While regulators fiddle, bankers sit and wait.
Such is the current state of Community Reinvestment Act compliance. After much fanfare, including a presidential directive, a series of nationwide hearings and several thousand public comments, the year-old federal CRA reform effort appears stalled.
As a result, many banks are also in a holding pattern, awaiting direction on whether or how to modify their programs. The extended reform effort has had the perverse effect of hampering community development initiatives at a time when, whatever one's opinion of the existing scheme, more resources than ever are being devoted to CRA compliance.
This unintended byproduct of CRA reforms most severely impacts banks that want or need to do the most: those with fledgling or deficient CRA programs and those desirous of enhancing their existing efforts. These institutions have understandably postponed potentially expensive and time-consuming initiatives, because they are uncertain which activities will garner maximum credit once CRA reform is completed.
But the delay affects many other institutions as well. Strategic planning, an important component of most business endeavors and the one specifically encouraged by the regulators for CRA, is acutely hampered by the lack of knowledge about the future legal framework. Few institutions have the confidence to make long-term commitments in the face of possibly radical regulatory change.
And if the banks are holding back, it is obviously their communities that suffer. Potential CRA activities, especially those involving grants and lending through intermediaries, endeavors which are deemphasized for retail banks under the pending proposal, are being carefully evaluated in light of anticipated changes. If there's any doubt as to its future eligibility, an activity is put on hold.
When confronted by anticipated regulatory changes, standard legal advice is simply to continue to comply fully with existing law. However, CRA is unlike other types of banking regulation. In large part, it is the ambiguity of existing law that precipitated the reform effort. Bankers are uncertain how to best comply with current regulation and logically await the results of the reform effort to design or modify their programs.
This uncertainty is heightened by the mixed signals emanating from the regulators. According to the Office of the Comptroller of the Currency, final reform is imminent. According to the Fed, it's back to the drawing board. Moreover, and notwithstanding agency rhetoric to the contrary, some performance evaluations continue to equate form with substance.
This is not to diminish the importance of well thought-out regulatory revision. The reform effort will ultimately be judged on its end result, not on how long it took to get there.
But in the meantime, the regulators must acknowledge the negative impact of a lengthy CRA reform effort and attempt to address it.
They can begin by reaching a consensus on whether reform is imminent or remote. If there will be a new regulatory framework by the summer, then another month or two of uncertainty is tolerable. But if a substantially new proposal will be issued and a new round of comments sought, then interim guidance from the agencies is essential.
Some Agreement Seen
In the latter event, presumably (and hopefully), there are at least some elements of CRA reform on which the agencies already agree. An example might be elimination or substantial modification of the 12 assessment factors employed in examinations. Some of the elements that make up the factors, like the frequency of CRA committee meetings and extent of employee training, are really peripheral to what should be the focus of CRA: the amount of credit extended to the community.
Similarly, the regulators might agree to stop requiring each instituion to draft a CRA statement, an exercise with little real value to the community.
Any elements of future reform that can be presently disclosed will facilitate future planning and provide banks with some measure of comfort that they will not be penalized in the future for initiative today. As a minimum, the regulators should provide guidance and direction involving interim activities.
As the regulators continue their deliberations, they will do well to keep in mind that the longer CRA reform takes, the more important it becomes that the process ends. Put another way, pending reform may be worse than no reform at all.