In the words of dissenting Federal Deposit Insurance Corporation (FDIC) Board member Martin Gruenberg, the FDIC and the Office of the Comptroller of the Currency’s (OCC) Notice of Proposed Rulemaking (NPRM) on the Community Reinvestment Act (CRA) “is a deeply misconceived proposal that would fundamentally undermine and weaken the Community Reinvestment Act.”
The agencies would lessen the public accountability of banks to their communities by enacting performance measures on CRA exams that would be complex and opaque while at the same time over-simplifying how to measure bank’s responsiveness to local needs. Public input into this unworkable evaluation framework would be more difficult and limited. The result will be significantly fewer loans, investments and services to LMI communities most in need of more credit and capital.
Here are the major reasons why the proposed rule change is fundamentally flawed:
Significant dilution of focus on low- and moderate-income people and communities
- In 1977, Congress passed CRA in response to redlining of low- and moderate-income (LMI) communities and communities of color. Since Congressional passage, the federal bank agencies have focused CRA on meeting the needs of LMI families and communities.
- 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 verifying that lower-income people will be tenants.
- Essential infrastructure such as bridges is added as an activity eligible for community development but clearly 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 from community development directly in LMI communities.
- Funding “athletic stadiums” located in LMI tracts in Opportunity Zones will be an eligible activity without any consideration of how many jobs or other benefits accrue for people with LMI.
- Financial education can now benefit people of all income levels instead of just LMI people.
- The revenue size for defining a small business is raised from $1 million to $2 million. Family farms are now included as CRA beneficiaries although examples in the NPRM indicate revenues of these farms can be as high as $10 million.
Where it Counts
Impacts of assessment area (AA) reform proposal is unclear
- The NPRM recognizes that banking is evolving with more banking occurring online. The NPRM proposes to establish new AAs for banks with significant levels of deposits outside of their branch networks but a lack of data on deposit-taking outside of branch networks makes it difficult if not impossible to estimate the impact of this proposal in terms of how many banks would be impacted and new geographical areas covered.
- The OCC and FDIC should have considered lending outside of AAs in their reform proposal because of the availability of data on lending outside of branch networks.
- The NPRM also allows for credit to be given for CRA activity outside of their assessment area regardless of performance in the banks assessment areas. This will encourage banks to gravitate to the largest deals anywhere in the country instead of executing smaller deals more responsive to local needs.
How it Counts
The One Ratio is the dominant and determinative factor on CRA exams
- This ratio would consist of the dollar amount of CRA activities divided by bank deposits. It would be computed at the bank level and for each assessment area (AA) or geographical area that is examined.
- The one ratio will favor larger and easier transactions and likely decrease bank small-dollar home and small business lending.
- The ratio-focused analysis will also decrease consideration of how responsive the activities are to local credit and capital needs.
Limited consideration of bank branches, no consideration of bank deposits
- The NPRM eliminates the current large bank service test and examination of basic banking accounts for LMI customers instead of making the service test better.
- Bank branches in LMI communities are devalued considerably under the one ratio approach. For example, a bank with a high 30% of their branches in LMI census tracts, would only receive an addition of .3 percentage points in the one ratio. Moving to this approach will greatly diminish the importance of bank branches in CRA compliance, which will likely lead to significant branch loss in LMI communities and a decrease in lending.
Retail lending test is supplemental, counts less.
- The lending test that looks at home mortgage, small business and consumer lending would now be pass or fail instead of generating ratings. It would count for much less towards the rating in each AA and overall.
- Banks can fail their retail lending test in half of their assessment areas and still pass.
- Home mortgage lending in LMI communities is eliminated as an exam criterion. NCRC has suggested alternatives to this approach which avoid displacement in gentrifying neighborhoods and which aim to promote integration.
Public input harder because CRA exams will be less transparent
- The NPRM just refers to public comments about local area needs. Will the agencies consider public comments on the performance of banks?
- The exams are likely to be less transparent, making it harder for the public to comment on bank performance. What types of data tables will be on exams; will exams mainly show the proposed one ratio overall and the two ratios that are on retail test?
Less Accountability for Banks: Outstanding rated banks examined once every five years
- The NPRM indicates that banks with an Outstanding rating will be evaluated once every five years instead of once every two or three years.
- This stretch-out reneges on the agencies’ statutory duty to ensure banks are continuing to respond to community needs. Banks with a five-year exam cycle will relax their efforts in the early years of the cycle. Banks will also have less accountability to maintaining acceptable recent CRA performance when they seek permission to merge with other banks.
Small banks get a pass
- About 85% of all banks or those with less than $500 million in assets will not be subject to the new exams, although the agencies estimate that they will do better on the exams than their larger counterparts.
- By continuing with their old exams that just look at retail lending, these institutions will have no obligation to offer community development financing. Currently, banks with assets between $321 and $500 million have a requirement to engage in community development financing. NCRC estimates that these banks make a significant contribution to community development so exempting them results in a community loss although these banks are equipped to pass the new tests.