CRA reform plan is suddenly outdated

Bank regulators were in the process of reshaping a 43-year-old community lending law when the coronavirus pandemic hit, prompting calls from bankers and community advocates alike to suspend rulemaking and revealing how inflexible the proposal could be amid a crisis.

Even absent current economic shock waves, support for the proposed changes to the Community Reinvestment Act has been tepid at best, with banks citing regulatory burden and advocates predicting diminished banking services to communities in need.

Beyond those objections, the proposal runs counter to its own public-policy goal that CRA modernization should reposition bank investments from areas that are “hot spots” for community development and redirect it to areas that need it most, known as banking “deserts.”

Instead, the proposal threatens to do the opposite by inflaming hot spots and neglecting deserts. The proposal augments banks’ existing facility-based assessment areas with a new category of deposit-based assessment areas. This steers banks with CRA responsibilities to highly populated, already well-served areas like New York City, Los Angeles, Chicago and Houston.

The proposed deposit-based assessments also will not result in additional banking services for CRA deserts, which bank regulators say includes rural areas, distressed communities and Indian country. These communities are highly unlikely to be sources of the deposits that qualify as an assessment area under the proposal. Meaning, they will remain deserts even in the wake of the pandemic.

The proposal’s requirement that banks serve deposit-based assessment areas is fixed and inflexible, at a time when the importance of flexibility in determining community needs and resources is at an absolute premium.

Beyond whatever else may be required to recover from the economic consequences of the pandemic, locking banks into an assessment model that prevents them from offering services where they are needed most will restrict their ability to help communities hit hardest by the crisis.

There is a better way.

Reinvestment redistribution, a concept proposed by consumer bankers, would deem internet deposits as sourced from a broad U.S. “cyber-community,” rather than from any particular geography. This would permit CRA obligations that are based on internet deposits to be fulfilled with activities benefiting low- and moderate-income people and communities anywhere. It particularly helps banking deserts by providing a weighted incentive for engaging in activities there.

Reinvestment redistribution accomplishes this goal by maintaining only the current facility-based assessment areas and applying two metrics in each assessment area, and to the bank overall. The first metric, applicable to all retail banks, would measure CRA loans on a unit basis and compare a bank’s performance to threshold levels of market lending activity or loan demand. This would be based on data provided by the regulators.

The second metric — applicable to large, wholesale and limited-purpose banks — would measure the dollar volume of community development activity and compare that sum, as a percentage of noncorporate, nonbrokered domestic retail deposits, against market activity.

In practice, CRA responsibilities based on a bank’s physical locations would continue under the reinvestment redistribution. But an important part of the bank’s total CRA obligations would be set as a percentage of its retail deposits.

In that case, a bank with only one location but a large volume of internet-sourced deposits would need to provide an overall level of CRA qualifying activities that exceeds its facility-based obligations.

The key to reinvestment redistribution is that a bank seeking additional CRA activity to enhance its overall rating could choose to direct its CRA dollars to the qualifying markets of its choice. Rather than forcing investment in hot spots, the dynamics of CRA investment would become more balanced by implementing a market-driven approach to CRA, creating viable economic opportunities that stimulate banks to invest in areas that need it most.

The CRA benefits would be more evenly distributed across the country, with dollars flowing to meet needs, including those that become highly apparent as the country recovers from the pandemic.

Reinvestment redistribution would retain some of the important strides toward CRA modernization contained in the proposal. This includes better rating transparency and consistency, metrics with a presumptive rating, clear market and demographic benchmarks, and a multiplier to incentivize certain activities.

But it would also accomplish the regulators’ public-policy goal that has become more vital in light of the coronavirus pandemic: reduce hot spots and serve deserts by establishing a system that promotes flexibility in the geographic areas where banks can receive consideration for CRA activity.

Editor's note: Buckley LLP helped the Consumer Bankers Association prepare its comments on the CRA modernization proposal.