Fed plan to reform CRA at odds with OCC rule

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WASHINGTON — The Federal Reserve released a preliminary proposal Monday to update the decades-old Community Reinvestment Act, distancing the central bank even further from a CRA rule finalized by the Office of the Comptroller of the Currency in May.

In the Fed's advance notice of proposed rulemaking, the agency floated a new framework in which banks could rely on existing data collection and reporting requirements, deviating from the OCC's plan to request new data points for CRA scoring. The Fed would also include key tests that consumer advocates had blasted the OCC for abandoning, such as a separate community development test “with separate financing and service subtests,” according to the Fed's memo.

“Stakeholder feedback indicated that retail and community development activities are both fundamental to the CRA and essential for meeting the core purpose of the statute," the Fed said in its memo. "Staff believe that separately evaluating these activities in a Retail Test and a Community Development Test would better ensure that these activities are appropriately taken into consideration.”

Having separate retail and community development tests would allow the Fed to tailor CRA metrics for a bank’s local market conditions, which may have disparities between retail lending and community development financing, said Fed. Gov. Lael Brainard in remarks to the Urban Institute after the Fed voted to approve the proposal.

While the Fed has embarked on a different path from the one the OCC followed, the central bank indicated that it intends for the new ANPR to be the basis for the agencies to work together on an eventual CRA reform plan. And some observers said the door is still open to the Fed, OCC and Federal Deposit Insurance Corp. agreeing on a joint plan.

“It has been 25 years since the last significant revision to the CRA regulation, so it is important to get reform right,” said Federal Reserve Gov. Lael Brainard. Chair Jerome Powell said, “The measure before us proposes ways to modernize CRA assessment areas while maintaining a focus on more traditional means to provide banking services.”
“It has been 25 years since the last significant revision to the CRA regulation, so it is important to get reform right,” said Federal Reserve Gov. Lael Brainard. Chair Jerome Powell said, “The measure before us proposes ways to modernize CRA assessment areas while maintaining a focus on more traditional means to provide banking services.”

Some analysts say that because the OCC’s finalized framework won’t go fully into effect until 2023, that timeline will give regulators ample time to coordinate on an interagency framework of some kind, regardless of who occupies the White House after this year. The Fed's ANPR will be open for comment for 120 days, stretching past the upcoming general election.

“The OCC regulation doesn’t really go into effect until January 2023,” said Warren W. Traiger, senior counsel at Buckley. “There is plenty of time, no matter what happens with the election, for the regulators to come together on this.”

Others said it helps that the Fed's board approved its rulemaking notice unanimously.

“In a year where partisanship has tainted every corner of the political discourse, this is a refreshing exception,” said David Dworkin, president and CEO of the National Housing Conference. “Unanimous support of a modernized approach to the CRA really sets the table for the FDIC and OCC to come together on a unified approach. Banks and advocates desperately need that.”

The Fed's plan would evaluate banks on retail lending and community development according to their asset size. It would also seek to modernize CRA assessment areas, which commentators say have become outdated as banks' footprints have enlarged beyond their branch networks. Yet the central bank's framework would still retain a focus on bank branches as an anchor for CRA activity.

The ANPR would also expand eligible community development activities for which banks can receive CRA credit and incorporate uniform metrics into the examination process

Under the new framework, smaller banks would be able to opt out of the proposed retail test and community development test and operate instead under the current CRA regime. The ANPR also seeks feedback on whether the Fed should set an asset threshold of $750 million or $1 billion that would differentiate between the CRA requirements for large banks and those for small banks.

Smaller banks could also choose to comply with the new CRA framework, but they would be evaluated only on their retail lending activity, unless they wanted to have other activities considered.

The Fed also suggested that online lenders without a physical branch network would be evaluated within a nationwide assessment area, rather than an assessment area based only on where those banks are headquartered.

The Fed’s proposal would “strengthen, clarify and tailor” CRA to better meet the purpose of the 1977 law, said Brainard, who is spearheading the regulator’s revamp.

“It has been 25 years since the last significant revision to the CRA regulation, so it is important to get reform right,” she said in a statement.

The law is a top priority for the Fed, echoed Chair Jerome Powell. Even though the Fed, OCC and Federal Deposit Insurance Corp. have all appeared to follow separate paths in reforming CRA, Powell emphasized that stakeholders have encouraged the banking regulators to work together to develop a new proposal.

