WASHINGTON — Community organizations and the banking industry are advancing dueling visions for how to reach the unbanked, with community groups asking regulators to strengthen existing rules while community banks want to lighten their regulatory burden so they can extend their services.

On one side are community bankers like Micah Bartlett, president and chief executive of Town and Country Bank in Springfield, Ill., who said that rules are preventing him from opening bank branches in economically-depressed neighborhoods. To make those branches viable, he would have to charge higher interest rates, but fair lending rules would make that exceedingly difficult to do.

"My point for today is not as much about regulatory burden per se. My point is that the rules are not working," Bartlett told regulators during an event last week at the Federal Reserve Bank of Chicago. "I'm actually not here today to represent community banks. I am actually here to represent our community, the citizens, and the small businesses. The rules are not working for them."

But community development organizations and some Congressional Democrats have a different vision of reform. Their priority is a revamp of the Community Reinvestment Act, a 1970's-era anti-redlining law that requires banks to make loans to low- and moderate-income borrowers in the areas where they operate.

Regulators are already working on changes to CRA implementation. Speaking at the same event in Chicago, Fed Gov. Lael Brainard said that regulators have received "numerous constructive comments" from community banks on an update to "question and answer" guidance.

She cited comments on three areas in particular: revising the Fed's definition of "assessment area" to account for remote deposits rather than relying only on brick-and-mortar branches or ATMs; raising asset thresholds to lessen CRA rules for smaller community banks; and revising performance tests to encourage community development activities.

But Brainard said it may take time for the agencies to formulate policy responses to the suggestions they have received.

"These are important issues, and we are looking at a wide range of suggestions and options, which may mean it will take us time to distill the comments and formulate effective policy responses in collaboration with the other banking agencies," Brainard said. "In the meantime, I urge you to continue providing specific suggestions to help inform our interagency deliberations."

Regulators may soon have help in the form of the Government Accountability Office, which is working on a report due next year that will offer recommendations for how to improve their regulations to expand access to basic financial services.

The push and pull of whether to tighten or loosen existing regulations comes as community banks continue to face the threat of consolidation, which could result in closed branches in rural and low-income areas.

Ellen Seidman, senior fellow at the Urban Institute and former head of the Office of Thrift Supervision, said that much of that trend is purely economic — it's harder to make money as a small bank, and it's harder to be a big bank in a sparsely-populated area. That might create an opening for Community Development Financial Institutions and credit unions — which are not subject to as stringent regulatory oversight — to reach those unbanked areas.

"Rural banking is really tough," Seidman said. "It is hard to be a consumer-oriented bank at less than $500 million in assets … and rural banks have a tendency to be small because their populations are small. I think that maybe some of the mission-oriented organizations [CDFIs or credit unions] with some help through CRA from the big guys may be better able to serve these communities than regular banks. This is especially the case in the South."

Members of Congress have noticed. The Senate Banking Committee is scheduled to hold a hearing Oct. 28 to examine the challenges faced by rural bankers. Other members have focused their attention on regulators' oversight of mergers and combinations, asking the Fed in particular to scrutinize combination deals that result in fewer branches and fewer services.

Rep. French Hill, R-Ark., said during a July hearing in the House Financial Services Committee that academic studies have concluded that one in five counties — "particularly rural counties" -- have no physical bank presence of any kind, a development he called "concerning."

Gene Ludwig, chief executive and founder of Promontory Financial Group and former head of the OCC, said that when it comes to reaching the unbanked, both activists and banks have the right approach.

"I think both are right," Ludwig said. "Complying with all the regulations community banks face can complicate their efforts to expand access, and the CRA definitely is in need of a spring cleaning."

It may be that the two ideas are not necessarily incompatible — indeed, regulators are already working on reducing the regulatory burden on community banks at the same time as they are pursuing incremental CRA reform. But for CRA advocates, reducing regulation as a general matter is seen as counterproductive, while banks shudder at the idea of new or more stringent regulation, Ludwig said, and the two sides have a hard time seeing how much they have in common.

"Some of these folks have been antagonists so long that it's hard to get them to work together," Ludwig said. "It is very hard … but its payoff for the communities is enormous."

