CRA credit for fighting climate change: One Fed bank's suggestion

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As policymakers mull changes to the 42-year-old Community Reinvestment Act, economists at the San Francisco Fed have put forth this novel proposal: Give banks CRA credit for helping low-income communities protect themselves, or rebuild, from severe weather events related to climate change.

Natural disasters often hit low- and moderate-income communities the hardest because they have fewer resources to prepare for and recover from those types of events. The researchers said in a recent paper that banks should be able to earn CRA credit by financing developments that help those communities withstand disasters such as hurricanes and severe floods.

Their proposal comes at a time when policymakers are considering ways to modernize CRA and more and more bankers are starting to think more seriously about what they can do to mitigate the impacts of climate change.

Jesse Keenan, a faculty member at Harvard University’s Graduate School of Design and co-author of the paper, said that many bankers he has spoken with have been “very supportive” of the researchers’ proposal.

“Banks are eager to engage on climate change,” he said. “They’re just looking for the most appropriate pathway to do so.”

So far, much of the discussion around modernizing CRA has been focused on what counts as an assessment area when there are digital banks that have just one office but take deposits from and make loans to customers nationwide. Banks have also been pushing for establish a uniform grading system so there won’t be any confusion over what does and does not count as CRA credit.

Credit for helping communities adapt to changing weather patterns have, to date, not been part of the discussion, though the San Francisco Fed’s researchers argue that such activities should count.

Their argument relies on interagency guidance stating that activity “presumed to revitalize or stabilize” can count toward CRA credit if it’s “consistent with a bona fide government revitalization or stabilization plan or disaster recovery plan.”

Increasingly, state and local governments are undertaking plans to mitigate risk from natural disasters before they even occur, and with good reason. In its paper, the San Francisco Fed cites 2017 research by the Multihazard Mitigation Council showing that every $1 spent in pre-disaster mitigation can save another $6 in post-disaster relief efforts.

Therefore, banks should earn CRA credit under the service test for participating in local planning projects and general credit for making loans and investments that fortify low- and moderate-income communities before disaster strikes, they said. Those activities could include retrofitting homes, financing affordable housing away from flood zones or contributing in advance to disaster relief funds.

The proposal is framed as an interpretation of the existing law, rather than an update, and several industry experts told American Banker that regulators could accomplish this without changing the law.

“My view is that they wouldn’t necessarily need to change the regulations to expand what’s meant by revitalizing and stabilizing lower-income communities to include the impact of climate change,” said Warren Traiger, senior counsel at Buckley.

Regulators could issue a joint regulatory interpretation affirming that banks would receive CRA consideration for participating in projects intended to stabilize low- and moderate-income communities in preparation for a potential natural disaster, he said.

Bill Peterson, a senior lending officer at the $4.9 billion-asset Amalgamated Bank in New York, said that few banks consider lending for pre-event stabilization simply because there isn’t much guidance on the subject.

“It’s up to individual regulators to determine that. It creates some confusion and it’s hard for banks to invest a lot or do a lot on projects or investments they’re unsure will qualify,” he said.

“You’ve got investment tax credits and enterprise zones and all kinds of regulations where they stipulate what would qualify, and I don’t think it would be that hard to do within the CRA regulations as well.”

Banks are hardly in agreement about what they can do — if anything — to limit the damage from climate change, but a number of large and midsize banks have scaled back their lending for fossil-fuel exploration and accelerated financing of renewable energy projects and activities.

Lauren Compere, managing director of the investor firm Boston Common Asset Management, said that addressing climate risk through the financial system will require a variety of incentives and regulatory mechanisms. Her firm focuses on environmental and social responsibility and has pressured the banks in which it holds stakes to transition away from financing fossil fuels and pursue opportunities in renewable energy.

“The CRA credit could certainly play this role and a wider spectrum of banks from large to more regional and small-cap financial institutions would be leveraged then to address climate change,” she said.

Jenny Flores, head of corporate social responsibility at Bank of the West in San Francisco, expressed a similar sentiment.

“I think that for banks that are not thinking about this issue or haven’t really studied it or thought about what it means for their business, it provides an incentive to dip their toe in the water and think about what to do and how they can play a role,” she said.

The proposal does have some skeptics. Kenneth Thomas, the president of the Miami-based Community Development Fund Advisors, said he worries that expanding CRA in this fashion will water it down and detract from the broader mission of expanding affordable housing.

“I think their motive is good here,” Thomas said of the San Francisco Fed. “I’ve gone through too many Category 5 hurricanes and I know this is an important area, but more important than that is affordable housing.”

Jesse Van Tol, CEO of the National Community Reinvestment Coalition, said he shares the concern that expanding CRA too much will dilute it, but he disagrees that CRA should be focused only on affordable housing. He said the law was intended to promote community development in low- and moderate-income areas more broadly.

Van Tol also said he supports the San Francisco’s Fed proposal — with an important caveat.

“I think keeping it focused on low- and moderate-income communities in the context of climate change, not giving credit for just any investments, but really keeping it focused on low-income areas would be important,” he said.

Michael Swack, director of the Center for Impact Finance at the University of New Hampshire, said he believes these kinds of activities could meet the CRA’s objective of stabilizing low-income communities. He added that lending to improve climate resiliency could also easily fall under the umbrella of affordable housing.

“Think of a place like New Orleans, where a lot of the poor communities are really vulnerable,” he said. “Adaptation would involve lending to protect those communities, or relocate or build housing in safer areas. Those would seem to be CRA types of activities.”

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CRA Climate change Community banking Affordable housing Federal Reserve Bank of San Francisco