WASHINGTON — Bank regulators are gearing up to modernize their policy on Community Reinvestment Act enforcement, but the CRA reform effort appeared to benefit from a jump-start Tuesday thanks to the Treasury Department.

Industry representatives, analysts and consumer advocates all praised the Treasury report recommending a slew of CRA reforms that could serve as a jumping off point for regulators that seemed poised for another attempt at updating their decades-old policy.

Despite hope that policymakers are serious about bringing CRA enforcement in line with modern technology, including the growth of mobile banking, regulators have tried to update the law before, to no avail. Still, the Treasury report — which included recommendations to redefine CRA assessment areas and provide flexibility on CRA exams, among others — appeared to spark optimism.

Treasury building
The Treasury “released an astonishingly progressive set of recommendations to reform implementation of the Community Reinvestment Act,” one firm analyzing the report said. Bloomberg News

The Treasury “released an astonishingly progressive set of recommendations to reform implementation of the Community Reinvestment Act,” Federal Financial Analytics said in a note Tuesday. “If these are taken up by the federal banking agencies — and they will be — banks would do more for their communities and thus rely a lot less on” government-sponsored “lending to show they care even when they really don’t.”

Here are the key takeaways from the Treasury report.

Industry representatives and community reinvestment advocates both lauded Treasury

Few issues in the years since the financial crisis have united bankers and consumer advocates, but all observers reacting to the report praised Treasury's recommendations.

“Treasury’s report includes many common-sense recommendations to ensure banks are meeting the needs of American consumers and communities across the country,” said Rich Foster, senior vice president and senior counsel for the Financial Services Roundtable.

That sentiment was echoed by John Taylor, the CEO of the National Community Reinvestment Coalition, who said he was "pleasantly surprised" by the report. Taylor said he was largely on board with the recommendations, with his concerns mostly just about clarifying things.

David Dworkin, the new president and CEO of the National Housing Conference, said the administration “has unexpectedly” backed a more detailed CRA assessment that “market conservatives will argue risks credit allocation.”

“The report embraces and accepts the fact that it’s time to provide much more detail and specificity for banks and the consumer advocates that are judging them,” said Dworkin, who was the senior housing policy analyst at the Treasury as it was working on the report.

CRA assessment areas will continue to be a focus of reform deliberations

One of the biggest concerns that both lenders and consumer groups have raised about the CRA is that the evaluations are largely based on the communities surrounding a bank’s physical locations, which has become increasingly outdated as more loans are made online and there are fewer branches nationwide.

Treasury said that concern can be addressed with a greater focus on "alternative channels" in evaluating financial institutions' compliance.

“Banking has changed drastically since the enactment of CRA. However, as the industry has changed, the definition of assessment areas under CRA has not evolved at the same pace,” the report said. “CRA’s concept of community should account for the current range of alternative channels that exist for accepting deposits and providing services arising from the ongoing evolution of digital banking.”

The Treasury also noted that regulators should expand the assessment areas for wholesale banks and limited-purpose banks. Such institutions have very few physical locations, with headquarters in states such as Utah and Delaware, but they often provide loans and other products on a more national scale.

“Treasury believes that an approach that would allow banks to address needs that overlap with their entire customer base,” not just based on state headquarters, “would improve the effectiveness of the CRA statute,” the report said.

Taylor said the report "addressed what we have for a long time talked about with assessment areas. ... We think that is a step in the right direction."

But he said he wanted to make sure that regulators do not lose sight of the importance of branch locations if they expand the assessments to other areas.

“Branches are still incredibly important to low- and moderate-income areas that are become a banking desert,” he said. The report “seems to be diminishing the importance of bank branches and I think it’s too soon for the Treasury to throw in the towel on why those branches are important.”

A goal of reform is to expand banks' opportunities to earn CRA credit for their activities

The Treasury also suggested expanding the types of loans that would qualify for CRA credit, and that the regulators should clearly publish criteria for earning such credit prior to evaluating a lender, rather than retroactively.

“The lack of defined terms for evaluating CRA-eligible activities presents problems for banks,” the report said. “Banks frequently invest considerable time and resources only to learn at the time of their performance evaluation that an activity is not considered eligible for CRA credit.”

The Treasury particularly noted that it would support any reform “that embraces innovative approaches to CRA eligibility definition, including technology-enabled approaches.”

Lenders and consumer groups have long advocated for regulators to expand categories in CRA evaluations to online loans and other technology-focused services, especially as fintech firms have begun partnering with banks.

“We welcome the Department of Treasury’s recommendations for modernizing a decades-old law, last revised when mobile phones and digital technologies were in their infancy,” Richard Hunt, president and CEO of the Consumer Bankers Association, said in a statement. “However, bringing the law into the 21st century would allow banks greater flexibility to use mobile, online and other digital technologies to better interact with and serve consumers in their local communities.”

Regulators may focus on making CRA evaluation less subjective

The Treasury advocated for major changes to the CRA rating system, which lenders have long argued is too subjective, unclear and inconsistently applied across regulatory agencies.

Currently, there are four ratings a bank can receive for CRA compliance: Outstanding, Satisfactory, Needs to Improve or Substantial Noncompliance.

But the Treasury said banks are unclear about how many points they can receive for CRA-eligible activities based on a geographic assessment area.

“There is no official quantity of CRA-eligible activities that determines when a bank is deserving of a particular rating,” the report said. “Banks stated that they do not understand how to ‘meet the minimums.' ”

The Treasury also recommended that the bank regulators create more incentives for lenders to get a higher rating, something the industry has long advocated as well.

“Adjustments that enhance the transparency, consistency and predictability of the supervisory process — and that recognize the many ways banks meet the credit needs of the communities they support — will help institutions better serve their customers and promote economic growth,” Rob Nichols, president and CEO of the American Bankers Association, said in a statement.

The Treasury also suggested that regulators create a standard timeline from when banks are evaluated to when their rating is publicly released. That process can sometimes take years to complete, eventually becoming outdated.

“Treasury supports statutory changes, if necessary, that would enable more timely evaluations and ratings,” the report said.

Taylor said he agreed on the need for more objectivity.

“The CRA examinations can be subjective,” he said. “We would all benefit from banks having a more consistent, well-trained and more regular examinations.”

Subjecting nonbanks to CRA supervision is still an open question

A sticking point for both consumer groups and banks is that nonbanks are not subject to CRA evaluations, even though they continue to account for a larger share of the financial services landscape. For example, the Treasury report cited data from the Urban Institute that the total origination share for nonbanks of loans backed by the government-sponsored enterprises jumped from 30% in 2013 to 60% in 2017.

Even though the Treasury report devoted half a page on the topic of nonbanks, it stopped short of recommending that they join banks in having to be examined for CRA compliance, which would like require legislative reform. Instead, the report simply recommended that regulators “continue to monitor the impact of the emergence of nonbanks on the effectiveness of CRA.”

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