators estimate that 9% of banks with assets of $10 billion to $50 billion would have received “Needs to Improve” ratings from 2017 to 2019 based on the retail lending test conclusions under the proposed rule, while 4% of banks with assets over $50 billion would have had the same.
It’s currently very rare that a bank over $10 billion will receive a “Needs to Improve” rating. None did in 2021, according to government
“Sure, I want to encourage everyone to succeed, but the idea that no one ever fails is not credible,” said David Dworkin, president and chief executive of the National Housing Conference, a coalition between industry and advocacy interests. “What they’ve done now is said that’s not going to be the case anymore; this is now going to be real grading.”
Still, banks notched a big win on certain elements of the proposal, he said, mostly in how the proposed rule promises to more sharply define what kinds of activities will receive CRA credit.
“This has been frustrating for everyone from advocacy groups to the banks themselves,” Dworkin said. “There was a lack of consistency both within regulators and across regulators. You could, in a three year period, have one examiner who viewed a deal one way, and get another examiner a year later sees it as something else. You could get credit or not based on what feels like personal whim.”
Banking groups largely applauded the proposal, focusing on what they said is increased transparency and consistency for them.
“We’re pleased to see the proposal focus on providing banks with the clarity, consistency, and transparency necessary to continue delivering on CRA's important mission for years to come,” Richard Hunt, president and CEO of the Consumer Bankers Association, said in a statement.
Katie Collard, senior vice president and associate general counsel at the Bank Policy Institute, said that, “at first glance,” her group is “encouraged” by efforts to lay out more explicitly what kind of activities count toward CRA credit, making the exams more transparent and predictable for banks.
Does the proposal go far enough?
Despite the rule’s appeal, it falls short of what some industry-watchers hoped.
One of the biggest letdowns is that the proposal doesn’t explicitly set targets for credit to minority groups. It does call for large banks to disclose the racial and ethnic background of borrowers, which regulators said they hoped would provide more transparency, and includes provisions for minority-focused institutions.
Jesse Van Tol, CEO of the National Community Reinvestment Coalition, said the proposal is a “cautious step forward” on improving how the law expands credit access to minority communities.
Because of how the law was originally written, regulators likely would have faced legal challenges if they explicitly incorporated race into their proposed rule, he said.
“It’s sort of the original sin of the CRA,” Van Tol said.
Dennis Kelleher, president and chief executive of Better Markets, said that he will advocate for metrics in the finalized rule that better measure success in minority communities.
“It’s weird they evaluate the success of the CRA with how well the banks are doing rather than how well the so-called beneficiaries of the law are doing,” he said. “I think we have to stop focusing on what banks need and want and start focusing on what the law requires and meaningful change in the lives of the people who live in low income communities.”
The future of the CRA
As industry and advocates hash out the particulars of this proposal, there are still a few fundamental issues that Congress would need to address.
Because of the way the original CRA law is written, explicitly incorporating race would likely be among those issues. Another big one is the inclusion of nonbank firms, which conduct an increasing share of lending.
Rohit Chopra, director of the Consumer Financial Protection Bureau, acknnowledged this possibility in his comments. “Banks have obligations under the Community Reinvestment Act because of the significant public benefits they receive,” he said. “However, I believe it is important to recognize that nonbank financial firms have also received more public benefits in recent decades.”
He noted that state legislators, such as those in Illinois, Massachusetts and New York, have passed laws requiring nonbanks to meet state CRA requirements.
“If policymakers believe that public benefits to banks and nonbanks in the mortgage market should be similar, it seems reasonable to ensure that the public obligations are also similar,” he said.
The idea has garnered some industry support from banks. Rob Nichols, president and CEO of the American Bankers Association, argued in his statement following the release of the proposed rule that the work on CRA “will not be complete until the increasing array of non-bank financial services providers are held similarly accountable to the communities they serve.”
Caroline Eisner, a CRA specialist with the law firm Alston & Bird, said it was “noteworthy” that Chopra singled out nonbank mortgage lenders and the fact that certain states have included them in their community reinvestment regulations. Because such institutions are typically not federally insured, folding them into the CRA framework would require additional policy amendments.
“That's why Director Chopra was focusing on reminding policymakers of that point and noting that Illinois, Massachusetts and New York policymakers have specifically chosen to apply their state CRA to both banks and nonbanks,” Eisner said. “Nonbank mortgage lenders should be reviewing and commenting accordingly. They have quite a few arguments to make for why the CRA should or should not apply to them.”
Getting Congress on board could be difficult — especially if Capitol Hill flips in the midterms. Republican lawmakers came down swiftly on the regulators’ proposal Thursday.
“While I hope this proposal will enhance the objectivity and transparency of CRA examinations, I fear it is yet another attempt to empower partisan activists to push their far-left agenda on our nation’s financial system,” said Rep. Patrick McHenry, R-N.C., the ranking member on the House Financial Services Committee. “We must ensure any CRA modernization meets the current needs of the consumers it was intended to help and financial institutions alike.”
Sen. Pat Toomey, R-Pa., the ranking member of the Senate Banking Committee, suggested that Congress could pursue legislation in the opposite direction of expanding the law: “Given this proposal and the past misuse of the CRA by so-called community organizers and other activist groups, it may be time for Congress to consider statutory changes that puts an end to rent seeking and the hostage taking over otherwise valid bank mergers.”
Kyle Campbell contributed reporting.