One potential area of agreement could be establishing some kind of "safe harbor" program for banks to try to find alternative products or services directed at underserved communities that might not pass regulatory muster in normal circumstances.

Calvin Holmes, president of the Chicago Community Loan Fund, a community development institution based in Chicago, said during the event last week that one of the biggest challenges his community faces is that property values are so low that no bank can issue a mortgage without running afoul of loan-to-value ratio requirements. Regulators need to get creative in order to recognize when they are contributing to the problems they are trying to solve, he said.

"One of the variables we see clearly in Chicago is that lending is down because the neighborhoods [in question] have sustained low property valuations, and many lenders who are anxious to make those loans can't because the LTVs are hard to negotiate around," Holmes said. "Regulators have been creative in the past, and they can be creative in the future."

Town and Country Bank's Bartlett made a similar suggestion, saying that a regulatory atmosphere that encourages innovation and a supervisory process where examiners can "truly exercise judgment during exams based on principles rather than rules" could help spur the kinds of economic development that the CRA was intended to foster.

For now, however, it seems uncertain whether some broader push to combine the forces of community banks and CRA advocates will emerge. Seidman said that the heads of all three regulatory agencies care about CRA reform and would probably prefer to be more active in that arena. But CRA is a divisive issue, especially in political circles, and the regulators have likely decided that making some low-profile changes would be more productive than attempting a more sweeping set of reforms that would be attacked and undermined, she said.

"CRA has tended to be a lightning rod on the Hill, and so there has been a reluctance to put something up that will create a conflagration," Seidman said. "I think they're all strong supporters, I think the question that has been in their mind is, is our support more likely to be effective by not putting forth major changes and trying to work through the issues in the supervision process?"

Ludwig said the main challenge at the agencies is a lack of pressure from above and a wide array of more pressing problems in the banking sector. The financial crisis obviously absorbed the regulators' entire attention at the time, and the implementation of Dodd-Frank has been an incredibly consuming process since 2010. More recently, the Fed has been under almost unprecedented scrutiny in the past year over whether and when it will raise interest rates. Without some specific direction from the President or Congress, the agencies simply don't have the attention to spare on CRA issues, Ludwig said.

"What's happened since 2008 is that the bandwidth at these regulatory agencies has been stretched because of the crisis," Ludwig said. "The changes they propose will be sensible and thoughtful, but to make a more major change this kind of issue needs to be a higher priority."

John Taylor, president of the National Community Reinvestment Coalition, agreed, saying "there's not a lot going on behind the scenes" on CRA reform at the agencies, and for that reason his group is going to take more incremental steps of its own. NCRC successfully called on the Fed to extend the comment period on its review of Goldman Sachs' bid to buy the online depository assets of GE Capital, which is exiting banking altogether.

Taylor said his group is going to use that opportunity and other mergers like it to try to exact CRA commitments from big banks that have sidestepped the process so far, particularly to extend those obligations to banks with broad customer bases but no physical locations.

"The GEs and the Schwabs of the world are basically taking their business away without necessarily having the same obligation to serve those neighborhoods, because they don't have a brick-and-mortar place," Taylor said. "This is something that regulators haven't been willing to deal with."

There are calls from other quarters to do more in this area as well. The Ferguson Commission last month issued its report on socioeconomic conditions surrounding unrest in the Missouri town last year and recommended broad changes in CRA implementation. The San Francisco Fed and Corporation for Enterprise Development are also slated to release a book in December laying out recommendations on how to spur economic development and access to financial services.

"It will heat up as time goes on," Ludwig said. "Unless we give the community banks relief, there will be fewer and fewer of them in this country and that will be a crying shame. Similarly, unless we do something to modernize the CRA, it will be less useful and communities will get more frustrated."

Community banks and the organizations pushing for CRA reform appear to feel the same way.

"We all love the communities we serve and we all want the same outcome," Bartlett said. "But if we go to our corners … we will have another 10 years of what we have had. We want the same things, so let's work together to find what works for community groups and what works for banks in a way that is supportive of our community business model."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.