Agencies urged to pause CRA reform as banks manage pandemic response

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WASHINGTON — Regulators should slow efforts to modernize the Community Reinvestment Act as the coronavirus pandemic dominates the workload of bankers and the agencies, a cohort of stakeholders said this week.

Comptroller of the Currency Joseph Otting has signaled his agency and the Federal Deposit Insurance Corp. are plowing ahead on their controversial CRA reform plans, despite concerns from multiple interest groups about aspects of their December proposal and the Federal Reserve's refusal to back the framework.

But the pandemic crisis throws another wrench into banks' ability to implement an overhaul of the law, according to participants in a CRA webinar who represent community groups and the financial industry.

“Even under normal circumstances, implementing a modernized CRA framework would be a really heavy lift for banks,” Krista Shonk, vice president of regulatory compliance policy at the American Bankers Association, said during the Zoom panel hosted by the Urban Institute on Wednesday. “Now that we're here during the pandemic, bankers are marshalling all their resources to help consumers and businesses help them to deal with a significant economic impact that we're seeing associated with our public health crisis.”

Mark Willis, who formerly oversaw JPMorgan Chase's community development program, said that while the CRA has been in need of reform for several years, the current system continues to chug along and operate reasonably well, even in the grips of a pandemic.

"Further delay [of CRA reform] will prevent these additional resources from reaching those who need them most in this time of national emergency," said Comptroller of the Currency Joseph Otting in April.
"Further delay [of CRA reform] will prevent these additional resources from reaching those who need them most in this time of national emergency," said Comptroller of the Currency Joseph Otting in April.

“We're not in a crisis in that this thing has completely broken down,” said Willis, a senior policy fellow at New York University's Furman Center. “Right now, we have a system that's working; again, it can be improved, and we'd all agree it should be. But that doesn't mean we need to rush here.”

Otting has led a controversial campaign to modernize the CRA since he took office in 2017, and the coronavirus pandemic has not weakened his resolve. In early April, he told American Banker that the pandemic actually increased the urgency of his agency’s proposed reforms, and that "slowing the rulemaking would only delay relief and support that communities across the country need."

"Modernization would bring valuable additional resources to communities across America that are currently underserved by the current regime," Otting said. "Further delay will prevent these additional resources from reaching those who need them most in this time of national emergency."

But opposition to that approach continues to swell.

“We haven't done a thorough review of CRA since 1995, and there's just no reason to rush it through now,”Laurie Goodman, vice president and co-director of the Urban Institute’s Housing Finance Policy Center, said during Wedneday's web seminar. “The current system isn't perfect — I mean, it's certainly far from perfect — but it works reasonably well. We should take our time, gather the necessary information, do the proper analysis, understand the changes, and then re-propose the rule.”

Banks were were already worried about the overhaul meaning costly changes to their existing CRA compliance systems, based on the proposal released by the Office of the Comptroller of the Currency and FDIC. The pandemic hasn’t made the proposition any more appealing.

“We've suggested that the agencies maybe take their foot off the gas a little — not abandon the modernization effort, but do a pilot program and test out some of these ideas on specific banks and see what the results look like,” the ABA’s Shonk said.

There is increasing skepticism that the demands of the pandemic will make it feasible for banks upgrade data collection and other efforts in a timely manner in order to comply with the CRA rule. Otting has suggested that a rule could be finalized and implemented in time for a reformed CRA framework to help ease the economic stress on communities from the pandemic.

“Imagine gearing up for an overhauled proposal — it would take banks one or two years to revamp their data collection systems, for example,” said Josh Silver, senior adviser at the National Community Reinvestment Coalition. “Let’s hope" that the pandemic "is over in a year or two. Even if this new [proposal] would be implemented, I think Mr. Otting is incorrect on the timing aspect.”

And even if a newly modernized CRA framework could be introduced and put into action by the OCC and FDIC, observers continue to say that the absence of the Fed from the proposal would only amplify banks’ regulatory headaches. (Regulators encouraged banks to assist customers impacted by the pandemic throughout March, including by expanding the eligibility of CRA credit.)

“Not surprisingly, we have started to see a number of questions from our banks with respect to how COVID response and CRA will intersect with each other,” said Shonk. “This is just not the time to have different regulatory regimes, in terms of how regulators may interpret the application of CRA data to COVID today. And it’s certainly not the time to have different regimes as it relates to modernization going forward.”

Meanwhile, the pandemic caused some analysts to reexamine aspects of the proposed CRA modernization in a new light.

For example, the OCC and FDIC proposed raising the limit of small-business loans eligible to qualify for CRA credit from $1 million to $2 million. But some say that because the vast majority of American businesses earn less than $1 million in annual revenue, such a shift could pull much-needed funds away from struggling small businesses right at the moment they need it most.

“You're diverting lending to businesses that are really beyond the barber shops or the landscapers that are particularly suffering right now under the pandemic,” Silver said.

Moreover, criticism of the proposed metrics for measuring sufficient CRA activity has intensified during the pandemic. Those metrics place a new emphasis on bank's balance-sheet volume and the dollar amount of CRA projects to calculate total activity. Some experts, including Federal Reserve Gov. Lael Brainard, argued that that may result in banks prioritizing large projects such as the finance of sports stadiums at the expense of smaller, more targeted loans that may have a more direct benefit to a community.

Silver and others said more targeted CRA investments can have a bigger impact in the middle of a crisis.

Because the proposed framework’s measurement system could “drive banks to seek the largest deals, they'll be tempted to gravitate towards stadium financing,” Silver said. “Community development activities around the stadium would be neglected.”

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CRA OCC Joseph Otting FDIC Coronavirus Policymaking American Bankers Association Lael Brainard