Flexible boundaries and exams: How Treasury would modernize CRA

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WASHINGTON — The Treasury Department released long-awaited recommendations Tuesday of reforms for enforcing the nearly 40-year-old Community Reinvestment Act.

The CRA, which grades financial institutions on their lending and other activities in low- and moderate-income neighborhoods associated with their market, has not been significantly updated since the Clinton administration.

The report calls for updates to how banks are examined for compliance, including the definition of geographic boundaries used for CRA exams. Treasury's recommendations come as federal bank regulators have indicated they will soon release a proposal to reform CRA policy.

“Forty years since the passage of CRA, it is time for modernization to fit today’s banking landscape and community needs,” Treasury Secretary Steven Mnuchin said in a press release. “Our recommendations will improve the effectiveness of CRA by enhancing the assessment and examination process, enhancing the ability of banks to deliver services in the communities they serve while considering technological advances in the financial industry.”

The Treasury’s main recommendations are:

• Updating the definitions for how banks are assessed based on geographic areas. The current law, which only looks at lending around a bank’s physical location, does not take into consideration changes in banking like online lending and consumer behaviors. The Treasury recommends the assessments now reflect those advancements and go beyond the surrounding area of branch locations.

• Greater flexibility on CRA exams and more transparency in how banks are rated.

• Improve the timeliness in how banks are evaluated to when a rating is published, a process that has sometimes taken regulators years to complete.

• Implement more performance incentives for banks to encourage more community lending.

“Treasury’s recommendations will incentivize bankers to do more for low- and moderate-income communities, especially in cases where the bank has underperformed in prior assessment periods,” the report said.

Treasury's recommendations could be used as a framework on what bank regulators will address as they begin to look at potential changes to CRA and the exam process.

The Treasury’s report “confirms the need to modernize our regulatory approach to the CRA so that we can increase lending and services to people and in areas that need it most, make bank CRA performance more transparent and accountable, increase timeliness of evaluations and related regulatory decisions, and expand the type of lending and activities eligible to receive positive CRA credit,” said Bryan Hubbard, a spokesman for the Office of the Comptroller of the Currency.

Hubbard added that the Treasury’s recommendations “affirm the direction of federal banking regulators’ work on an advance notice of proposed rulemaking that is expected to be released soon.”

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CRA Community banking Fintech CDFIs Steven Mnuchin Treasury Department