Comptroller of the Currency Thomas Curry is to be commended for recently suggesting that it's time for policymakers to consider some substantive reforms to the Community Reinvestment Act. Since 1995, when former comptroller Eugene Ludwig made the last meaningful reforms to the 1977 law, there's been a lot of talk about further reforms but very little action.
The reason is very simple. Most banks have learned to live with CRA and see no need for change. Just 2% to 3% of banks receive "needs to improve" or "substantial noncompliance" ratings, the equivalent of a "D" or "F" in school.
That hasn't always been the case. My 1993 book on CRA documented that 11% of banks and thrifts got below average ratings between July 1, 1990, and Dec. 31, 1991, when CRA ratings first became public.
The fact that so few banks get the lowest ratings today means that CRA grade inflation — which I raised as a concern two decades ago — is getting worse, or banks really have taken steps to improve their CRA performance.
But even if banks are performing better as a whole, few are going above and beyond what's required of them. This is evident in the declining number of banks receiving "outstanding" ratings. The percentage of top-rated banks has fallen by more than half in recent years — from 12% in 2007 to just 5% in 2013.
Does this mean that regulators are being less generous with their grades these days or that fewer banks are truly outstanding performers? My research suggests that it's a bit of the former, but the primary reason for the decline appears to be that there is no real incentive for banks to achieve or maintain "outstanding" status.
Countless bankers have told me that their only concern with CRA is not failing. Some say they can't justify the additional expense of getting and keeping an "outstanding" rating. Others worry that an "outstanding" rating might mean getting hit up more by donation-seeking community groups.
One banker challenged me to identify one meaningful advantage of having an "outstanding" rating over a "satisfactory" one — other than the fact that it can generate some positive PR. He half-jokingly suggested the possibility of "regulatory profiling" where an "outstanding" rating might be a signal for some safety-and-soundness examiners to scour the books for troubled loans.
As a lifetime CRA advocate, I find these and similar comments troubling.
Good CRA public policy should encourage "outstanding" rather than just "satisfactory" performance. Since this is not the case now, maybe banks need to be given some financial incentive to work toward the top rating. A bank that receives an "outstanding" rating could be rewarded in the form of a tax credit and/or reduced deposit insurance premiums. All banks with "outstanding" ratings could also be given an additional year between exams, as is presently the case for small banks.
Conversely, a bank with a failing CRA rating would have higher premiums or be penalized in some other manner.
As it stands, a weak CRA performance generally only hurts a bank when it comes to receiving regulatory approval for an acquisition or other type of expansion. But banks might try harder to improve their CRA ratings if they knew that the results of an exam would directly affect their bottom lines.
I would also suggest returning to the five, rather than four, overall CRA ratings that existed prior to July 1, 1990, More than 90% of banks receive "satisfactory" ratings, so it's hard to know if they were barely satisfactory or satisfactory bordering on outstanding. Massachusetts has its own version of CRA that applies to state-chartered banks, as well as state credit unions and mortgage lenders, and it uses the five-rating system. Comptroller Curry, a former Massachusetts bank commissioner, would be wise to consider adopting such a system at the federal level.
These three proposals, all of which I recommended in the 1990s, would constitute real CRA reform and make an "outstanding" rating meaningful. If more "satisfactory" banks are now truly motivated to become "outstanding," then we will see more banks making more community development loans and investments — a win-win-win for the community, the banks, and their regulators. Since we have a comptroller with a pro-CRA background, I am hopeful such reforms will be one of his legacies during the OCC's 150th anniversary.
Kenneth H. Thomas, an independent bank consultant and economist, was a lecturer in finance at the University of Pennsylvania's Wharton School for more than 40 years. He is the author of The CRA Handbook.