No shortage of ideas on CRA overhaul as official plan remains mystery

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WASHINGTON — Bank regulators have not even proposed a plan yet for overhauling the Community Reinvestment Act, but stakeholders likely to weigh in on the plan are already establishing battle lines.

At an event Monday on the CRA reform effort, participants dug into the need for a long view on modernizing enforcement of the 1977 law, how CRA can combat redlining, potential changes to banks' assessment areas and developing a system to measure a bank's CRA commitment.

“The ‘how much’ question comes up quite frequently from our financial institutions,” said Govetta Gardineer, senior deputy comptroller for compliance and community affairs at the Office of the Comptroller of the Currency, at the National Community Reinvestment Coalition conference.

“It would be nice if we had a quantifiable method that the banks understood, the regulators understood, and that community advocates understood as well on how you calculate how much is enough.”

Gardineer sat on a panel of stakeholders discussing their priorities for how to better implement the CRA, as the OCC and other agencies are mulling a proposal to reform their CRA policy for the first time in over two decades.

She said those who will be submitting feedback on the plan need to take a long view in their comments. The implementing regulations for the 1977 law have not been substantially revisited since 1995, Gardineer said, so stakeholders should consider not only how to update them for the immediate term but how the landscape might change down the road.

“Twenty-three years is a long time to go without making any changes in a regulation that has this type of grounding in economic development and meeting financial needs,” Gardineer said. “In the unlikely event that we don’t open this up again for another 23 years, we need to think not just about today, but we need to be looking toward the future.”

The CRA was designed not only to outlaw redlining practices, but to affirmatively require lenders to make loans to those communities that lie within their geographical footprint, as defined by location of bank branches.

But since the law was passed, banking transactions that used to be exclusively conducted in branches are now executed almost anywhere, making the tether between branch locations and business activity far more tenuous than it used to be.

The Treasury Department and other regulators have been looking at revamping the CRA for almost a year, and Comptroller of the Currency Joseph Otting said soon after being sworn in that reforming how the law is implemented is among his top priorities.

Treasury issued a highly anticipated report on its priorities for revising CRA last week, which included revising regulators’ approach to geographical boundaries, a reconsideration of what activities should be considered for CRA activities, and making the terms of CRA compliance more objective across institutions.

Buzz Roberts, president and CEO of the National Association of Affordable Housing Lenders — which includes community development financial institutions, larger banks and other lenders involved in affordable housing — said that one of the most important details that need to be addressed in CRA reform is re-weighting activities that count toward CRA compliance.

Activities and loans that have more impact on low- and moderate-income borrowers should be favored over less meaningful activities such as buying someone else’s loans, he said.

“Not all activities are equal in impact,” Roberts said. “To treat the purchase of a Ginnie Mae security as equivalent to a loan to a CDFI would be a mistake and would result in very little financing for CDFIs, and lots of financing for activities for which there is already global liquidity.”

Barbara Van Kerkhove, research and policy analyst for the Empire Justice Center based in Rochester, N.Y., said lending explicitly to minority borrowers, as opposed to low- and moderate-income borrowers, should count for more CRA credit.

Recent reports by the NCRC and the Center for Investigative Reporting have found that discriminatory practices in lending remain a potent obstacle for people of color, and many say the CRA should do a better job of preventing redlining.

“If I had a magic wand, one of the first things I would say needs to be in the law is … it explicitly has to say that the banks, in order to serve the entire community, they also have to serve communities of color and people of color,” Van Kerkhove said. “That is why we see all these issues today around disparities and … redlining.”

Michael Gaughan, executive director of Vermont Municipal Bond Bank, said that another approach to CRA that could resolve the question of geographical assessment areas and address the Treasury report’s desire for a definite and quantifiable compliance metric is to require banks to hold CRA-compliant investments in its portfolio, with less of a concern about where those investments are.

“I really think, as a general concept, we should move from the map to the balance sheet,” Gaughan said. “Behind the curtains, people talk about how CRA should be X% of Tier 1 capital. So let’s just … treat it like an asset class, which it is. So [banks] have to have X% of this asset class in your portfolio.”

Roberts said revising the way regulators draw CRA assessment areas is a critical area that needs to be improved, not just as it pertains to mobile deposits and the decline of branch banking, but also how assessment areas in general are defined.

Banks currently are assessed not only in their primary geographical areas, but in other places in which they may have a smaller footprint. The latter tend to receive “limited-scope” reviews.

“I would also say the current CRA structure has a systemic bias against smaller metros and rural areas,” Roberts said. “Simply saying, ‘We’ll make sure every place gets a full-scope review once every three cycles’ has the mathematical impact of saying, ‘It counts only a third as much.’ ”

Instead, Roberts said, regulators could assess a bank’s impact within the 50 largest metro areas nationwide and then aggregate activities outside of those metro areas statewide, which would leave banks with a total of 100 total assessment areas.

Gardineer agreed that the way full-scope and limited-scope assessment areas are considered creates a disincentive for banks to pay attention to or address lending needs of smaller communities. She said the OCC has tended to apply the same limited-scope and full-scope examinations on the same areas across multiple cycles, and she expects that to change in the future.

“We need to shake things up a little bit,” Gardineer said. “We need for the institutions to understand that we are going to go in and we will look at areas that we have not looked at previously under the earlier exam. That gives us a more fulsome view of how things are being met.”

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