WASHINGTON — The Treasury Department is embarking on an effort to revise the implementation of the Community Reinvestment Act, a law many community groups say is out of step with modern banking practices and that institutions say has devolved into a compliance exercise.
Tucked away in Treasury Department’s regulatory reform report released last month was a nascent effort to reform the way regulators implement the CRA — a law intended to compel banks to offer loans and financial services to low- and moderate-income areas. The report said regulators need to “better align the benefits arising from banks’ CRA investments with the interest and needs of the communities that they serve” while also improving the “supervisory and regulatory framework” for CRA obligations.
“Treasury expects to comprehensively assess how the CRA could be improved to achieve these goals, which will include soliciting input from individual consumer advocates and other stakeholders,” the report said. “Aligning the regulatory oversight of CRA activities with a heightened focus on community investments is a high priority for the secretary.”
Treasury Secretary Steven Mnuchin said during a hearing of the House Appropriations Committee June 12 that the agency is launching a “task force” to re-examine the CRA, and that he supports the law and its objectives. Speaking in response to a question from Rep. Jaime Herrera-Beutler, R-Wash., about cuts to the community development financial institution grant programs in the president’s 2018 budget, Mnuchin said he wants to help underserved communities receive access to financial services and lending, and CRA reform is part of that commitment.
“I think in too many cases, this money is not properly going to the community and I want to make sure we meet with community advocates, with nonprofit groups, with community leaders, CDFIs and others to make sure that the billions and billions of dollars that banks are spending — which is far larger than what we support on CDFI — is absolutely going to help communities and isn't just a check-the-box to satisfy regulators or shareholders,” Mnuchin said.
Mnuchin's experience with CRA likely is more than academic since he ran OneWest Bank in California, an FDIC-insured bank that was later sold to CIT. The same is also true for Joseph Otting, the Trump administration's nominee to serve as comptroller of the currency. Otting served as CEO of OneWest, too, in addition to positions at other large commercial banks. Yet some critics may question Mnuchin and Otting’s involvement in any CRA reform push given the concerns that community groups had raised about OneWest’s CRA performance in connection with the CIT merger.
The relationship between banks, low- and moderate-income communities, regulators and the Community Reinvestment Act is a long and complicated one. The law was passed in 1977 in an era where concerns about discrimination in housing, lending and finance were at a fever pitch and Congress was determined to enhance consumer protections. Whereas fair lending laws were aimed at preventing banks and other financial institutions from rejecting loan applicants based on race or gender, the CRA was targeted at stopping banks from rejecting loans from low- and moderate-income individuals and communities.
The law requires banks with branches in a certain metropolitan statistical area to provide loans, financial services and investment to low- and moderate-income — known colloquially as LMI — individuals in that area. Banks are assessed by their primary regulator every few years and given one of four ratings: substantial noncompliance, needs improvement, satisfactory, outstanding. Banks with less than a satisfactory rating may be blocked from being able to merge or acquire another institution.
Greg Baer, president of the Clearing House Association, said that banks bucked under the burden of CRA for years and many pro-industry members of Congress advocated its abolishment — not unlike the continued protestations over the Consumer Financial Protection Bureau. But over time, banks have come to accept the law and don’t advocate for a lessening of the requirements they face.
“My sense is that banks aren’t really looking for a lower CRA obligation,” Baer said. “They just want a predictable rule.”
John Taylor, president of the National Community Reinvestment Coalition, said he is optimistic that the Trump administration is acting in good faith when it seeks to improve CRA implementation. He said Secretary Mnuchin called him to talk about CRA before he was sworn in in January, and he received a call a few weeks ago from the acting comptroller of the currency, Keith Noreika, on CRA reform. Both the OCC and Treasury confirmed these conversations took place.
“It seemed like there was a sensitivity there that he understood,” Taylor said of his call with Noreika. “I do think there is possibility there that allows me to not assume the worst is about to occur. Hope springs eternal.”
Noreika said in a statement that he looks forward to “a healthy dialogue about modernizing the law so that it recognizes and encourages the kind of services and activities needed today to allow financial service providers to continue to meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound operations.”
A Treasury spokesman said that the CRA "can and should be more effective," and that the current state of affairs "doesn’t appropriately measure success and has morphed into an exercise that punishes banks rather than credits their investments." He also said the CRA review was included in the Treasury's regulatory reform report on Mnuchin's insistence, and that the secretary "recognizes the value and necessity of banks investing in their communities" though "the CRA is outdated, having been written in the 1970s before the internet and the rise of interstate banking."
Taylor said the biggest problem with CRA implementation today is that it continues to assess banks on their LMI loan volumes based only on those areas where they have a physical branch. That was appropriate when financial transactions were primarily executed at branches — as they were when the CRA was first passed — but the rise of mobile banking and fintech firms has created a loophole where banks can provide services almost anywhere and not have any CRA obligations, unlike the community and CDFI banks they are competing with.
“You can cull the higher-end loans and leave the more expensive, more time-consuming loans, and essentially unfairly compete with institutions that are examined for CRA purposes,” Taylor said. “That needs to be corrected — the regulators need to be able to look at the volume of lending that banks are doing in a geography, and that needs to be included in their assessment.”
