NCRC comment on Federal Reserve Board’s Advance Notice of Proposed Rulemaking regarding the Community Reinvestment Act – February 2021

Overview and introduction

Docket Number R-1723 and RIN Number 7100-AF94

To Whom it May Concern:

The National Community Reinvestment Coalition (NCRC) appreciates the thoughtfulness of the Federal Reserve Board’s (Board) approach to modernizing the regulations implementing the Community Reinvestment Act (CRA). NCRC is an association of community-based organizations whose mission is to increase access to credit and capital in traditionally underserved communities. On a daily basis, NCRC and our members use CRA in our collective work to help finance loans, investments and services to underserved communities. As our nation recovers from the COVID-19 pandemic, a stronger CRA is more imperative than ever in order to help our devastated communities recover.

CRA reform must update bank charter rules to reaffirm commitment to communities

As the Board embarks on CRA reform and considers how the reform can aide the recovery from the pandemic, the Board must also grapple with how CRA and bank charters are designed to promote accountability to the public and to prevent banks from arbitrarily changing their business models and discontinuing major product lines. Lost in the history of CRA enforcement is an abandonment of one of the most critical objectives of this civil rights law. Namely, that banks meet the credit needs of the neighborhoods they are chartered to serve. For decades banks have simply announced, without regulatory response, that they are no longer going to make mortgage loans or small business loans below $100,000 or ending of other products or services.  One lender actually announced it was only going to issue jumbo home loans.

The act of ending a lending product must be considered in the context of the requirement for meeting the credit needs of a neighborhood. Continued permissiveness regarding this behavior amounts to regulators ignoring the fundamental precept of the CRA law that banks continually and affirmatively meet credit needs. When a major lender exits home or small business lending abruptly, this causes lending levels to drop precipitously––by tens of thousands of loans in some cases.

Banks are savvy enough to not state publicly that they are no longer going to lend in certain neighborhoods. But if they announce they are no longer doing small business loans, mortgages, and closing branches in those neighborhoods, then this is clearly tantamount to saying they are no longer going to meet the credit needs in those neighborhoods. Dropping products in poor or minority areas, without a consideration as to whether those products are needed, is precisely why this anti-redlining law was created.

To deter this abandonment of business that banks promised in their charter applications, NCRC suggests that banks must re-apply for charters once every decade and must re-apply before material changes in their business or product lines. These applications would be subject to public comment. In addition, changes in product lines should be a criterion on the retail lending and services test just like closings and openings for bank branches. Finally, refusal to offer retail loans below a specified dollar threshold is discrimination and must result in a ratings downgrade.

Strengthening CRA is a critical component of a just recovery

The Board must strengthen the rigor of CRA exams in order to promote recovery from the pandemic. The Board has described approaches in its Advance Notice of Proposed Rulemaking (ANPR) on CRA that will make CRA exams more objective and transparent. The Board has described proposed improvements to performance measures, data collection, and assessment areas that promise to bolster the robustness of CRA exams. Yet, questions remain about whether the Board’s approach will reduce the high rate of CRA inflation. If nearly every bank continues to pass their CRA exams with high ratings, banks will not engage in strenuous efforts to help communities of color and low- and moderate-income (LMI) neighborhoods recover from the pandemic’s devastation.

The National Community Reinvestment Coalition (NCRC) recently released a major report finding statistically significant correlations between redlining and susceptibility to COVID.[1] In the 1930s, the Home Owners Loan Corporation (HOLC) commissioned the production of maps that rated neighborhoods based on the risk of lending in them. Working class and minority neighborhoods usually received the riskiest designation of hazardous. The designations subsequently facilitated redlining and discrimination against these neighborhoods, which remain starved of credit and are predominantly lower income and minority. These neighborhoods also have the highest incidence of health conditions such as asthma, diabetes, hypertension, high cholesterol, kidney disease and stroke, which make residents more susceptible to COVID-19. Life expectancy is almost four years lower in the redlined communities than the neighborhoods not designated as hazardous by HOLC.

Since the start of the pandemic, the number of Black business owners dropped by 440,000 or 41%, compared to just a 17% decline in white small business owners.[2] Discrimination in lending contributes significantly to racial disparities in small business survival rates. An NCRC investigation found that African American testers applying for Paycheck Protection Program (PPP) loans for their small businesses during the pandemic were likely to receive less information or encouragement to apply than white testers.[3]

The Federal Reserve proposal must be strengthened to increase lending to people of color and investing in communities of color

CRA must be strengthened considerably in order to combat historical and present-day discrimination, and to help our communities recover from depression-like conditions caused by the pandemic. Although the Board recognizes racial inequities in its ANPR, its proposed remedies of considering underserved areas on exams and encouraging more financing to minority depository institutions are not of a large enough scale to address systemic inequities. The proposals do not embed increasing access to credit to communities of color into the CRA exam and subtests.

