Interagency breakthrough on CRA looks to be in reach

WASHINGTON — As the Biden administration fills out its roster of bank regulators, optimism is growing that agencies that had diverged on how to reform the Community Reinvestment Act may come together on a joint framework.

During the Trump years, the Office of the Comptroller of the Currency finalized its own CRA rule without support of other regulators. Critics warned that the agency's sweeping overhaul could hurt the very communities that the anti-redlining law was meant to help. They supported a more restrained, consensus-driven approach offered by the Federal Reserve.

The rule has yet to be fully implemented. Acting Comptroller Blake Paulson appeared willing last month to slow down the process, telling banks they no long needed to meet a May deadline to submit data meant to inform the creation of a new CRA scoring system. And analysts see both candidates under consideration by the Biden administration for comptroller as likely to hit the pause button, opening the door to the agencies returning to the negotiating table.

“The prospects are good for interagency collaboration on CRA reform,” said Quyen Truong, a partner at Stroock & Stroock & Lavan.

That sentiment was echoed last week by Fed Chair Jerome Powell, who told House lawmakers that he sees "an opportunity for a harmonized rule among the agencies.”

The administration's search for a new comptroller has reportedly been narrowed to two candidates: Michael Barr, a former Obama administration official and law professor with an extensive pro-consumer record; and Merhsa Baradaran, a law professor at the University of California, Irvine and an author of books examining social justice in the financial system.

Observers say either would likely throw out the CRA rule finalized under former Comptroller Joseph Otting, potentially shifting focus to the Fed's alternative plan spearheaded by Gov. Lael Brainard. The Fed issued a rulemaking outline in September that, unlike the OCC rule, would rely on existing data collection and reporting for CRA scoring, and preserve tests that consumer advocates had criticized the OCC for weakening.

“We would expect that the rulemaking process will move more in the direction of the Fed’s proposal rather than the current regulation by the OCC,” said Peter Dugas, managing principal at Capco. “We haven’t seen significant complaints levied against that plan.”

The Federal Deposit Insurance Corp. has yet to offer its own plan, but new leadership at the agencies could affect the FDIC's thinking as well. If the Senate confirms Rohit Chopra to lead the Consumer Financial Protection Bureau and a new comptroller, Democrats could hold a majority on the FDIC even though the board is chaired by a Trump appointee, Jelena McWilliams.

Truong expects the OCC to help take the lead on an eventual reform framework regardless of who becomes comptroller. Banks supervised by the agency account for roughly 70% of the assets in the U.S. financial system.

“The approach the OCC decides to take will have great weight, given its importance to the industry,” Truong said. “The regulators place a premium on consensus within the CRA framework. It’s not a matter of one agency dictating how it will turn out for all. But the OCC will play a very strong role in driving that outcome.”

Though the OCC rule technically went into effect late last year, banks will not have to comply with the brunt of the changes until 2023 or later.

Despite some controversy over whom the administration ultimately will choose to run the OCC, many observers see relatively little daylight between Barr and Baradaran on CRA. Barr was a key architect of Dodd-Frank, while Baradaran has strong support among progressives for her positions on postal banking and other consumer policy issues.

“Either of them would be great comptrollers,” said Kevin Stein, deputy director of the California Reinvestment Coalition. “We look forward to one of them being put in place as soon as possible.”

In 2005, Barr defended the CRA in the New York University Law Review, disputing conservative claims that the law was too costly and inefficient to implement.

“CRA does not appear to be a drag on the efficiency of banks and thrifts or the financial sector as a whole,” Barr wrote at the time. “Although the benefits and costs of CRA as we have them are not, strictly speaking, summable, even a rough sense of the costs and benefits of the regulation suggests that it is, on net, socially beneficial, and consistent with the underlying theories justifying CRA.”

Baradaran has also defended the CRA. In 2019, testifying before the House Financial Services Committee, she argued the law was “an endangered species."

"It once stood among a coherent system of bank regulations and regulatory enforcements designed to ensure that banks play a role in public policy and fulfill their obligation to the public,” Baradaran said. “The CRA is the lone survivor of this regulatory tradition. As such, changes to the CRA must avoid further eroding banks’ public obligations.”

