Proposed Changes to the Community Reinvestment Act Will Be Disastrous for Low- and Moderate-Income Communities

The government’s plan to change how it enforces the Community Reinvestment Ac is “fundamentally flawed” and will significantly weaken the law, according to analysis of the proposal by the National Community Reinvestment Coalition (NCRC). 

Some of the most flawed changes in the notice of proposed rulemaking (NPRM) released last week by the Federal Deposit Insurance Commission (FDIC) and the Office of the Comptroller of the Currency (OCC) include weakening affordable housing standards, relying on a simplistic metric for CRA exams, devaluing bank branches in low- and moderate-income (LMI) communities, reducing bank accountability by only conducting exams every five years for all banks that received an Outstanding rating on their previous exams, and removing small banks – those with less than $500 million in assets – from rigorous exams (this represents nearly 85% of all banks).

“There is no doubt that these proposed changes will be disastrous for LMI communities,” said NCRC CEO Jesse Van Tol. “While we have always supported CRA reform, these measures will greatly diminish the effectiveness of a law that was desperately needed when it was enacted to combat discrimination in banking and which remains essential to ensure banks meet the credit needs of all communities where they take deposits, not just the wealthy ones. This is an attempt to turn the clock back and an invitation for banks to cherry-pick where they do business, reduce their lending to LMI borrowers and neighborhoods and turn their backs on potentially millions of people whose deposits are the foundation of the banking business.”

NCRC agrees with FDIC board member Martin Gruenberg, who said last week, “This is a deeply misconceived proposal that would fundamentally undermine and weaken the Community Reinvestment Act.”

Under the NPRM, the definition of affordable housing is relaxed to include middle-income housing in high-cost areas. In addition, housing is assumed to be affordable if lower-income people can afford to pay the rent without requiring banks to verify that lower-income people are the actual tenants.

Funding for essential infrastructure like bridges and non-essential large projects like athletic stadiums located within LMI census tracts would be eligible for CRA credit as community development activity. However, the NPRM does not require determining how these projects impact the community. Estimating the benefit to LMI populations of such large-scale projects is difficult and likely to result in ratings inflation as well as diverting funding away from other more clearly beneficial community development projects in LMI communities.

The NPRM is additionally flawed by allowing banks to receive credit for CRA activity outside of their assessment areas regardless of performance within their assessment areas. This will encourage banks to gravitate toward the largest deals anywhere in the country instead of executing smaller deals that are more responsive to local needs. 

The regulators have been adamant about including a “one ratio” metric, a simplistic measure of the value of CRA activities divided by the value of a bank’s deposits. This overly simple metric would favor larger and easier transactions and likely decrease small-dollar home and business lending. The ratio-focused analysis will also decrease consideration of how responsive the bank activities are to local credit and capital needs. 

Another destructive change involves how banks are assessed on their retail lending, which includes mortgage, small business and consumer lending. In place of ratings based on lending in each of a bank’s assessment areas, the new rules would apply a simple pass-fail test. Banks would be able to fail their retail lending test in half of their assessment areas and still pass.

One positive sign in the proposal is a mandate for improved data collection. But even that proposal is flawed because much of this new data would not be publicly available.

“The federal bank regulators had an opportunity to modernize CRA in a way that would be helpful to banks and to families and underserved communities,” Van Tol said. “Instead, the regulators have clearly favored the banking industry, ignoring the harm all but certain to come if these new rules are enacted. Americans expect better from the banks where they deposit their money and they deserve better from the government that’s supposed to look out for the interests of everyone. The OCC and FDIC should cancel this proposal and figure out how to modernize and strengthen CRA in concert with the Federal Reserve.”

To view a summary of NCRC’s analysis, visit:


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