Kenneth Thomas, president of Community Development Fund Advisors in Miami, said the tethering of CRA obligations to physical brick-and-mortar locations has a second negative impact, which is that many of the largest banks with mobile deposits situate their headquarters in places based on tax and legal considerations. But since their headquarters generate CRA obligations, those large banks can outcompete local banks for what LMI loans there are in those areas.
“They locate in one area — in Salt Lake City, or Wilmington or Sioux City — because of favorable usury laws, and all the CRA benefits go to those communities,” Thomas said. “If you’re a bank in those communities, it’s very hard to buy CRA paper, because the big banks gobble it up.”
Eugene Ludwig, a former comptroller of the currency under President Bill Clinton and founder of Promontory Financial Group, said banks’ dwindling number of branches over the last several years makes the problem impossible to ignore.
“We’re living through a time of profound change technologically,” Ludwig said. “We may see half the number of branches in the next five years. We’re certainly going to see more online digital banking.”
Baer agreed that the advances in mobile banking are effectively forcing the administration’s hand to take up the issue.
“The move toward mobile commerce is going so quickly,” Baer said. “There are going to be so many important questions about how you assess performance that somebody is going to have to answer. There’s sort of an action-forcing event there.”
Thomas said one solution would be to require banks to track and report where their mobile customers are located and the levels of their deposits, as opposed to the FDIC’s current practice of tracking deposits by branch location. Regulators then would have a better sense of where deposits are originating, and if a bank has a concentration above some de minimis level — say 5% of deposits — it triggers CRA obligations.
Banks could then meet those obligations through any of the three forms of CRA reinvestment — services, investments or loans — Thomas said.
“They can have the option of any of those three — investments, loans or services,” Thomas said. “So they could do services, like Habitat for Humanity, or can do investments — to buy affordable housing obligations, for example — commensurate with the deposits that they’re taking from [the community]. There really is an elegant, simple solution to this.”
The Treasury spokesman said that CRA assessment areas are "just one of many changes requiring modernization of how assessments are determined," and that the agency expects to have its examination "underway in the coming months."
Baer said that, from the banks’ perspective, another problem with the Community Reinvestment Act is one that has only arisen in the last few years, which is the gentle slide of the law toward a generalized consumer compliance exercise. He said the OCC’s recent steep CRA downgrade of Wells Fargo in connection with its phony-accounts scandal is counterintuitive and actually harms the CRA process. It negates any incentive for Wells — which had been a leader in LMI lending — to try to be a leader in that area.
“What’s happened over the last five years or so is that CRA has gone from being a measure of community reinvestment to also being a measure of general consumer compliance,” Baer said. “There’s a natural inclination to throw the book at a bank when it does something wrong … but that’s why it’s really going to be important for community leaders to say, ‘You’re really not doing us any favors here.’ ”
Ludwig said compliance issues can sometimes bleed into one another. As comptroller, he said, he would sometimes encounter rural banks that would have robust LMI portfolios but would clearly not extend loans or services to people of color.
“A bank may have been making CRA-like loans, in some instances to poor white people but not poor black people,” Ludwig said. “They had been lending in their geographic area, including to low- and moderate-income and underserved populations, and the number may even be pretty good, but it’s pretty hard to give them an outstanding CRA rating when they’re discriminating.”
There have been attempts to revise CRA before. The Federal Financial Institutions Examination Council — an interagency group of bank regulators from the Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency — issued a revised question and answer document on CRA implementation last August. Sen. Elizabeth Warren, D-Mass., and Elijah Cummings, D-Md., asked the Government Accountability Office to make recommendations on how to improve CRA implementation. The GAO report is expected in the fall.
The new administration’s efforts to revamp the CRA may be hampered by those same antagonisms that were present in the early years of the act’s adoption, which have never really gone away.
Thomas said the more public and drawn out the move to CRA reform is, the more likely it is to scuttle any consensus. Between the community groups, the regulators and the banks, it would be exceedingly hard to craft a formal rule that would meet everyone’s satisfaction, he said, so it would be better to go as far as possible with another Q&A.
“I don’t like opening it up to regulation,” Thomas said. “Those three groups come to the table, and they’ll never agree on anything. So we do it by Q&A.”
Taylor agreed, saying that the further this reform effort remains from Congress, the more likely it is to lead to something positive for underserved communities.
“I’m mildly optimistic if the solution is regulatory, and totally pessimistic if the solution is legislative,” he said.
Ludwig said part of the gamble with the CRA is that it has to compete with any other administrative priorities — of which tax reform, regulatory relief and sustained growth over 3% are but a few. Whether something gets across the finish line in this administration, he said, depends a great deal on those other moving parts.
“Every administration has a lot of priority goals,” Ludwig said. “Whether something gets really focused on or done really depends on time availability and how many folks you have to do it, and your own priorities. But God forbid you should have a financial crisis or something else that shifts attention and that would shift the priorities.”
Taylor said he has reason to think that Mnuchin is approaching the issue as an honest broker and is hoping to solve a bona fide problem rather than score a regulatory rollback for the banking industry.
“I like to think he is not beholden to anybody,” Taylor said. “I like to think he is his own person and he has the ability to figure these things out in a fair way.”