Consumer Groups Tear Into Agencies' First Steps on CRA Reform

WASHINGTON — Regulatory efforts to change Community Reinvestment Act rules — unveiled three years after holding nationwide public hearings on the subject — are far too timid, according to consumer groups.

They are criticizing the regulators for their March proposal designed to give more CRA credit for out-of-market community development projects, saying it does not keep pace with the modern era of banking.

"It may be helpful in the area of community development financing," said Joshua Silver, vice president of research and policy of the National Community Reinvestment Coalition, said in an interview. "But it is not helpful in completely capturing the whole range of activities of a bank in making sure its activities are safe and sound and it effectively reaches low- and moderate-income people."

Some defend the regulators' approach, arguing that they have to move incrementally, and warning that expanding boundaries too far would have unforeseen consequences.

"This is a cautious first step," Ellen Seidman, a former director of the Office of Thrift Supervision who now chairs the Center for Financial Services Innovation, said in an interview. "The way they're going about trying to get banks to look beyond their assessment area to look into really underserved areas is a better way of doing it than proliferating assessment areas."

Beyond the political debate over whether CRA — with its overarching goal of meeting credit needs of low- and moderate-income members in a bank's local community — helped fuel the lending crash are periodic efforts by policymakers to revise the law's real-world application in the face of a dynamic financial services sphere.

Almost three years ago, federal bank regulators held a series of hearings around the country on ways to improve CRA supervision. Their proposal in March was one of the first concrete steps taken out of those meetings, and suggested revisions to a question-and-answer document used as primary guidance for the law's implementation.

Silver said many community-focused groups were disappointed in the narrow focus of the proposal compared to the interest regulators showed in the subject through the hearings.

"It seemed that the agencies were thinking of pretty far-ranging changes to the CRA regulations and examination procedures," he said. "Three years later, we get some proposed changes to the question-and-answer document. They're helpful, but they're modest compared to what needs to be done."

Among other steps, the proposal would tweak language in an effort to give banks credit for community development activities in their broader statewide or multistate region, beyond their regular assessment area. The change would also ensure such activities would get an additional layer of regulatory scrutiny through the bank's CRA exam. A bank's assessment area typically only includes locations in its physical branch network.

Rather than considering such activities only if an institution has already "adequately addressed" community development needs of the assessment area, which is the current standard, the proposal could grant CRA treatment to such out-of-market activity simply if it was not "in lieu of, or to the detriment of" activities in the assessment area. The reform is designed in part to encourage bank involvement in community development projects in underserved rural areas that are still within reach of the bank's market.

While consumer groups like the proposal, they say it did not go nearly far enough. They are pushing for regulators to take a more straightforward approach, such as extending the boundaries of an assessment area. NCRC and its affiliates are also urging greater incorporation of foreclosure prevention activities and loan purchases — in addition to originations — in exams.

More than a dozen comment letters have been filed on the plan so far, and many more groups are expected to weigh in before the comment deadline expires on May 17.

Robert Dickerson Jr., who chairs NCRC and is involved with the Birmingham City Wide Local Development Company in Alabama, said in an April 11 comment letter that the city-based group is "profoundly disappointed that the agencies are proposing half measures in the form of Q&As while the agencies need to engage in comprehensive reforms regarding assessment areas, the service test, foreclosure prevention, and the consideration of loan purchases on CRA exams."

In an interview, Dickerson said that the time has come to modernize CRA regulations.

"A bank that is a national organization makes profits in many areas where it doesn't have branches, so there needs to be a greater evaluation of its activities in those areas," he said. "There needs to be greater consideration for those areas where banks make money and not just where they build a facility."

Critics of the proposal say expanding parameters of the CRA exam beyond where the bank has physical branches would, among other things, provide a truer picture of how an institution serves its broader community. For example, the regulators' proposal would only apply the change in language to community development investments, without affecting the bank's grade for overall lending.

"Some of the largest lenders in the St. Louis area don't have any deposit taking branches here. As a result, their assessment area does not include St. Louis, they're not under the same level of scrutiny as institutions that do have branches and they don't have the same incentives to meet the needs of the community," said Elisabeth Risch, director of research and education at the Metropolitan St. Louis Equal Housing and Opportunity Council, in an interview. "In a place like St. Louis these institutions have a huge presence … and so it would make sense to have that reflected in their assessment area."

But Eugene Ludwig, who was comptroller of the currency the last time policymakers implemented broad CRA reforms in the nineties, said with lawmakers reluctant to get involved with any updates to the law, the regulators should be praised for taking on the thorny issue again as financial services distribution methods continue to evolve.

"The question is, if a bank has a distribution mechanism for offering products all over the United States, should its assessment area be where its headquarters are based or where those products are distributed, which is nationally? This is a tough issue because it is driven in a lot of ways by the changes in modern distribution of financial services," Ludwig said in an interview. "Access to banking services through the Internet, cellphones and apps didn't exist when the CRA was passed in 1977, and barely existed when we did the previous revisions to the regulations in the early nineties."

Seidman said an expanded assessment area would be more appropriate for a bank's CRA lending test, rather than the analysis of community development investments. It is possible regulators may address that in future revisions, she said.

"Having more assessment areas for the purpose of looking at lending, that's a different issue. For the investments, more assessment areas is not the right answer," she said.

Some banking industry representatives and other observers say expanding assessment areas may be too extreme a step.

"There has to be some kind of connection to the community in order for it to be able to do community development activity," said Robert Rowe, vice president and senior counsel for the American Bankers Association, in an interview. "That's why I think there has been a hesitancy to get away from physical locations and the branch network."

Rowe also criticized the step embraced by regulators in the proposal, saying the change in language designed to provide flexibility on what community development projects would be counted outside an assessment area could still be interpreted too harshly by examiners. The current "adequately addressed" language could stay, he said, if examiners are instructed to apply it in a balanced way.

"The idea of 'adequately addressed' should be sufficient because the idea is you're not ignoring your assessment area. As long as you're not ignoring your assessment area, you should be getting credit," he said. "We think the solution is not changing the language but training the examiners."

With the "in lieu of" revision, he added, "The examiner could say, 'You had opportunities in your assessment area so we won't give you credit outside your assessment area.'

"Our concern was it will have a negative impact and make community banks leery of going outside their assessment area."

Others said expanding assessment areas could broaden the perception that CRA is a governmental tool used to force banks into being social saviors.

"It feels like the slipperiest of slopes to me," said Lawrence White, a professor at New York University and a longtime CRA critic. "Then we really are getting into government designation of where banks must be focusing their efforts — 'where' in the social sense, not in the geographic sense."