Dear regulators: Don’t take CRA’s revamp too far

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Bank regulators, like referees, should be unbiased and base their decisions on facts with input from fellow regulators, just like when referees confer to make the right call. There are, however, an increasing number of critics who believe that some of the actions by Treasury and the Office of the Comptroller of the Currency to date on Community Reinvestment Act reforms may not meet these criteria.

First, both Comptroller Joseph Otting and Treasury Secretary Steven Mnuchin worked together at the same bank that faced considerable CRA protests from community groups in a highly contested bank merger. According to the community activist who led the opposition, the current CRA reform effort is “very much done through the lens of two bankers who came out of California and a battle with communities in which they always put their needs last.”

While this gave them firsthand industry experience with CRA, it unfortunately was not a good experience. Otting is the first to admit that “I went through a very difficult period with some community groups. … And, so I have very strong viewpoints.”

Bank regulators have a critical role in balancing the interests of banks and their customers, which is why Otting has also been criticized for viewing banks as the OCC’s “customers.” Such a narrow perspective, if that is in fact the case, would appear to contradict the OCC’s mission statement to not only ensure banks operate in a safe and sound manner but also to provide fair access to financial services and treat customers fairly by complying with applicable laws and regulations. Again, a good regulator like a good ref treats both sides fairly — there should not be any actual or perceived biases either way.

Second, it is surprising and historically notable that the OCC has acted as a “lone wolf” regulator on several recent CRA and fair-lending initiatives, even before the current advance notice of proposed rulemaking, without the traditional interagency effort involving the Federal Deposit Insurance Corp. and the Federal Reserve. While the OCC is hopeful that the other regulators will join them in their efforts, the result so far is an unlevel playing field for banks regulated by these other agencies.

Third and most important, there appear to be some factual inconsistencies with the comptroller’s recently stated rationale for his current CRA reform effort: “Despite the best of intentions, the CRA regulatory framework, which has been pieced together over the past 40-plus years, is outdated, ambiguous, overly complex, and unnecessarily burdensome. These problems hinder banks' ability to fulfill the statute's goals.”

Let’s look at the facts.

Bank’s do not have problems fulfilling CRA’s goals since 98% of banks pass their CRA exams and only 2% fail. This was, in fact, an issue in the 1980s when 9% to 16% of banks and thrifts failed their CRA exams, but the 1995 reforms helped reverse this trend.

CRA is not unnecessarily burdensome, except perhaps to those who had a bad experience with it. In fact, a recent study by the Federal Reserve Bank of St. Louis identified CRA as just the sixth most costly compliance reg, amounting to just 7% of all compliance costs — far less than Bank Secrecy Act compliance, which accounts for nearly a quarter of all compliance expenses. If Treasury and the OCC really wanted to help banks with unnecessarily burdensome regs, they should have started with BSA rather than CRA.

Moreover, the current CRA regulatory framework has not been “pieced together over the past 40-plus years.” Rather, there was one major and very effective overhaul of the 1977 law in 1995 and several targeted improvements since then. I believe most bankers, community groups and regulators (the current OCC excepted) have learned to live with CRA.

The 1995 reform and the subsequent 2005 enhancement with separate rules for midsize banks are far from complex. There are several specific and straightforward exam procedures and tests for different-sized banks: a four-pronged lending test for small banks, equally weighted lending and community development tests for intermediate sized banks; and lending, investment and service tests for large banks. There are also optional exam procedures for special purpose and other banks with unique business models. Again, if CRA is overly complex, why are 98% of banks passing their exams?

What is true about CRA is that there are a few aspects that are ambiguous, such as what counts as a “community development” activity, but these are usually though not always clarified through interagency Q&As and public performance evaluations. So, yes, some of CRA’s subjectivity can be reduced through more specific guidance and examples as well as examiner training that would benefit bankers and regulators alike.

It is also true that there are a few aspects of CRA that are outdated in our digital banking world, the most important one being the definition of the appropriate “assessment area.” This is the local area that a bank, not its regulator, defines as the basis for its performance evaluation. While the focus on the branch footprint of a traditional retail bank is appropriate, the best way of viewing an assessment area for a branchless bank would consider its digital footprint based on the underlying geocoded physical addresses of its internet customers.

These and similar improvements to CRA, such as quantitative guidelines and other enhancements I have recommended over the years, represent a needed regulatory tuneup rather than a total overhaul of the law as suggested by the Comptroller's Office’s ANPR. Bottom line: CRA can certainly be improved, but it is not broken as some detractors would have us believe.

The overriding public policy concern with CRA expressed by critics of the current reform process is that a biased and nonfactual view of CRA by a lone-wolf regulator could weaken it. The fear is that if virtually everything a bank does everywhere counts for CRA credit, the law will have been effectively repealed.

Good public policy suggests that it is time for the FDIC and the Fed to work with their fellow referee to make sure the goal is to improve and modernize CRA in an impartial and fair way rather than totally overhauling it. Otherwise, Congress must step in and get this reform right, the way Sen. Proxmire, the father of CRA, envisioned it.

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CRA Policymaking Financial regulations OCC FDIC Federal Reserve