Can CRA be modernized and still serve its original purpose?
WASHINGTON — As regulators try to agree on how to update the Community Reinvestment Act, a big sticking point may be conforming the 1977 law to today's banking environment while ensuring the law stays true to itself.
Among the key objectives with the CRA reform effort is redefining geographic areas in which banks are evaluated. Those areas are traditionally based on physical branch networks, but the rapid shift to digital banking has prompted a rethink.
While most stakeholders agree that regulators should revisit the assessment areas, some worry a new definition could lead to CRA grade inflation, remove an incentive for banks to keep branches open or divert community investments away from neighborhoods that need them most.
“The central issue going forward will be to preserve the foundations of CRA — the community-based focus, the reliance on community input, and the consideration of discriminatory and other illegal credit practices in the CRA evaluation — while adapting CRA to a changing banking environment,” said Martin Gruenberg, who sits on the Federal Deposit Insurance Corp.'s board and is the former chairman, in a speech last month.
With the banking agencies still trying to form a joint CRA proposal, the Office of the Comptroller of the Currency in August went out with its own list of questions about the reform effort for public comment to guide the process. Those questions included how regulators should grade banks on their lending to low-to-moderate-income communities.
The OCC's comment period set to close this month, and debates are stirring within the banking industry, and among consumer groups and the regulatory agencies, about how to define a community in need and assess banks in those assessment areas.
“There’s a lot of splinters, factions, a lot of banks are doing their own comment letter which is somewhat rare,” said Jesse Van Tol, chief executive of the National Community Reinvestment Coalition. “We’ve got some significant frustrations and issues around the assessment areas as well.”
At issue is how the CRA was originally written. The law has assessed lending at banks based on their branch locations and headquarters. But as online banking has grown and more branches close, assessing a bank based on its branch locations has become more outdated.
Most community groups, like the NCRC, and banks themselves are on board with expanding the assessment areas, but Van Tol cautions that that expansion should not result in banks having easier CRA exams.
“Generally speaking, banks have pushed for an approach to assessment-area reform that does not expand the obligation itself, but rather makes it easier to go more places to get credit,” he said.
Some community groups, however, would prefer regulators expand the assessment areas because there are whole communities in critical need of lending that have no surrounding branches. Under the current approach, community groups say banks do not feel any pressure to serve those areas, which are often called "CRA deserts."
“Expanding the assessment area is the greatest thing on the CRA reform” agenda, said Faith Bautista, president and CEO at the National Diversity Coalition. She disagrees with the claim that such an expansion will simply lead to easier CRA exams. “It’s good for the bank and to the community where they do not have a branch.”
Bankers are also largely in favor of expanding the assessment areas. But some banks, particularly smaller banks, fear the importance of bank branches would get lost if CRA incentives are broadened elsewhere. Some bankers say more credit should be given for maintaining branches in low-income and rural areas that need more access to lending.
“Let's face it, it's getting down to dollars and cents for a lot of these institutions including mine, which is an African-American-owned institution. Let's begin looking at what type of credit an institution is given to keep these branches open,” Alden McDonald Jr., president and CEO of Liberty Bank and Trust Co. in New Orleans, said at a recent FDIC advisory committee meeting.
“There's a lot of work that can be done in that area that could perhaps change the trajectory of having some of these branches stay either open or closed," McDonald said.
Bankers and others during the FDIC meeting cautioned regulators not to change their CRA policy in a way that would encourage banks to continue closing branches.
“I see policies being adopted now that are making their circumstance worse, not better. I am deeply concerned about CRA proposals which tend to obscure the import of closing bank branches in some of these communities and what the implications are,” Wade Henderson, president and CEO of the Leadership Conference on Civil Rights and counselor to the Leadership Conference on Civil Rights Education Fund, said during the meeting.
Comptroller Joseph Otting recently said one option would be to offer extra CRA credit if a bank will lend to a “CRA desert” where it does not have a branch.
“These communities are in very high need that need the resource so I think that’s a good example of redefining communities and assessment areas,” Otting said during a conference call Aug. 28, when the OCC released its advance notice of proposed rulemaking.
Gruenberg said the outcome of the reform effort should not be a regulatory policy that strays too far from the CRA's original intent. But he said there is some leeway to revise the assessment areas.
“Consideration should be given to how CRA could be adapted to include communities in which banks do substantial business but do not fall within existing assessment areas,” Gruenberg said.
Despite disagreements within groups on how to reform CRA, many believe there is enough universal agreement for the regulators to eventually move forward on reforms.
“There does not have to be only one answer, and we believe a successful modernization effort will consider both a bank’s business strategy as well as community needs,” said Steve Zeisel, executive vice president and general counsel at the Consumer Bankers Association. “There is a common goal to make CRA better by improving clarity and creating more certainty.”