Federal regulators seem to be of two minds about the Community Reinvestment Act, a law with an explicit and limited congressional purpose of requiring each banking regulator "to use its authority when examining financial institutions, to encourage such institutions to help meet the credit needs of the local communities in which they are chartered consistent with the safe and sound operation of such institutions."
On the one hand, even though its congressional purpose makes no mention of proscribing lending discrimination based on race, ethnicity, sex, or other prohibited factors, the CRA has become an important tool for enforcing laws that do, like the Fair Housing and Equal Credit Opportunity Acts.
In 2011, the Department of Justice used banks' CRA assessment area delineations to support allegations of racial redlining, and the federal banking regulators downgraded banks' otherwise robust CRA performances based on "evidence" of discriminatory or other illegal credit practices.
On the other hand, the federal banking agencies are unwilling, unable or uninterested in doing the hard work necessary to provide a modern regulatory framework for banks to carry out the actual intent of the CRA—prudently serving community credit needs.
The result is an expanding yet arguably inappropriate use of the CRA as a sword to enforce other laws, while the less sexy and more difficult task of modernizing and clarifying a bank’s CRA compliance responsibilities can seemingly wait for another day.
This disconnect is not the result of a failure by the regulators to recognize that the mid-1990s CRA rules have become outmoded. In fact, in June 2010, the banking agencies announced they "want to ensure that the CRA remains effective for encouraging institutions to meet the credit needs of communities," so they plan to update the CRA rules "to reflect changes in the financial services industry, changes in how banking services are delivered to consumers today, and current housing and community development needs." The agencies followed their pronouncement with four public hearings during the summer of 2010 at which bankers and community organizations testified about updating the regulations governing CRA compliance.
Since then there's been nearly radio silence, as the industry continues to await promised guidance on issues fundamental to CRA compliance like the appropriate geographic scope of exams, treatment of affiliate activities, ways to expand access to under-banked consumers, and regulatory incentives that could encourage and recognize banks with superior CRA performance. This regulatory neglect of nuts and bolts compliance guidance undermines the CRA by hindering the ability of banks to effectively serve their communities.
And that's not the only important CRA matter where the regulators are MIA. Seventeen months after enactment of Dodd-Frank, there’s still no word on how the Consumer Financial Protection Bureau will coordinate its fair lending oversight of banks having $10 billion or more in assets with the prudential regulators’ CRA oversight of the same banks.
How this coordination will work, particularly how the Fed, FDIC and OCC will determine whether CFPB "evidence" of a fair lending law violation is sufficient to downgrade a bank's CRA rating, has significant ramifications for the industry. A less-than-satisfactory CRA rating can preclude a bank and its holding company from merging, acquiring or even opening a new branch. The prudential regulators have recently lowered the CRA ratings of banks with adequate or even exemplary CRA compliance based on evidence that other laws were violated, and bankers are concerned that this pattern will increase, given that fair lending oversight of the largest banks is now in the hands of the consumer-oriented CFPB.
This combination of regulatory action and inaction crystallizes the bipolar nature of the federal government's attitude regarding the CRA: it's full-speed-ahead when it comes to aggressively using the statute to enforce the fair lending laws, but the administrative mechanism governing how that will happen remains a mystery. Meanwhile, whether such enforcement is consistent with the law's congressional purpose of safely and soundly serving community credit needs is beside the point.
Granted, there's a lot on the regulators' plate these days. However, ignoring issues central to serving community credit needs while jury-rigging the CRA to enforce the fair lending laws sends a message that the CRA is good enough to use to enforce other laws but not important enough to devote the time and thought necessary to make the regulatory changes necessary to actually advance its congressional intent.
Warren W. Traiger is counsel in the New York office of BuckleySandler LLP.