The Federal Reserve proposal must be strengthened to prevent grade inflation

In order to bolster the transparency of CRA exams, the Board describes thresholds associated with performance measures on its retail and community development tests. However, the Board does not discuss in detail the impact of these proposed thresholds on the ratings distribution except to hint that the ratings distribution would not change that much. This outcome would not achieve the overall objective of CRA reform, which must be increasing lending, investment and services in communities of color and low- and moderate-income (LMI) communities. Reproducing the same ratings distribution in which 98% of banks pass their CRA exams with high ratings will fail to significantly increase lending, investment and services in underserved communities. On the contrary, it may lead to stagnation in reinvestment since banks would not be motivated to improve their CRA performance.

Ratings need more nuance and gradations so that banks are motivated to continually improve their reinvestment performance. As well as urging the Board to be more clear regarding the implications of the thresholds on the final ratings, NCRC asks the Board to reconsider its proposal to reduce ratings on the subtests from five to four. Five ratings more effectively reveal distinctions in performance, thereby motivating the lagging banks to improve. For example, if a bank receives a rating of Low Satisfactory on a subtest instead of High Satisfactory, it would be more likely to seek improvements in its performance.

The Board proposes to blend Low and High Satisfactory into just one rating, Satisfactory. This could likely result in most banks receiving Satisfactory ratings on the subtests (as they currently do for the overall rating) instead of more distinctions in subtest performance. This is the wrong way to go on CRA reform. Instead, subtest as well as overall test ratings must reveal more distinctions in performance rather than producing a distorted ratings distribution that inaccurately indicates that the vast majority of banks perform in the same stellar manner.

In contrast to the Office of the Comptroller of the Currency (OCC), the Board recognizes that CRA cannot be reduced to a few performance measures or tests that will fail to accurately measure bank responsiveness to various needs in underserved communities. The OCC’s predominant measure in its final rule is a ratio of the dollar amount of CRA activities divided by deposits. This measure will distort bank activity and encourage banks to pursue relatively few infrastructure or community development projects of a large scale nature. As a consequence, community needs for desperately needed loans and investments to rebuild housing and small businesses will be neglected. In contrast, by maintaining separate tests, including the service test, this aspect of the Board’s proposal ensures that the needs for retail loans, community development financing, branches and deposit products and services will be met by banks.

Assessment areas must support and reflect a commitment to local lending, investments and services

NCRC is appreciative of the Board’s proposals and discussions of expanding assessment areas since Board-sponsored research has demonstrated that assessment areas motivate lenders to increase retail lending in LMI communities.[4] The Board offers a number of approaches for expanding assessment areas in the case of online lenders and banks with a hybrid approach of lending through branches and via non-branch means. The Board needs to adopt an approach that captures the vast majority of a bank’s loans on CRA exams, whether it is a traditional or non-traditional bank, in order to be most effective in increasing access to safe and sound loans for neighborhoods in recovery.

Along the same lines, we applaud the Board’s proposal to eliminate distinctions between full-scope and limited-scope assessment areas. Full-scope assessment areas, which are usually the largest cities, count more on current CRA exams than limited-scope areas that generally are smaller cities and rural counties. Often, communities of color, Native American reservations, and other underserved communities continue to receive fewer CRA-related loans and investments because they are in limited-scope areas.

CRA modernization must maintain its focus on lower income communities and better target communities of color

Unlike the Office of the Comptroller (OCC), the Board generally does not stray away from the focus on LMI communities in its ANPR proposals. However, we do not support expanding financial education to any income level since low- and moderate-income (LMI) consumers and people of color are most likely to be unbanked or underbanked as revealed by surveys conducted by the Federal Deposit Insurance Corporation (FDIC). The Board can designate additional subgroups in the population such as people of color, people with disabilities or older adults for whom CRA credit for financial education or other community development activity can be earned instead of opening it up to everyone regardless of need. Likewise, the Fed should further develop its procedures for awarding CRA credit for financing affordable housing that is not subsidized so that such financing actually serves LMI tenants.

Collecting improved community development and deposit data

NCRC strongly supports the Board’s proposals to improve data collection regarding community development financing, the geographical location of deposits and deposit products by income level of census tracts. A major shortcoming of current CRA exams and analysis is the lack of data of critical CRA activity. The service test sporadically and inconsistently involves data and discussion of deposit products for LMI customers, which makes it difficult to compare banks against each other and to determine scores and ratings for that part of the test. Likewise, the community development component of the tests produces data in an inconsistent manner, resulting in relatively rare peer comparisons and thwarting objective scoring. Moreover, the lack of a database on community development activities makes it impossible to determine CRA hot spots and deserts. Effectively targeting undeserved areas with community development financing is not possible without data being available at a census tract and county level.

