“Speak Up.” Credit: BeverlyIsLike

September 29, 2020; Next City

Those who were concerned about the future application of the federal Community Reinvestment Act should be happy, because there will be a second bite at the apple. The Federal Reserve’s board of governors has put forward a proposed set of new CRA regulations they unanimously believe can bring the law into the 21st century without harming the communities it was designed to benefit.

The Fed’s positive action comes just days before a set of new and contentious CRA regulations for financial institutions chartered by the Federal Office of the Comptroller of the Currency (OCC) went into effect. What had been a unified approach that covered the lending activities of all federally regulated financial institutions shattered when three oversight agencies couldn’t agree on a new set of common rules.

The process that got us to this point began when the FDIC, the Federal Reserve, and OCC, each with oversight responsibility for a portion of the nation’s sprawling banking and lending industry, set out together to create a new shared set of ways to make sure the CRA was meeting its goals in a changing banking environment. Along the way, the leadership of FDIC and the Fed disagreed with the direction OCC was advocating and dropped away from the joint process. OCC chose to go it alone and issued its own set of new guidelines for just the banks it oversaw. The new OCC regulations had been heavily opposed and, from many perspectives, were judged to be dangerously flawed.

The CRA was enacted in 1977 to remedy the ills of redlining and the lack of investment in low- and moderate-income communities. As Debby Warren, writing for NPQ, observed earlier this year:

Although CRA has not been a panacea for dismantling centuries of institutionalized racism that has so often blocked wealth building in communities of color, the law has had a potent and positive effect in urban neighborhoods and rural communities across the country. Since CRA’s inception in 1977, banks have invested nearly $2 trillion into neighborhoods previously largely ignored by financial institutions. The CRA has benefitted low-income homebuyers, small farms, businesses owned by women and people of color, housing tax credit investors and syndicators, nonprofit single-family and multifamily housing developers, local governments, community development finance institutions (CDFIs), and Indian Country.

According to Next City, local community development advocates say the standards OCC would begin to apply in October will bring about a new form of redlining. Banks would be able to comply even if they do not invest in many of the local communities in which they do business. The new standards also appear to favor banks that make fewer, larger loans at the expense of providing funds for small business loans and home mortgages, which the communities in the areas targeted by the CRA need.

Now, the Federal Reserve, by saying it was ready to issue its own set of rules for the institutions it oversees, is providing a second chance to modernize without inflicting the harm contained in the OCC rules. Based on its analysis of national and local data, the Fed is proposing to establish a “set of tailored geographic benchmarks for CRA obligations based on each state or metropolitan area where a bank has branches. Rather than dollar amounts, the geographic benchmarks emphasize the number of loans made to borrowers in each area, to ensure banks aren’t incentivized to focus on larger loans.”

Speaking about these new rules at an Urban Institute Forum, Federal Reserve Governor Lael Brainard explained that she sees this new process as one that can protect the objectives of the CRA and serve as a new effort to create a single set of rules for all financial institutions:

We very much keep at the forefront of our thinking the history of the CRA. The CRA was enacted as one of several landmark civil rights laws that were designed to address systemic inequities in credit access, in particular a response to redlining…

It’s important to recognize, with the path we’re on today, there are effectively two separate rules. We have heard from stakeholders one set of rules would be best, for both communities and banks.

From the perspective of the Association for Neighborhood & Housing Development, the Fed did what had to be done, saying, “The Federal Reserve’s ANPR serves as a productive alternative to the OCC’s rushed, harmful update to the rules. They are providing the public ample time to review this proposal and respond to the questions posed and appear serious about incorporating community input. We are particularly pleased to see direct questions about how the CRA can better serve people and communities of color, combat displacement, and promote impactful activities, such as bank branches, access to banking, lending to the smallest of businesses, and housing for the unhoused and very low-income populations.”

Over the next 120 days, which is an unusually long period for public comment, the Federal Reserve is inviting feedback on key areas of its proposed approach. As noted on Lexology, the Fed has asked for comment on:

  • how to define a financial institution’s local community for CRA evaluations;
  • a proposed “Retail Test” containing two subtests: (i) a “metrics-based” approach that focuses on a bank’s major product lines and the credit needs and opportunities of its assessment areas; and (ii) a qualitative approach aimed at improving predictability and transparency in the evaluation of “important aspects” of retail banking services (i.e., branches, delivery systems, and deposit products);
  • a proposed “Community Development Test” containing two subtests: (i) a “metrics-based” approach that is unique to a bank’s major product lines and its assessment area’s community development needs and opportunities; and (ii) an approach that would assess community development services in a manner that is more cognizant of the value of “qualifying volunteer activities,” particularly in rural communities;
  • updating how states, multistate metropolitan statistical areas, and institutions are rated; and
  • data collection and reporting requirements.

Although the OCC’s new rules formally go into effect today, it is not too late to fix them. According to Oscar Perry Abello, writing for Next City, the agency “agency rushed through the new rules before it finalized the data collection process with the banking industry. So, OCC-supervised banks actually have until 2023 or 2024 before they actually have to be in compliance with those new rules. So, these new rules may not ever be enforced—not to mention, a coalition of civil rights and community development groups have filed a lawsuit to overturn them.”

Ellen Seidman, nonresident fellow at the Urban Institute, believes the 120-day comment period provides some time for those who value the CRA’s core vision of equity to weigh in, create a new set of effective rules, and bring the Fed, FDIC, and OCC together. “Given where we’re starting from,” Seidman says, “the hope is many of the comments will be about how to come to a convergence. Maybe that’s wishful thinking, but maybe the longer comment period provides a chance.”

With another chance to weigh in, and with the Fed’s leadership ready to listen, supporters of the CRA need to step forward. The new proposed regulations and information about how to give input can be found here. Let’s not miss this chance to make a difference for those who will be passed by without the protections of the CRA in place and made relevant to 21st-century banking.—Martin Levine