BankThink

Don’t overhaul CRA just for the sake of it

Federal bank regulators involved with reforming the Community Reinvestment Act seem obsessed with overhauling it when only a tuneup is required.

They have even come up with some proposals that are unnecessary and will add to the regulatory burden of CRA without improving it.

The regulatory preoccupation with overhauling CRA is puzzling since a recent St. Louis Fed analysis found that CRA ranks only sixth in bank compliance costs compared to the Bank Secrecy Act, under which compliance costs roughly three times as much.

Fed Vice Chairman for Supervision Randal Quarles
Randal Quarles, vice chairman of supervision at the Federal Reserve, listens during a Senate Banking Committee hearing in Washington, D.C., U.S., on Tuesday, Oct. 2, 2018. The hearing focused on implementation of a new law easing Dodd-Frank Act rules on community and midsize banks. Photographer: Andrew Harrer/Bloomberg
Andrew Harrer/Bloomberg

After more than 40 years of working with CRA, most bankers have learned to live with it — as evidenced by the 98% pass rate.

The main rationale for CRA reform has been the increase in digital banking and branchless banks where the traditional assessment area around a bank’s offices is outdated for some banks. In fact, the current comptroller previously suggested abandoning the entire concept, but later backed away from that idea.

But the Fed’s recent recommendation to have separate assessment areas for retail banking and community development activities is unnecessary and will increase the regulatory burden without resulting in any meaningful improvement in CRA performance.

Banks and their examiners slice and dice demographic, economic, competitive and other information for assessment areas to ascertain their needs — and this work would be doubled with two such areas. It will only be a matter of time before community groups, and perhaps even regulators, suggest that a bank expand its retail lending focus beyond their original assessment area to the broader community development one. Community banks will likely resist that idea, because they may be uncomfortable lending in outlying markets where they have done some community development activities, especially as CRA is predicated on the concept of safe and sound lending.

The better public policy solution is to maintain the current assessment area infrastructure but allow CRA credit for all community development activities outside the area, as long as a bank first meets those needs inside of it. This approach is, in fact, currently allowed for certain community development activities, such as a bank buying certificates of deposit in minority banks anywhere, as long as the bank has first met such needs within its assessment area.

The only real tuneup required to the assessment area concept in our digital banking world is that “branchless” internet, credit card or fintech banks should likewise be given credit for community development activities anywhere, rather than being limited to the artificially narrow assessment area around their main office.

The only exception to this improvement would be in regions where 5% or more of their deposits emanate, where a commensurate portion of community development activities should be reinvested in the spirit of the Community Reinvestment Act. This approach is consistent with Treasury’s recommendation that assessment areas should consider a bank’s deposit-taking as well as branch footprint.

At the same time, the OCC recently proposed the reduction or elimination of CRA credit for mortgage-backed securities “after three, four, five, six different trades” for the same underlying CRA loan. While this proposal appears reasonable on its surface, a closer look reveals it is impractical, unnecessary and potentially disruptive to affordable housing.

CRA-qualified MBS are more expensive than other MBS, partly because their underlying CRA-qualifying mortgages originated by banks and nonbanks are customized for a buying bank’s assessment area. Most banks and CRA investment vehicles like mutual funds that buy MBS in targeted assessment areas from these loan originators typically do not resell them for CRA credit but rather hold them.

This is because different banks have different assessment areas, and an MBS tailored for one bank will not provide CRA credit for another. Also, banks receive ongoing CRA credit for such community development investments over successive exam review periods, so it is unnecessary to incur the costs of selling them and repurchasing others for the next exam.

Even assuming two banks with similar assessment areas, the MBS purchaser would need access to detailed borrower income, loan pay-down and other data to provide CRA credit documentation to examiners. Further assuming multiple CRA MBS sales, would there be a sliding scale for CRA credit based on the number of sales? The fact is that multiple sales for CRA credit may be common for CRA loans but not for CRA MBS.

If banks that rely on MBS for their CRA investment needs are unsure they will get credit, the demand for them will fall and originators will be discouraged from making affordable housing loans to be securitized. This proposal would add to the bank, examiner, and MBS industry recordkeeping burden and could potentially kill the CRA MBS goose that lays the golden affordable housing egg.

The most troubling aspect of this proposal is that very few of the roughly 1,500 comments on the OCC’s advance notice of proposed rulemaking even mentioned it. Only 115 commenters (106 excluding duplicates), fewer than 10% of the total, referenced MBS in response to question No. 18 about possibly limiting or excluding the community development treatment of certain activities, citing investments in MBS as an example.

Of the 106 comments mentioning MBS, 84% were supportive of them for CRA credit — and only 16% were not. Among the 17 negative MBS comments, only eight even mentioned multiple MBS trading. Those latter eight comments represent about one-half of 1% of all ANPR comments. In other words, much CRA reform ado about nothing.

So, instead of following Treasury’s CRA reform mandate to expand the types of eligible CRA investments, provide clearer standards for CRA credit and implement simplified record-keeping procedures, this proposal would do the opposite.

It is encouraging that regulators are finally offering some specific CRA reforms rather than glittering generalities, but it is discouraging that they reportedly have had but one joint meeting and phone call since this reform process began. As they hopefully continue this joint rulemaking process, they must not forget that the law has been working satisfactorily for decades.

Rather than forcing unnecessary and costly reforms, the agencies need to fine-tune it within the spirit of the law, so banks can fairly and efficiently do their job of serving their communities. Otherwise, we should preserve the status quo, since no reform is better than poor reform.

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