CRA needs to come off 'autopilot,' Fed's Quarles says

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WASHINGTON — The rules to comply with the Community Reinvestment Act have become "formulaic and ossified," and must be changed to encourage the kinds of lending practices that the law was originally intended to foster, the Federal Reserve's top regulator said Tuesday.

Speaking to the House Financial Services Committee, Fed Vice Chairman for Banking Supervision Randal Quarles praised a recently released Treasury Department report calling for CRA reform and said the central bank is focused on revitalizing the regulations.

“That’s an important focus for the regulatory agencies,” Quarles said. “The Treasury Department recently put out a report on ways to improve and invigorate the application of CRA, and I think … it lays out a good framework for consideration.”

Quarles’ comments came in response to a question from the committee’s top democrat, Rep. Maxine Waters, D-Calif., who pressed Quarles about how the Fed and other regulators intend to revisit the CRA in light of recent reports suggesting that redlining — the practice of denying loans to qualified people of color — remains a persistent problem.

“When you say you would move them off autopilot, have you determined that they simply get these satisfactory ratings without these requirements that would make them better or more effective? Or are you saying they just ignore the requirements now?” Waters asked. “What are you saying?”

"I'm saying," Quarles responded, "that the banks have developed ways with complying with the law out of a genuine desire to comply. The examiners have expectations about what they know will be viewed as ‘passing’ … and all of that could be broadened to have greater effect. It’s not that the law is being ignored, we’ve just gotten comfortable in how it can be applied.”

Quarles emphasized that CRA must "move off of autopilot" for banks and regulators.

Rep. Barry Loudermilk, R-Ga., said he and other Republicans on the committee have asked regulators and the Treasury Department to reconsider how they implement the CRA, particularly in how financial technology has changed the lending landscape, specifying what loans can receive CRA credit and speeding examination results. Quarles said he agreed with each of those priorities.

“Do you think the CRA can be modernized without detracting from its core purpose?” Loudermilk said.

“Not only without detracting from its core purpose, I think for it to achieve its core purpose in the modern world, I think it can better achieve it if we sort of take a fresh look at it,” Quarles responded.

Quarles’ comments came as his fellow member of the Fed’s Board of Governors, Lael Brainard, spoke in Baltimore about the need to modernize the CRA, noting that implementing regulations for the law have “traditionally” been jointly issued by the Fed, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency.

The OCC is reportedly moving ahead on an advanced notice of proposed rulemaking concerning CRA modernization, and community groups and other stakeholders are already laying out their priorities for such a push.

In her speech, Brainard said that any revision of the CRA rules should include certain considerations, including a new definition of assessment areas that addresses the credit needs of affected communities, a reconsideration of the relationship between major and smaller markets in CRA evaluation, a tailored approach for the size and complexity of institutions, more consistent examinations across institutions and an integrated approach to other fair lending laws.

“The Federal Reserve is deeply committed to the [CRA’s] goal of encouraging banks to meet their affirmative obligation to serve their entire community, and in particular the credit needs of low- and moderate-income communities,” Brainard said. “As we have seen all over the country, when banks are inclusive in their lending, it helps low- and moderate-income communities to thrive.”

Additional highlights from Quarles' testimony, his first since taking office as head of banking supervision at the Fed:

  • With respect to whether the Fed's examination of banks' resolution plans, or living wills, he said the Fed does not need Congress to act in order to move from an annual to a biannual or even less frequent schedule for banks to submit new plans. “We do have it in our power to have these assessments less frequently, and I think we’re at a time when it’s appropriate to do that,” he said.
  • Under repeated questioning from Rep. Brad Sherman, D-Calif., Quarles ultimately said that he believed that the biggest banks have made great improvements in their risk management since the financial crisis and that, “at the moment, I don’t see how” a failure of a single institution could collapse the economy.
  • Quarles said that the Fed and other U.S. representatives should remain engaged in the Financial Stability Board and Basel Committee on Banking Supervision, contrary to some Republicans on the committee who have suspected those international forums of subverting U.S. regulatory autonomy. “To ensure a level playing field for [U.S.] banks, we need to be able to influence those decisions,” Quarles said. “I do think we should remain engaged in them, yes.”
  • When asked whether he would support Congress expanding a community bank carve-out from the Volcker Rule to include bigger banks, or to eliminate the requirement altogether, Quarles said he did not think such a change would threaten the financial system. “I don’t think doing that — it depends on the scope — but I don’t think it would create any risk to the safety or soundness of the financial system,” he said.
  • Quarles pushed back against suggestions from some Republican lawmakers that the Fed’s regulatory powers should be curbed. Rep. Sean Duffy, R-Wis., asked him whether it was appropriate that that the Fed has the power to remove members of a bank’s board of directors, to which Quarles said that, though those instances would be exceedingly rare, in some circumstances such action “would be appropriate.” Quarles similarly pushed back against Rep. Andy Barr, R-Ark., who asked whether he would support a bill that would subject the Fed’s regulatory activities to congressional appropriations. “I am concerned that would create the possibility for some future Congress to put pressure on the monetary policy side,” Quarles said.
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CRA Volcker Rule TBTF Randal Quarles Maxine Waters Lael Brainard Federal Reserve Treasury Department OCC FDIC