Principles for CRA Reform: Strengthen Communities, Exams and Accountability

By holding banks accountable for serving local communities, the Community Reinvestment Act (CRA) has leveraged trillions of dollars of responsible loans, investments and services for traditionally underserved communities. The Office of the Comptroller of the Currency (OCC) issued damaging changes to its CRA regulations in May 2020. A public comment period ended in February 2021 on a Federal Reserve Board’s (board’s) Advanced Notice of Proposed Rulemaking (ANPR) that established a more solid basis for CRA reform than the flawed OCC final rule. NCRC advocates for the OCC to rescind its CRA rule. Then the OCC and the Federal Deposit Insurance Corporation (FDIC), the third bank regulator, should work with the Federal Reserve on a joint, interagency rule. 

As we recover from the COVID-19 pandemic, CRA must increase accountability to local communities, as they need to focus their revitalization efforts on improving health care facilities, increasing food supply and preserving and expanding their small businesses that have suffered during the pandemic. CRA reform that diverts attention from local needs will thwart the nation’s recovery from this crisis. In particular, the pandemic devastated the small business sector and created multiple needs for financing to reduce food and health care deserts. In addition, CRA reform should address digital divides and the need to support community-based cultural, educational and news networks. Re-establishing and lending to local, minority-owned and women-owned small businesses can help address these pressing community needs. 

The agencies must not undermine the effectiveness of CRA by designing new exams that do not effectively hold banks accountable for meeting the credit needs of local communities. The following are principles of reform; if the agencies contradict or contravene these principles, we will oppose any additional regulatory changes just as we have opposed the OCC final rule.

NCRC has always advocated for applying CRA broadly throughout the financial industry. This expansion would require an act of Congress. While this is discussed below, the focus of these principles are areas we expect the federal bank agencies to consider in reforming CRA. Reforming CRA must not become a pretext for relaxing CRA.