Rigorous ratings, performance measures, assessment area definitions and data collection are necessary if CRA is to increase meaningfully access to credit and capital to communities of color, LMI neighborhoods, Native American reservations and other underserved areas and populations, including older adults and people with disabilities.

An interagency process is imperative and Congress must apply CRA to non-bank institutions

While the Board’s ANPR is a good start, NCRC believes that the process will remain incomplete and CRA will not be able to realize its full potential in stimulating reinvestment unless the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) join the Board in establishing an interagency process. The OCC must rescind its final CRA rule, which would significantly decrease lending and investing in LMI communities, and join the FDIC and Board in proposing a CRA rule that builds on the Board’s ANPR. If CRA is not a uniform regulation across the three agencies, communities will not be able to engage various banks operating under the CRA rules. Needed cooperation on significant community projects would be difficult, if not impossible, to achieve among banks supervised by different agencies if the CRA rules differ by agency and provide disparate incentives for banks to engage in a disjointed range of activities.

An interagency rulemaking process must also build in periodic updates to the rule. One area for periodic updates is the list of eligible activities, since community needs will evolve over time. In addition, the thresholds for the proposed retail and community development tests will need to be adjusted on a periodic basis. The Board implies that the community development financing metrics will probably need to be refined as more data is collected and becomes publicly available. In general, a rulemaking process should consider thresholds after each CRA exam cycle of about two or three years and take into the account the ratings distribution and whether the ratings overall and in the subtests accurately reveal distinctions of performance or are inflated

In addition to a uniform CRA rulemaking, Congress needs to expand CRA broadly throughout the financial industry in order to encourage non-bank financial institutions to join banks in reinvesting in LMI and communities of color. Non-bank financial institutions, including mortgage companies, insurance companies and securities firms, are becoming formidable competitors to banks, with assets in the trillions of dollars. If they remain outside of CRA and the banking industry shrinks, the available pool of resources for reinvestment needed to combat decades of discrimination could diminish significantly, leaving underserved communities crippled in the wake of the pandemic.[5]

The following organizations support the views in this letter:

Grounded Solutions Network


National Association of Real Estate Brokers

National CAPACD

National NeighborWorks Association

National Urban League

[1] Jason Richardson, Bruce C. Mitchell, Helen C.S. Meier, Emily Lynch, Jad Edlebi, Redlining and Neighborhood Health, NCRC, September 2020, https://ncrc.org/holc-health/.

[2] Rodney Brooks, “More than half of Black-owned businesses may not survive COVID-19,” National Geographic, July 2020, https://www.nationalgeographic.com/history/2020/07/black-owned-businesses-may-not-survive-covid-19/;  Governor Lael Brainard, Modernizing and Strengthening CRA Regulations: A Conversation with Minority Depository Institutions, October 2020, https://www.federalreserve.gov/newsevents/speech/brainard20201015a.htm; and R.W. Fairlie, The Impact of Covid-19 on Small Business Owners: Evidence of Early-Stage Losses from the April 2020 Current Population Survey (No. w27309). National Bureau of Economic Research, https://doi.org/10.3386/w27309

[3] Anneliese Lederer, Sara Oros, Sterling Bone, Glenn Christensen, Jerome Williams, Lending Discrimination within the Paycheck Protection Program, NCRC, July 2020, https://ncrc.org/lending-discrimination-within-the-paycheck-protection-program/ and follow-up report, Lending Discrimination during COVID-19: Black and Hispanic Owned Businesses, November 2020, https://ncrc.org/lending-discrimination-during-covid-19-black-and-hispanic-women-owned-businesses/.

[4]  Lei Ding and Leonard Nakamura, Don’t Know What You Got Till It’s Gone: The Effects of the Community Reinvestment Act (CRA) on Mortgage Lending in the Philadelphia Market, Working Paper No. 17-15, June 19, 2017,https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2991557, and Lei Ding, Raphael Bostic, and Hyojung Lee, Effects of the CRA on Small Business Lending, Federal Reserve Bank of Philadelphia, WP 18-27, December 2018,https://www.philadelphiafed.org/community-development/credit-and-capital/effects-of-the-community-reinvestment-act-cra-on-small-business-lending.

[5] Josh Silver, Why The Community Reinvestment Act Should Be Expanded Broadly Across The Financial Industry, NCRC, August 2020, https://www.ncrc.org/why-the-community-reinvestment-act-should-be-expanded-broadly-across-the-financial-industry/.

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