The Office of the Comptroller of the Currency’s (OCC) final Community Reinvestment Act (CRA) rule released on May 20 would decrease banks’ public accountability 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 banks’ responsiveness to local needs. Opportunities for public input into this unworkable evaluation framework would be more difficult and limited. The result will be significantly fewer loans, investments and services to low- and moderate-income (LMI) communities most in need of more credit and capital.
The core of the final rule is the same as the proposal: a flawed CRA evaluation measure, a limited retail lending test and confusing procedures regarding test components such as multipliers. Here are some of 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.
- As the OCC proposed, the final rule assumes rental housing is affordable if lower-income people can afford to pay the rent without verifying that lower-income people will be tenants.
- As proposed, the final rule adds essential infrastructure such as bridges 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.
- As proposed, the final rule codifies that financial education can now benefit people of all income levels instead of just people with LMI.
- As proposed, the final rule provides generous consideration of activities that at most partially benefit LMI people and communities instead of activities that primarily benefit these populations (as measured by the majority of dollars). This raises the possibility of abuses such as banks stringing together several infrastructure projects that benefit a small percentage of LMI people and boosting their CRA evaluation measure and rating. The final rule should have provided that a project must have at least 30% of dollars benefiting LMI individuals or communities.
- The final rule improved upon a few aspects of the proposed rule such as reducing the revenue size limits of small businesses and farms from $2 million to $1.6 million. Also, the OCC deleted offering CRA consideration for middle-income housing in high-cost areas. On balance, however, substantial concerns remain regarding dilution of the focus on LMI people and communities.
- The OCC’s final rule stated that its new definition of distressed and underserved areas would benefit communities of color but it did not calculate how many predominantly minority census tracts would be considered distressed and underserved areas, making it hard for the public to assess the OCC’s claims. Also, these areas would benefit from community development financing but not be included on the retail lending test.
How it Counts
The CRA evaluation measure is the dominant and determinative factor on CRA exams
- As proposed, the final rule creates a ratio that would consist of the dollar amount of CRA activities divided by bank deposits. It would be the major factor in CRA exams. It would be computed at the bank level and for each assessment area (AA) or geographical area that is examined.
- The CRA evaluation measure will favor larger and easier transactions and likely decrease bank small dollar home and small business lending. The CRA measure would likely diminish new lending and investment since banks receive credit for financing as long as it remains on their balance sheets.
- The OCC had proposed specific ratios of 6% for Satisfactory and 11% for Outstanding. The OCC scrapped these thresholds, admitting it does not have data to support this core part of its proposal. The thresholds are to be developed through additional rulemaking.
- In contrast to the OCC’s proposed rule, the final rule stipulates that multipliers would be applied in the case of community development (CD) only if the bank offers more CD financing than on the prior exam. NCRC does not support the use of multipliers but this is an improvement from the proposal.
- In response to concerns that the ratio-focused analysis would decrease consideration of how responsive the activities are to local credit and capital needs, the OCC proposed a multiplier of four for activities deemed responsive and innovative. Since this determination is at the discretion of the examiner, this procedure introduces possibilities for subjectivity and inconsistencies across exams. Likewise, the multiplier for activities in CRA deserts of four is also problematic as a list of CRA deserts are not determined before an exam but upon a bank requesting such designation from an examiner. Subjectivity and inconsistencies are likely in the application of the CRA desert multiplier.
Limited consideration of bank branches, no consideration of bank deposit accounts
- As the OCC proposed, the final rule eliminates the current large bank service test and examination of basic banking accounts for LMI customers instead of making the service test better.
- As the OCC proposed, bank branches in LMI communities are devalued considerably under the CRA evaluation measure. For example, a bank with a high 30% of their branches in LMI census tracts, would only receive an addition of .6 percentage points in their ratio (.3 x .02). 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.
- As the OCC proposed, the final rule creates a lending test that looks at home mortgage, small business and consumer lending. It is now pass or fail instead of generating ratings. It will count for much less towards the rating in each AA and overall.
- The OCC had proposed to eliminate home mortgage lending in LMI communities as an exam criterion. The OCC restored this criterion, but overall the diminished weight of the retail test is likely to lead to less retail lending to LMI people and in LMI communities.
- The OCC removed its proposed thresholds for passing the retail test in another acknowledgement that it lacks the data for its half-baked performance measures.
- In a change from the proposal, the final rule requires large banks to pass their CRA exams in 80% of their AAs, up from 50%. While this is an improvement, if the tests remain easy (which is likely but unclear since the OCC will be proposing more refinements to test thresholds in the coming weeks), the tougher requirements for passing in AAs will not make the overall exam more rigorous.
Where it Counts
Impacts of assessment area (AA) reform proposal is unclear
- As the OCC proposed, the final rule established new AAs for banks with significant levels of deposits outside of their branch networks. However, a lack of data on deposit taking outside of branch networks makes it impossible to estimate the impact of this change in terms of how many banks would be impacted and new geographical areas covered.
- The OCC should have considered lending outside of AAs in their rule because of the availability of data on lending outside of branch networks.
- As the OCC proposed, the final rule allows for credit to be given for CRA activity outside of bank AAs regardless of performance in the banks’ AAs. This will encourage banks to gravitate to the largest deals anywhere in the country instead of executing smaller deals more responsive to local needs.
Public input harder because CRA exams will be less transparent
- As the OCC proposed, the final rule emphasizes 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 the retail test?
Less Accountability for Banks: Outstanding rated banks examined once every five years and affiliates get a pass
- As the OCC proposed, the rule indicates that banks with an Outstanding rating will be evaluated once every five years instead of once every two or three years.
- 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.
- In a change that is worse than the proposal, the OCC excluded affiliates from consideration on CRA exams unless they are involved in a CRA-related financing as an “intermediary.” Now, inclusion of affiliates is optional. NCRC argued that inclusion must be mandatory to avoid affiliates from engaging in abusive lending and other behavior.
Small banks get a pass
- About 89% of OCC banks or those with less than $2.5 billion in assets (small and intermediate) will not be subject to the new exams but can opt to continue with their current streamlined exams.
- By continuing with their old exams that just look at retail lending, small banks with less than $600 million in assets will have no obligation to offer community development financing. Currently banks with assets between $321 million and $600 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.
Josh Silver is NCRC’s Senior Advisor on Policy and Government Affairs.