Regulators aren't only ones at odds over CRA reform

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WASHINGTON — As the effort to modernize the Community Reinvestment Act unfolds, a proposal championed by Comptroller of the Currency Joseph Otting is struggling to win supporters as lawmakers in Congress are divided over the process and community reinvestment advocates have largely assailed the plan.

CRA reform up to now has been driven by the regulatory agencies. But just as the process has divided those agencies, Democrats and Republicans in Congress have vastly different views on the OCC plan. Republicans largely laud the proposal, while Democrats say that it would harm communities and that the lack of consensus among regulators will lead to confusion.

“This is regulatory chaos,” said Rep. Gregory Meeks, D-N.Y., at a House Financial Services subcommittee hearing Tuesday, referring to the Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. issuing the Dec. 12 proposal without the support of the Federal Reserve. Meeks charged that the rulemaking process has been "railroaded."

But Republicans on the whole backed Otting's plan for modernizing what all parties agree is an outdated CRA framework.

"This is a common-sense proposal to ensure increasing transparency from institutions, for consumers, all while improving banks’ ability to serve their communities,” said Rep. Blaine Luetkemeyer, R-Mo., the ranking of the consumer protection and financial institutions subcommittee.

The proposal would expand CRA assessment boundaries and establish a new measure of what constitutes sufficient CRA activity by a bank. A key aim is to extend CRA projects to areas not served by physical bank branches.

But community reinvestment advocates, with some exception, have blasted the proposal, saying it would unduly ease banks' obligations and dilute CRA resources in low-income communities that need them most. The hearing included five witnesses from advocacy groups, all but one of whom criticized the plan.

“The proposed changes are substantial, dilutive and would weaken the effectiveness of the law,” said Gerron Levi, policy director of the National Community Reinvestment Coalition. “I can say, without equivocation, the winners would be the nation’s largest banks and the losers would be low- and moderate-income and underserved borrowers and communities.”

Others testifying at the hearing were even blunter in their assessment.

Paulina Gonzalez-Brito, of the California Reinvestment Coalition, said the proposal would do “serious harm” to the organization’s constituents. “We will not sit back and allow this to happen without calling it out for what is — a deregulatory scheme designed to help the largest and most powerful corporations at the expense of low-income families and families of color seeking to build wealth and thrive,” she said.

But the panel of witnesses wasn’t universally opposed to Otting’s proposed changes. Faith Bautista, CEO of the National Diversity Coalition, claimed that there was an urgent need to reform the CRA.

“The failures of today’s CRA regulations are not something to protect, they are something to remedy as quickly as possible,” she said in prepared remarks. “Fear of unintended consequences is not a good reason to stick with a failed system that for four decades has resulted in generational poverty and disparate impact on our communities of color.”

At times, tension between Bautista — the only witness to support the proposal — and the rest of the panel seemed high. During one exchange, she told members of the subcommittee “not to believe everything” they hear from her fellow witnesses.

The December proposal was published last week in the Federal Register, officially setting the deadline to file public comments by March 9.

But Democratic lawmakers and some community groups have asked for the 60-day comment period to be doubled to 120 days.

“A 60-day comment period is simply unfair to the community of stakeholders that are tasked with understanding the various aspects of the proposal and how it would impact their work and their communities,” said Levi. “The proposal cannot be understood, digested and analyzed in 60 days, plain and simple.”

“The CRA is complex,” agreed Hope Knight, CEO of the Jamaica Development Corp. in New York. “Changes to the regulation will have far-reaching impacts. The short, 60-day, comment period does not allow enough time for reflection and thoughtful comment on the proposed changes. We request that the comment period be extended to a total of at least 120 days.”

Community groups are also lining up behind criticism of the OCC’s ratio-driven approach to CRA scoring, where multiple tests for retail lending, physical bank locations and community development are crunched into a final score. Among their concerns is that the proposed calculation would incorporate a dollar-amount component for measuring how much CRA activity is enough.

“This proposal will create incentives for banks to favor big deals over small, simple deals over complex, cookie-cutter approaches over innovative and impactful initiatives, and importantly, it will hurt rural communities, said Gonzalez-Brito. “The new one-ratio metric will have banks chasing the largest deals since that will count for more credit towards their target goals.”

Even the OCC and FDIC’s proposed changes to assessment areas — considered less controversial than other elements of CRA reform — trouble community advocates, they said.

With the rise of digital banking, regulators have argued that the definition of assessment areas should be tied to a bank’s concentration of deposits, even if that concentration is not tied to traditional branches.

But advocates see a danger in expanding CRA assessment areas beyond a physical branch network.

“Instead of focusing on a clear geography, the proposed regulation greatly expands where banks can get CRA credit, allowing for investment in areas outside of local assessment areas,” said Knight. “Without clear geographic direction, it is less likely that financial assistance will flow to communities that need it the most.”

Nearly all the witnesses mentioned Fed Gov. Lael Brainard’s speech on CRA reform last week, where she laid out her misgivings with proposed changes to CRA scoring metrics.

Brainard “noted that it was more important to get CRA rule changes done right than done quickly, that any rule should be based on rigorous data analysis that is made available to the public, and that the rule adhere to CRA’s core principles,” said Gonzalez-Brito.

Levi accused the OCC and FDIC of using “arbitrary” metrics in their proposal but said the Fed's data, unveiled by Brainard, would be "a better starting point for an informed discussion."

Community groups took aim at the diminished importance of bank branches in CRA scoring in the proposal.

"This proposal would greatly diminish the importance of bank branches in meeting the test for CRA compliance, which could lead to significant branch closures in LMI communities,” said Eric Rodriguez, senior vice president of UnidosUS. “Physical presence still has an impact on whether residents of LMI communities of color are banked, including in their decision on whether or where to open an account and resolving issues with a bank.”

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CRA Regulatory relief Regulatory reform Community banking Joseph Otting House Financial Services Committee OCC Federal Reserve