  • Local Geographic Focus Must be Strengthened – CRA exams must retain a local geographical focus. Congress passed CRA in response to the redlining of communities. Currently, CRA exams judge bank performance in assessment areas or geographical areas that contain bank branches and deposit-taking ATMs. These assessment areas work for many banks that do most of their lending through branches. However, other banks make loans through non-branch means such as the internet. Also, several financial technology companies (fintechs) are applying to the federal banking agencies for bank charters; fintechs make all of their loans through the internet. Assessment areas must expand to include geographical areas where banks and fintechs are gathering deposits or making significant volumes of loans outside of their branch networks. NCRC has developed a methodology that is a feasible approach for establishing assessment areas for branchless lenders that also elevates the importance of smaller metropolitan areas and rural counties. Rural areas and smaller metropolitan areas must receive more attention on CRA exams. It is not acceptable to obliterate assessment areas in CRA exams or create a nationwide assessment area for large lenders. This would be contrary to the purpose of CRA to prevent redlining. Moreover, removing local assessment areas from CRA exams would decrease lending to low- and moderate-income communities since research found that assessment areas have bolstered lending in modest-income communities. CRA must continue to adhere to its original purpose to ensure that local community needs are met. Do not remove “community” from CRA.
  • Data Must be Enhanced to Hold Banks Accountable for Addressing Local Needs – Data on community development lending and investing must be improved so that the public can track this activity on the census tract and county levels and hold banks accountable for financing health clinics, grocery stores and other projects that revitalize and stabilize communities recovering from the pandemic. The federal bank agencies and the Consumer Financial Protection Bureau must coordinate work on small business lending data required by Section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Under Section 1071, data would become publicly available that captures the extent to which banks are making loans to micro-businesses, women and minority-owned businesses so they can re-establish themselves in the wake of the pandemic. Publicly available data could have discouraged racial and gender disparities in access to emergency lending programs like the Paycheck Protection Program.  Improved data would also further the ability of members of the public to comment on the CRA performance of banks. The OCC’s final rule restricted the public availability of data, including new data to be collected by banks. In contrast, the board contemplated improving the community development financing and deposit data in its ANPR.
  • Bank Activity to People and Communities of Color Must be Considered on CRA Exams – Bank lending, investing and service to people and communities of color must also be considered on CRA exams, which now only consider low- and moderate-income borrowers and communities. Communities of color were the original communities redlined when Congress passed CRA and remain disproportionately victimized by predatory lending and a lack of prime, conventional lending. NCRC has developed one possible option for including communities of color on CRA exams, which involves identifying underserved census tracts and requiring CRA exams to scrutinize lending in these tracts. NCRC estimated that lending in communities of color would increase by about $10 billion over five years if the agencies adopted this approach.
  • Public Participation Must be Enhanced – The heart and soul of CRA is public participation. The public has the right to comment on CRA exams and merger applications. No stakeholder has better insights into local community needs than community residents. If banks do not seriously consider the comments of community residents, they will not effectively respond to local credit needs. Any attempts by the regulatory agencies to truncate public participation requirements are not only counterproductive but contrary to the intent and purpose of CRA. The agencies must facilitate public comment on CRA exams and merger applications by providing improved contact information for staff to whom to send comments and whom can answer questions. In contrast, the final OCC rule does not explicitly state that public comments on bank CRA performance will be considered on CRA exams like they are considered now.
  • Maintain the Importance of Branches – Currently, the CRA service test places primary emphasis on bank branches while still considering alternative service delivery. The OCC finalized rule will significantly dilute the provision of branches and deposit and retail services to low- and moderate-income communities. A large body of research documented that home and small business lending increases to low- and moderate-income borrowers in areas with more branches. Deemphasizing bank branches on CRA exams will cause banks to pay less attention to neighborhoods where they receive deposits and therefore would increase instances of redlining. Moreover, lending and bank services to low- and moderate-income people would likely decline. The board recognized the importance of branches, and in its ANPR it proposed to bolster the services test examining branches and the provision of deposit accounts.
  • Focus Must be on Low- and Moderate-Income Neighborhoods, No Credit for Large Infrastructure Projects or Police Stations –The OCC expanded the range of activities that can qualify on CRA exams to include financing initiatives that may have citywide benefits but that are not necessarily focused on low- and moderate-income neighborhoods. For example, large infrastructure projects such as interstate bridges now would count in OCC CRA exams. No one disputes the necessity for infrastructure, but CRA has historically not been used to finance these types of projects that do not significantly benefit low- and moderate-income people. Further, the final OCC rule would allow banks to finance public safety facilities including police stations, which are highly controversial and contested institutions currently. CRA must not be diluted to divert resources away from neighborhoods that were the original impetus for the law.
  • Discrimination and Violations of Consumer Protection Law Must be Penalized on CRA Exams – The OCC issued a memo that dilutes the negative impact of discrimination and violation of consumer protection law on a bank’s CRA rating. Instead of being emulated by the other agencies, this approach must be rescinded. A bank is not serving credit needs in a responsible manner if it is engaging in illegal and harmful activities on a large scale, behavior which now results in ratings downgrades. In contrast to the OCC, the Federal Reserve Board proposes to enhance the rigor of fair lending reviews, including possible downgrades in ratings for legal violations in the provision of deposit products as well as loans.
  • Banks Cannot Be Allowed to Merge after They Fail CRA Exams – The OCC has also made it easier for banks with failed CRA ratings to be allowed to merge or engage in other activities that require an application to federal agencies. Since only about 2% of banks fail on an annual basis, these institutions are exceptionally poor CRA performers. Currently, the only penalty for failed CRA ratings is the possibility of denial of merger or branch applications. This is one of the few sticks that motivates banks to pass their CRA exams. A presumption that applications will be denied for failed CRA performance must remain the regulatory practice.
  • Avoid Simplistic Measures of Performance – The existing CRA examination criteria have been developed over several years and reflect a careful balance regarding the importance of various activities for low- and moderate-income communities. The OCC implemented a radical overhaul of examination criteria such as reducing CRA performance to a simple formula that compares the sum of CRA activities to bank deposits. This ratio would encourage banks to focus on big deals like large infrastructure and ignore smaller dollar business loans needed for recovery from the COVID-19 pandemic. By also allowing for generous credit anywhere in the country, the OCC’s ratio measure eliminates the focus of CRA exams on local needs that vary across a bank’s footprint. While objective measures of performance can be improved on CRA exams, a reduction of CRA to only a few formulas would contradict the original local focus of the law. In contrast to the OCC, the board proposes to retain most existing performance measures and seeks to clarify how ratings would correlate to the performance measures.
  • Refine CRA Ratings and Combat CRA Grade Inflation – Only about 2% of banks fail their CRA exams annually, while about 90% are judged to have Satisfactory performance and close to 10% are judged to have Outstanding performance. This rating system fails to identify various levels of CRA performance among banks. The agencies should either introduce another rating category to the current four ratings or supplement the ratings with a point scale that can reveal more distinctions in performance. This would not only be fairer for communities but would also reward banks that are currently doing better than their peers but whose performance is not reflected adequately by the ratings. Further, the quantitative measures should be improved on CRA exams to assign ratings or points for each measure based on how well a bank performs compared to peers and demographic benchmarks. Qualitative measures must be improved to more effectively measure responsiveness to needs. A shortcoming in the board’s proposal is that it does not explicitly address how CRA grade inflation would be curbed and how ratings would be made more rigorous. 
  • Affiliate Activities Must be Automatically Considered – A number of banks own mortgage companies that are included now on CRA exams only at the banks’ discretion. This approach can lead to manipulation of CRA exams and the exclusion of mortgage companies when they engage in abusive practices or do not lend to low- and moderate-income borrowers. Affiliates must be automatically considered in CRA exams. In contrast, the OCC’s final rule removed even optional consideration of affiliate activity in most cases. In addition, CRA should be applied broadly throughout the financial industry to include mortgage companies, credit unions, insurance companies, securities firms and investment banks. This broad expansion of CRA would require an act of Congress.
  • Community Benefits Agreements Must be Recognized – Community benefits agreements (CBAs) are negotiated between banks, NCRC and community groups and commit banks to specific levels of loans, investments and services to low- and moderate-income and minority communities over a multiple-year time period. Banks have signed CBAs in the context of merger applications or to improve lackluster CRA performance. The agencies must not act to discourage CBAs and should recognize and promote them as a valuable means to improve CRA performance.

For more on NCRC’s work to modernize and strengthen CRA, check out the TreasureCRA hub.

This article focused on CRA reform as applied to banks. Previous articles have made the case for applying CRA broadly throughout the financial industry. See: 

CRA For The Securities Industry: A Tool For Combating Wealth Inequality And For Increasing Accountability 

Expanding CRA To Non-Bank Lenders And Insurance Companies 

Why The Community Reinvestment Act Should Be Expanded Broadly Across The Financial Industry 

Josh Silver is a senior policy advisor at NCRC.

Photo by Mike Erskine on Unsplash

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