“Given changes in the banking industry since the regulations implementing the CRA were last substantially revised, the measure before us proposes ways to modernize CRA assessment areas while maintaining a focus on more traditional means to provide banking services, like branches, given their importance to individuals and communities,” he said in a statement.

Rob Nichols, president and CEO of the American Bankers Association, said the Fed's plan was “an important step toward modernizing the Community Reinvestment Act in a manner that benefits communities and provides banks with regulatory clarity going forward.”

He stressed banks’ desire for a “unified CRA framework featuring clear and concise rules for all banks that will stand the test of time."

"Joint regulatory action will prevent confusion and avoid unintended consequences for banks and the communities they serve,” Nichols said.

Community advocates favored the Fed's approach out of the gate compared to the OCC rule.

Jesse Van Tol, CEO of the National Community Reinvestment Coalition, called the Fed's ANPR “an encouraging step toward thoughtful updates to CRA rules."

“Unlike the OCC, which earlier this year enacted an unworkable update to its CRA rules, the Fed has focused on transparent data analysis and qualitative measures of impact on communities, rather than on simplistic formulas that are easy to manipulate,” Van Tol said.

The Fed is also asking for public feedback on how its proposal could create incentives for bank investments in minority depository institutions, community development financial institutions and geographic areas outside of traditional CRA assessment areas, like Native American communities. The Fed also asks whether banks should receive CRA consideration for operating branches in “banking deserts.”

Brainard, speaking at the Urban Institute, also underlined that the Fed’s goal was to overhaul CRA in a way that would promote financial inclusion.

“By being inclusive in their lending and investing, banks help their local communities to thrive, which in turn benefits their core business,” she said. “The recognition of this mutually beneficial relationship between banks and their local communities is one of the core strengths of the CRA.”

Under the proposal, small banks operating in rural areas would have greater flexibility in defining their assessment areas, and would not be required to include areas of counties where banks don’t have a physical presence in their assessment areas.

The Fed also recommended designating certain inequity-plagued areas located beyond a bank’s reach where banks would be able to receive credit for community development activities.

“Many of the places that I have visited, such as in the colonias, the Mississippi Delta, Appalachia, and Indian Country, have few bank branches and are located outside of branch-based assessment areas,” Brainard said. “Banks need to be confident about receiving CRA credit to seek out activities and investments in these areas.”

The Fed additionally sought in its proposal to minimize the data collection and reporting burden on banks, recommending new metrics that would rely on existing data, and tailoring additional collection and reporting requirements to bank size.

In a statement, acting Comptroller of the Currency Brian Brooks said that the national bank regulator welcomed the Federal Reserve's plan.

"Public input and discourse fuels continuous improvement, and we look forward to reviewing the comments for potential insight into our own rulemaking that applies to national banks and savings associations," Brooks said. "We are pleased to see that many of the principles on which we worked together and that the OCC, FDIC, and Federal Reserve agreed upon prior to the finalization of the OCC rule in May will be part of their rulemaking discussion."

Yet even though the Fed said its goal is to "build a foundation for the agencies to develop a shared, modernized CRA framework that has broad support," it is unclear how that would happen. The OCC finalized its CRA framework without the support of the Fed or the FDIC.

“I think it's important to recognize that with the path we're on today, there are effectively two separate rules,” Brainard said. “We did want to provide a very long comment period — 120 days — [and] we did choose to issue an advance notice of proposed rulemaking. And of course there is a window on in which there is plenty of opportunity I think for the agencies to benefit from feedback from stakeholders, and to come together on a consistent approach. That's certainly my hope.”

Several elements of the Fed’s memo mark a clear contrast with the OCC's approach.

Notably, while the OCC had to request specific data from banks after issuing its initial proposal and ultimately punted on specific scoring thresholds in its final rule, the Fed’s proposal stressed that its framework would “would rely to the greatest extent possible on existing data and [tailor] additional collection and reporting requirements."

Yet the Fed's notice does retain elements of the OCC's rule. For example, the Fed is considering an “illustrative list” of the kinds of activities most often granted CRA credit, similar to a list that the OCC unveiled in December of 2019. And, similar to the OCC approach, the Fed’s outline will consider designating “certain areas, based on persistent inequities, where banks could receive credit for community development activities that often lie beyond the boundaries of a bank’s branches,” Brainard said.

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CRA Federal Reserve Jerome Powell Lael Brainard CDFIs OCC FDIC Lending