Treasury’s CRA reform has arrived: It’s good, it’s bad, it’s vague

Washington, DC – On April 3, 2018, the Department of Treasury released “Community Reinvestment Act Modernization Recommendations.” This long-awaited report recommends the first meaningful reform to the Community Reinvestment Act since 1995. In response, John Taylor, President & CEO of the National Community Reinvestment Coalition, made the following statement.

“There are provisions in this report that give us hope, and provisions that concern us, but the lack of detail really leaves us wondering where the regulators will choose to stand on just about every issue within the law.

“On one hand, I am optimistic to see Treasury suggest a framework that reflects the current banking landscape by expanding past physical branches and to all of a bank’s “substantial business.” We hope this means modernizing the Community Reinvestment Act to online lending and closing existing assessment area loopholes.

“But on the other hand, this is a far cry from the modernizations we are still hoping for. There has been a mutual agreement from both civil rights groups and banks to expand CRA to other financial institutions, like credit unions, non-banks and fintechs which we don’t see reflected in this memorandum.

“More troubling, this report also codifies weak enforcement by regulators, which has allowed 98% of banks to sail through the CRA exam for the past decade.

“The lack of detail in this report leaves to regulators interpretation of critical parts of the Community Reinvestment Act, including definitions of community development, and it ends the only penalty for failing a CRA exam: a presumption that applications for mergers and branch expansions will be declined.

“Furthermore, we are watching closely to see how the OCC and other regulators act upon this memorandum. The devil is in the details and this report leaves us worried until we see clarifications from the agencies.”

Summary of NCRC report analysis:

Positive Recommendations

Expand CRA to assessment areas to where banks conduct “substantial business”

Assessment areas are geographical areas where bank performance are evaluated on CRA exams. Currently, these areas include bank branches and deposit-taking ATMs. The Department of Treasury suggests that a number of banks are making loans outside of branch networks, via online lending. Treasury recommends that the definition of assessment areas be expanded to also include “areas where the bank accepts deposits and does substantial business.”

NCRC appreciates this recommendation because we have advocated for several years that CRA exams need to evaluate lending, investing, and services in areas outside of branches where a bank is gathering deposits or conducting substantial business. At the same time, however, NCRC asks Treasury to clarify this recommendation because it refers at one point for credit just for investments (not loans and services) in areas outside of branch networks. NCRC also does not want to allow banks to make CRA-related investments anywhere which could result in a surplus of investments in easier-to-serve areas.

Regulators will assess Community Benefits Agreements (CBAs)

Community groups and banks negotiate CBAs when banks are seeking to acquire other banks or improve their CRA ratings. While Treasury appears to recommend CBAs in general, sentences in this particular recommendation can be construed to emphasize or confine the use of CBAs to banks with less than Satisfactory CRA ratings. NCRC asks Treasury to clarify that CBAs are useful for a wide variety of banks, not just those with failed CRA ratings.

Clarity in the CRA examination process

NCRC also agrees with a number of Treasury recommendations for increased clarity in the CRA examination process. These include more regular communication among examiners, banks, and community-based organizations, improving the objectivity of CRA performance measures, standardizing examination schedules across agencies, and ensuring that non-metropolitan areas count more on CRA exams.

Harmful Recommendations

De-emphasis on bank branches

This will lead to the expansion of bank deserts if we aren’t careful. A cell phone cannot replace the financial benefit of a brick and mortar bank branch. Deemphasizing bank branches on CRA exams could cause banks to pay less attention to neighborhoods where they receive deposits (which was a major concern of lawmakers when they passed CRA). Moreover, lending and bank services to low- and moderate-income people are likely to decline. A large body of research including NCRC’s studies show that lending will decline in low- and moderate-income communities when branches close.

Allowing banks with less than Satisfactory ratings to merge or open up branches

Treasury recommends that the agencies adopt a memo of the Office of the Comptroller of the Currency (OCC) that allows banks with failed CRA ratings to merge or open branches if banks have or promise to improve their CRA performance and if the transactions have the potential to benefit communities. 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. The OCC memo provides too many escape valves or “get out of jail free cards” such as a vague guideline about whether mergers benefit communities. This language, on pg. 22, may allow banks to make the argument that consolidation and growth via mergers will allow them to “benefit the community more.” Approval of applications must be the exception, not the rule for banks with failed CRA ratings, which only constitute about 1 to 2 percent of all banks.

Adoption of OCC fair lending memo

Treasury urges the agencies to adopt the OCC memo on fair lending reviews. The OCC memo stated that violations of fair lending and consumer compliance law will henceforward not result in a double-downgrade of a CRA rating (for example, from Outstanding to Needs to Improve). This procedure disallows a sanction (a double downgrade) that could very well be necessary for a bank that has committed egregious legal violations. Moreover, the OCC memo disallows a legal violation associated with a loan product (such as consumer lending) not considered on a CRA exam from causing a downgrade on a CRA exam. However, if the violation in such a loan product is widespread is the bank genuinely serving community needs in a safe and sound manner as required by CRA?

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Redlining and Neighborhood Health

Before the pandemic devastated minority communities, banks and government officials starved them of capital.

Lower-income and minority neighborhoods that were intentionally cut off from lending and investment decades ago today suffer not only from reduced wealth and greater poverty, but from lower life expectancy and higher prevalence of chronic diseases that are risk factors for poor outcomes from COVID-19, a new study shows.

The new study, from the National Community Reinvestment Coalition (NCRC) with researchers from the University of Wisconsin–Milwaukee Joseph J. Zilber School of Public Health and the University of Richmond’s Digital Scholarship Lab, compared 1930’s maps of government-sanctioned lending discrimination zones with current census and public health data.

Table of Content

  • Executive Summary
  • Introduction
  • Redlining, the HOLC Maps and Segregation
  • Segregation, Public Health and COVID-19
  • Methods
  • Results
  • Discussion
  • Conclusion and Policy Recommendations
  • Citations
  • Appendix

Complete the form to download the full report: