Proposed rule changes to the Community Reinvestment Act (CRA) could encourage the neglect of entire markets by the largest banks, a new study found.
The analysis, from the National Community Reinvestment Coalition (NCRC), found that while the proposed retail lending distribution test appears to be rigorous, it is deceptive.
The test would assess low- and moderate-income (LMI) home mortgage and small business lending with a demographic comparison as well as a peer comparison with other banks operating in the same market.
In NCRC’s model of the test, the demographic comparator resulted in high rates of bank failures, but that result was wholly invalidated by the companion peer test.
A previous NCRC study found that nearly all banks that earned passing marks under current rules would be able to reduce their mortgage lending to low- and moderate-income (LMI) borrowers and communities under new rules proposed.
“The proposal would weaken CRA and lead to less lending in some communities, and it’s really as simple as that,” said Jesse Van Tol, CEO of NCRC.
To make matters worse, the proposed rules issued jointly by the Office of the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corporation failed to include the data or results the agencies used to model the outcome of the proposed changes.
In addition to modelling potential results of the proposed changes, NCRC developed an alternative, five-tiered grading system to provide more information than a pass/fail system would, and to create stronger incentive for under-performing banks to improve.
“Our analysis exposed the vagueness of the proposed tests,” Van Tol said. “We also described a realistic scenario under which the largest banks could exploit their large market footprints to achieve a substantial competitive advantage over smaller regional banks. A short public comment period and lack of data included in the proposal are also indicative of the agencies failure to engage the public in a thoughtful discussion of benefits and costs.”