How Regulators May Revamp CRA Enforcement

WASHINGTON — Regulators' recent signals that they are planning further changes to Community Reinvestment Act exams have reignited a debate over what reforms are coming next.

The banking agencies issued targeted changes last year to reward banks for community-focused steps taken beyond CRA assessment areas, despite calls from community advocates for more dramatic steps to bring CRA policy in line with the modern financial services landscape.

But while comprehensive action still appears unlikely, observers see a wide array of options at least to keep momentum moving on reform. Choices include considering more ways to credit community-related activities done outside a bank's market and broadening the section of the exam focused on branch offerings to include CRA credit for other services.

"There are things that institutions can do that perhaps fall outside of the test," said Thomas Fitzgibbon Jr., managing director at the $4.5 billion-asset Talmer Bancorp in Troy, Mich. "The major thing they look at is: Have you opened or closed any branches in low- and moderate-income census tracts?... There are other things that an institution can do that sometimes don't count."

Experts said potential areas regulators could explore are heightening the focus on products that specifically benefit low-and moderate-income borrowers, such as small-dollar loans, and expanding the list of community service activities that while not explicitly linked with financial services are still eligible for CRA credit.

"I wouldn't be surprised to see them attempt to do something" regarding small-dollar credit, "but it's going to be tricky," said Ellen Seidman, a former Office of Thrift Supervision director who is now a senior fellow at the Urban Institute. "They've been known to tweak the services test to try to get at certain issues they care a lot about."

Other areas potentially ripe for consideration include CRA credit for community development efforts that improve healthcare in low- and moderate-income areas, and adding more detailed data to exams about how products are benefiting low- and moderate-income customers.

"A bank may offer a low-cost checking account. That's applauded, but you really don't see anything on the test about the volume — how many of these low-cost checking accounts are really going to low- and moderate-income borrowers," said Joshua Silver, vice president of research and policy at the National Community Reinvestment Coalition. "So in some cases you suspect that the rating on the service test is inflated."

Under the guidance finalized in November, which came in the form of changes to an interagency "Questions and Answers" document interpreting CRA exam policy, a bank can get credit for community development activities done within its broader region even if they fall outside of the branch network, which is the traditional assessment boundary. Yet credit is granted only if the bank "has been responsive to community development needs and opportunities in its assessment area(s)."

But comments from two key regulators at an NCRC conference last month indicated those changes may just be the beginning.

"The agencies are continuing to evaluate other CRA-related concerns and we are considering additional improvements," Comptroller of the Currency Thomas Curry said in a speech to the group.

He was echoed two days later by Federal Deposit Insurance Corp. Chairman Martin Gruenberg, who said the 2013 guidance focusing on community development "was useful" but that "there are other areas … we can look at." He signaled regulators may consider changes in all three of the key CRA performance tests: lending, services and investment.

"I do think the services test is an important opportunity to utilize and encourage institutions to find nontraditional ways to extend access to the banking system," Gruenberg said.

But it is still unclear how far regulators are willing to go and how quickly.

"CRA has always been a process of rethinking, augmentation and fine-tuning over time, and I think that trend will continue for the next several years," said Keith Fisher, an attorney at Ballard Spahr.

The first likely step, many said, is for the agencies to finish evaluating the effectiveness of last year's changes to determine whether additional guidance is needed to nudge institutions toward development in communities without a physical branch.

"There is some interest in releasing another set of Qs and As" but "one of the issues will be how well the regulators think the prior set has worked to in fact bring more CRA activity into places that are not in the assessment areas of the major institutions," said Seidman.

Reviews of the 2013 guidance were mixed. Some have praised the regulators for taking an incremental step, but NCRC and other community advocates oppose the piecemeal approach, saying that CRA assessment areas should be redrawn to include all areas — not limited to branch networks — where a bank makes loans and provides other services.

"Assessment area reform is a crying need. Regulators need to go boldly beyond where no regulator has gone before," said Silver. "Even with the changes to the Q&As, it's still very hard even for the banks to know when they get credit outside of their assessment areas."

Fitzgibbon said he falls in both camps. On the one hand, he agrees the mismatch between modern, electronic-based financial services distribution and a CRA assessment area limited to a physical branch network needs to be addressed, but he also believes last year's incremental step was "appropriate."

He noted that additional tweaks to the lending test could come if regulators determine last year's changes to the Q&A document do not bring the effect regulators wanted. Regulators could also expand the list of technical assistance functions a bank may provide a community development organization — that is not directly related to financial services — that can receive CRA credit, he added.

"The examiners are going to provide some feedback to Washington in terms of what they're seeing in the CRA exams they're conducting on large banks to get a sense of how the industry is utilizing the changes in the Q&A to effectively do more in community development and lending than they had done in the past," Fitzgibbon said. "We should be able to see whether or not the opportunities that present themselves are being taken advantage of."

Seidman said one "longshot" addition to the CRA exam could be credit for community development activities that seek to improve healthcare options in low- and moderate-income communities, such as support for local primary care facilities and community health clinics.

"If the regulators are going to put out a new set of Qs and As, I wouldn't be shocked if they try to make clearer the extent to which community development activities that improve the health of low- and moderate-income communities and individuals count as community development activities," she said.