The Fed’s remarkable turnaround on CRA

The Federal Reserve should be congratulated for finally getting involved in and supporting the current Community Reinvestment Act reform effort, which until now, has been exclusively promoted by the Treasury Department and the Office of the Comptroller of the Currency since 2017.

Many bankers and regulators, including some at the Fed, would be surprised to learn that a quarter-century ago our central bank did the opposite and fought the OCC’s CRA reform efforts. In fact, some 15 years before that, the Fed did everything it could to kill the CRA.

But first, credit is due to the Fed’ recent efforts. Fed Chairman Jerome Powell, who came from a Wall Street background with little CRA experience, has made some general comments supportive of CRA reform. One Fed board governor even made a specific reform proposal for separate assessment areas for a bank’s lending and community development activities.

This proposal, however, would double the regulatory burden for both banks and their examiners. Also, it could result in pressure from community groups and perhaps regulators for banks to expand their lending area to a broader one with which they might not be that familiar.

Last month, the Fed released the results of “stakeholder feedback” on CRA reform, a summary of perspectives from over 400 bankers and community groups at 29 roundtables around the nation. Unlike the preferred OCC approach of publishing 1,500 written comments from all interested stakeholders, the Fed’s anonymous approach did not identify specific comments of banks or community groups.

Rather than providing specific proposals identifying their authors’ rationale, the Fed filtered feedback from stakeholders by using general terms like “many,” “several” and “some.” This left readers to speculate who said what and for what reason.

Besides ignoring feedback from academics, consultants, vendors and other CRA stakeholders, not one of the Fed’s 29 roundtables were in my home state of Florida, the nation’s third largest.

Most recently, the San Francisco Fed, with the biggest CRA and community development budget of all 12 Fed banks, proposed CRA credit for fighting climate change. While a noble social cause, it would water down the limited amount of bank funds for the most important community development activity today: affordable housing. Considering San Francisco, along with Miami and New York, are the nation’s epicenters for the affordable housing crisis, this should be that Fed’s top priority.

This latest proposal, wrapped in low- and moderate-income CRA-qualifying language, is part of the progressive effort to expand the CRA credit umbrella to cover important social topics such as solar panels, broadband access and even medical facilities. Former Sen. William Proxmire, a Democrat known as the "Father of CRA,” cared about providing affordable housing so our primary focus should be putting roofs over people's heads rather than installing solar panels or satellite dishes on the roofs.

While these recent CRA reform efforts by the Fed are of limited value, it is a marked improvement to what the Fed did during the last major CRA reform effort, between 1993 and 1995. The first December 1993 proposal from the OCC, which was clearly pro-consumer, resulted in over 6,700 comment letters.

While everyone expected a conflict between the community and industry positions, no one expected the publicized infighting by the regulators themselves, specifically between the pro-CRA OCC and the generally perceived anti-CRA Fed at that time.

Past Fed board members have publicly criticized the OCC’s 1993 proposal. At the time, Fed Gov. Lawrence B. Lindsey said he was “perfectly willing to tear it up, throw it into the fireplace, and go back and start again.” Other Fed governors condemned the proposal as the “wrong” approach and a “fundamental policy mistake,” resulting in not only credit but also “resource allocation.”

In addition to concluding that “the time to say ‘no’ is now,” one governor publicly stated that the Fed would oppose the proposal if bankers complained loudly enough. Even the presidents of the Federal Reserve banks piled on, with the bank-friendly San Francisco Fed arguing against the disclosure of CRA public examination schedules.

The Fed, with the help of bank lobbying that it called to action, was successful in watering down many of the toughest provisions of the 1993 proposal. The OCC was not happy but went back to the drawing board. And its September 1994 proposal generated over 7,200 comments.

The end result of approximately 14,000 comment letters (averaging more than one for every bank and thrift at the time) and seven public hearings was the third and final May 1995 reform proposal. The bank lobby, with the strategic help of the Fed, won almost every CRA reform battle it fought. These regulations went into effect in 1996 and are essentially the ones under which banks have been operating since that time.

Even the Fed’s undermining of the 1993-1995 CRA reform effort was nothing in comparison to how it tried to kill CRA during and prior to 1977.The banking industry, as expected, opposed this new law as a form of credit allocation.

But what was unexpected was the fierce opposition of the Fed. Thus began the Jekyll and Hyde bank regulator that publicly put on a pro-CRA face, but privately encouraged banks and others to lobby Congress to weaken the law. This was a first for a federal bank regulator in modern times.

Then-Fed Chairman Arthur Burns was very clear in his opposition to the CRA, arguing that it was not only unduly burdensome to banks but was also a form of credit allocation. Yes, the same Fed now waving the pro-CRA flag did everything it could to stop it. Fortunately, Sen. Proxmire prevailed when former President Jimmy Carter signed the law in 1977.

The Fed has come a long way from its tortuous CRA past. I am hopeful that it will use its considerable resources and power to meaningfully contribute to the current CRA reform effort.