Almost separate from the debate about the substance of CRA reform are the concerns about a lack of regulatory consensus. Both banks and community reinvestment advocates fear that a fragmented, two-tiered system — one developed by the OCC and another for banks supervised by other agencies — would create confusion and ultimately worsen industry performance under the law.

But banks have also raised concerns about the OCC's need to collect new CRA-related data from the industry. After finalizing its rule in May, the agency released a follow-up proposal in May providing more details about its scoring methodology, and asked institutions to submit new data necessary to building the grading system.

In a shift, however, after President Biden was sworn in in January, Paulson announced that banks would no longer be required to participate in the data collection survey by a previous May 31 deadline. He did not provide a new deadline.

"The OCC will provide more guidance if a new or renewed information collection will be issued," Paulson wrote in a Feb. 9 letter to numerous trade groups.

Dugas said the industry's biggest complaint about the OCC's CRA rule "so far is the complexity.”

“Especially around the data collection requirements — it’s a huge challenge, a huge lift, for institutions to be able to understand how the significant data collections requirements would be implemented from a reporting standpoint,” he said.

A Democratic comptroller would have the opportunity to pause implementation of the CRA reform framework and potentially issue a new proposal after consulting with the Fed and OCC.

“Whether through a change in administration or through litigation, we’re hopeful we will see the end of that harmful rule — and when I say ‘we,’ I think it’s a pretty big group,” said Stein. “A lot of people are waiting for its demise.”

While some analysts see some significant areas of overlap between the OCC and Fed’s approaches, the latter may be more palatable for community groups and banks.

“Nothing comes to mind from the Fed’s proposal that is worse than the OCC’s, from our standpoint,” said Stein.

Community groups have praised the Fed's plan for avoiding the approach taken by the OCC on scoring metrics, which would combine retail lending and community development tests into a single, final score based in part on the dollar value of CRA projects. Instead, the Fed would score retail lending and community development performance separately.

In a working paper published by the University of Pennsylvania in 2019, Barr appeared to take direct aim at the OCC's approach, writing that a “one-size-fits-all metric would not do a good job capturing the wide variety of bank business strategies in serving [low- and moderate-income] communities and households, and the wide variety of local contexts in which they operate.”

“A single metric would likely drive banks to make the easiest loans to the most well-off communities, not focus on more complex financing and more difficult to serve communities,” Barr wrote. “Such a metric would end up with too little activity in some contexts, might encourage un-economic activity in other contexts, and would become stale over time.”

In 2019 congressional testimony, Baradaran said banks should be required to develop longer-term plans about their CRA compliance strategy.

Strategic plans “should be required of all banks,” Baradaran wrote. “These strategic plans must be pegged to specific measurable outcomes and not just actions taken. A bank would specify the needs or problems in their region, devise a plan with specified metrics for meeting those needs, including the community partners involved in making and achieving those goals, and make yearly public reports on their progress.”

Meanwhile, some observers say the Fed's plan appears to focus more on the role that race plays in community disinvestment.

“Businesses in [Black, Indigenous, and people of color] communities are less capitalized,” said Hope Knight, CEO of the Greater Jamaica Development Corp. in New York, adding that the pandemic has left those communities more exposed. “When an event like this happens, it just devastates enterprises.”

In the Fed’s CRA plan, Knight said she saw “a bit more thoughtfulness” in how regulators would evaluate the needs of communities affected by racism. “There’s a recognition that communities of color have to be evaluated in a more meaningful way — that there still needs to be some context around what we’re comprised of,” she said.

In the Fed's advance notice of proposed rulemaking, the agency said it was considering “how best to define the local communities where banks’ CRA activities are assessed to both reflect changes in the banking industry and to retain CRA’s nexus with fair lending requirements.”

In the 2019 working paper, Barr also emphasized the need for CRA reform to “recall the legacies of racial discrimination and redlining that underpin the Act."

"Compliance with fair lending laws needs to be included in CRA exams and ratings, for the bank holding company as a whole,” he wrote.