Principles for CRA Regulatory Reform

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.[1] The federal bank agencies are considering changes to the CRA regulation and examination procedures. The agencies must not undermine the effectiveness of CRA by designing new exams that do not effectively hold banks accountable for meeting credit needs of local communities. The following are principles of reform; if the agencies contradict or contravene these principles, we will oppose the reform efforts.

These principles are directed at regulatory reform. NCRC has always advocated for applying CRA broadly throughout the financial industry. This expansion would require an act of Congress. While this is discussed briefly 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.

  • Assessment Areas Must be Preserved and Expanded – CRA exams must retain a local geographical focus. Congress passed CRA in response to redlining of communities. Currently, CRA exams judge bank performance in assessment areas or geographical areas that contain bank branches and deposit-taking ATMs.[2] 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, financial technology companies (fintechs) have recently applied to the federal banking agencies for bank charters and fintechs make all of their loans through the internet. Assessment areas can expand to include geographical areas where banks and fintechs are gathering deposits or making loans outside of their branch networks.  Rural areas and smaller metropolitan areas must receive more attention on CRA exams. However, it is not acceptable to obliterate assessment areas in CRA exams as some contemplate. This would be contrary to the purpose of CRA to prevent redlining. Moreover, removing assessment areas from CRA exams would decrease lending to low- and moderate-income communities since research has found that assessment areas have bolstered lending in modest income communities.[3] CRA must continue to adhere to its original purpose to ensure that local community needs are met. Do not remove “community” from CRA.
  • Public Participation Must be Safeguarded – 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 and regulatory agencies do not consider seriously 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 is not only counterproductive but is contrary to the intent and purpose of CRA.
  • Maintain the Importance of Branches – Currently, the CRA service test places primary emphasis on bank branches while still considering alternative service delivery. Some have proposed deemphasizing branches on CRA exams.[4] A large body of research documents that home and small business lending increases to low- and moderate-income borrowers in areas with more branches.[5] Deemphasizing bank branches on CRA exams would 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.
  • Focus Must Remain on Low- and Moderate-Income Neighborhoods – Some have proposed expanding the range of activities that can qualify on CRA exams to include financing initiatives that may have city-wide benefits but that are not necessarily focused on low- and moderate-income neighborhoods. For example, some talk about providing favorable consideration to financing the construction of hospitals regardless of where they are located.[6] No one disputes the necessity for these institutions but health facilities located in affluent parts of metropolitan areas do not significantly benefit low- and moderate-income people. CRA must not be diluted to divert resources away from neighborhoods that were the original impetus for CRA.
  • Discrimination and Violations of Consumer Protection Law Must be Penalized on CRA Exams – The Office of the Comptroller of the Currency (OCC) has issued a memo that dilutes the negative impact of discrimination and violation of consumer protection law on a bank’s CRA rating.[7] 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.
  • Bank Activity to People of Color 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.[8]
  • 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.[9] Since only about two percent of banks fail on an annual basis, these institutions are exceptionally poor CRA performers.[10] Currently, the only penalties 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. Some have suggested a radical overhaul of examination criteria such as reducing CRA performance to a simple formula such as comparing the sum of CRA activities to bank assets. While this ratio is useful as one performance measure, making it the totality of a CRA exam would throw out current examination weights which judge activities such as loan originations to be more important than purchasing loans on the secondary market. It would also be another attempt to eliminate the focus of CRA exams to 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.
  • Affiliate Activities Must be Considered – A number of banks own mortgage companies that are included now on CRA exams only at the option of banks. 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 addition, NCRC believes that CRA must be applied broadly throughout the financial industry to include mortgage companies, credit unions, insurance companies, securities firms, and investment banks. The broad expansion of CRA would require an act of Congress while these principles as discussed above are devoted to regulatory reform.
  • Refine CRA Ratings– Only about 2 percent of banks fail their CRA exams annually while about 90 percent are judged to have Satisfactory performance and close to 10 percent are judged to have Outstanding performance. This rating system fails to identify banks with various levels of CRA performance. 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 in the ratings.
  • Community Benefit Agreements Must be Recognized – Community benefit agreements (CBAs) are negotiated between banks 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 them as a valuable means to improve CRA performance.

[1] NCRC, The Community Reinvestment Act: Vital for Neighborhoods, the Country, and the Economy, June 2016, https://ncrc.org/the-community-reinvestment-act-vital-for-neighborhoods-the-country-and-the-economy/. See also, Josh Silver, The Community Reinvestment Act at 40: A Careful Review of the Reviews, September 2017, https://shelterforce.org/2017/09/14/community-reinvestment-act-40-careful-review-reviews/

[2] CRA regulation, see §25.41 assessment area delineation, viewed at https://www.ffiec.gov/cra/regulation.htm

[3] Joint Center for Housing Studies at Harvard University, The 25th Anniversary of the Community Reinvestment Act: Access to Capital in An Evolving Financial Services System, March 2002, http://www.jchs.harvard.edu/research/publications/25th-anniversary-community-reinvestment-act-access-capital-evolving-financial Also, see Elizabeth Laderman and Carolina Reid, Federal Reserve Bank of San Francisco, “CRA Lending during the Subprime Meltdown” in Revisiting the CRA: Perspectives on the Future of the Community Reinvestment Act, a Joint Publication of the Federal Reserve Banks of Boston and San Francisco, February 2009, https://www.frbsf.org/community-development/files/cra_lending_during_subprime_meltdown11.pdf

[4] Memorandum for the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation from the Department of Treasury, Community Reinvestment Act – Findings and Recommendations, https://home.treasury.gov/sites/default/files/2018-04/4-3-18%20CRA%20memo.pdf

[5] Access to Capital and Credit in Appalachia and the Impact of the Financial Crisis and Recession on Commercial Lending and Finance in the Region, a NCRC report for the Appalachian Regional Commission, https://ncrc.org/access-to-capital-and-credit-in-appalachia-and-the-impact-of-the-financial-crisis-and-recession-on-commercial-lending-and-finance-in-the-region/

[6] For a discussion of the hospital example, see Rachel Witkowski, Will CRA Finally Get its Makeover, American Banker, March 9

[7] OCC, Impact of Evidence of Discriminatory or Other Illegal Credit Practices on Community Reinvestment Act Ratings, October 2017, https://www.occ.gov/news-issuances/bulletins/2017/bulletin-2017-40.html

[8] NCRC, Home Mortgage and Small Business Lending in Baltimore, https://ncrc.org/home-mortgage-and-small-business-lending-in-baltimore-and-surrounding-areas/ and NCRC Foreclosure in the Nation’s Capital, https://ncrc.org/foreclosure-in-the-nations-capital-how-unfair-and-reckless-lending-undermines-homeownership/

[9] OCC, Impact of CRA Ratings on Licensing Applications, November 2017, https://www.occ.gov/publications/publications-by-type/other-publications-reports/ppms/ppm-6300-2.pdf

[10] NCRC analysis of CRA ratings. The ratings can be found on the FFIEC webpage via https://www.ffiec.gov/craratings/default.aspx

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