ST. LOUIS — As regulators mull updates to the Community Reinvestment Act, the head of the Federal Reserve Bank of Cleveland urged them to blend the best of the 41-year-old law with new ideas while never losing sight of the central word in its name: community.
In doing so, regulators must find a way to balance flexibility and consistent standards, Cleveland Fed chief Loretta Mester said Wednesday at a community banking conference hosted by the Federal Reserve, the Conference of State Bank Supervisors and the Federal Deposit Insurance Corp.
“The word community is important,” Mester said, stressing the “importance of continuing to focus on the community aspect of the CRA, even as the definition of assessment area is updated.”
Regarding assessment areas, the CRA can be modernized by “recognizing that banks come in different sizes, serve areas with different needs and use different business models,” Mester said.
Deciding the future of geographic analyses centered on branches will be a challenge.
While assessing CRA compliance for an online bank based on a single location “seems inappropriate,” Mester said, branches remain “very important” for banks that continue to use a traditional model.
Data suggests that branch closings “appear to have a serious impact on service in low-income areas,” she said.
Flexibility is another important element necessary in a CRA update, Mester said.
“The focus should remain on making the CRA effective,” she said. “That means tailoring the assessment approach for different kinds of banks and allowing them to meet their CRA obligations in a way that plays to their strengths, while best servicing their communities, which can differ in terms of credit needs and opportunities.”
Regulators should consider expanding the types of lending and services that quality for CRA credit, Mester said. Incorporating better incentives to lend and invest in underserved communities is another area worthy of consideration, she said.
An example of an opportunity for expanded CRA credit could involve infrastructure investments, such as providing internet connectivity in rural markets, Mester said in an interview after her remarks. Regulators could also consider giving more credit to banks that take a targeted approach to identifying and serving underserved markets.
“The focus should be on outcomes … and not necessarily the process,” she said.
Bankers were generally supportive of Mester’s comments, though they are hopeful regulators will focus more on positive incentives instead of consequences for noncompliance. The notion of having more ways of earning CRA credit was well received.
“The thing is you should give credit for more than how the mathematical equations work out for loans,” said Gilda Nogueira, president and CEO of East Cambridge Savings Bank.
Mester said that the biggest challenge to flexibility is the need to provide consistent CRA oversight.
“What we’re trying to do … is make things transparent and have people understand what the rules are,” she said in the interview. “We want banks to make loans.”
An area that is off-limits for regulators is applying CRA to entities such as Rocket Mortgage, Mester said in response to an audience question.
“If you were doing this from scratch you might want to incorporate them into the rules,” Mester said. “But we’re not. … We’re taking the rule as it is given to us. [Anything more] would be up to Congress.”
Nogueira expressed dismay at the CRA’s failure to address nonbanks, noting that fintech firms and credit unions are taking market share away from institutions that must comply with the law.
“CRA is old, and it needs to be changed … but the piece that is being influenced by CRA is becoming smaller,” she said.
Mester urged bankers to voice concerns about nonbank competition to regulators as they seek comments. The Office of the Comptroller of the Currency is already accepting comments, and Mester said that the Fed will also conduct outreach with stakeholders.
Mester touted some existing elements of the CRA, including public or community benefit agreements, where acquisitive banks make commitments to underserved markets when they seek regulatory approval for mergers. She also pointed to data showing that higher levels of CRA lending by banks is associated with higher lending by nonbanks.
“In my view, the body of evidence suggests that the CRA has had a positive effect on credit availability in low- and moderate-income neighborhoods, thereby supporting economic development in these areas,” she said.
