Give CRA reform credit where it's due
The primary motivation for the recently announced reforms to the Community Reinvestment Act was to modernize the law to account for technological advances, such as digital banking and branchless banks.
Yet the only part of the joint proposal by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. that really addresses this issue is the adoption of a previous reform concept that would require banks obtaining deposits from outside their headquarters to benefit the areas sourcing those deposits.
This reform is more important than ever now with so many fintechs and other giant tech barbarians, like Google and Amazon, lining up outside the banking gate.
The previous reform idea would require banks with 5% or more of their deposits in any area to reinvest a commensurate portion of their CRA benefits there. The latest proposal, however, would limit this 5% deposit rule to banks with more than half their deposits from outside their current “assessment area,” and not require any commensurate CRA benefit.
Currently, these branchless banks can place up to 100% of their CRA benefits in their home-office community. In the case of credit card banks, the primary beneficiaries are three “sanctuary states,” namely Delaware, South Dakota and Utah, that provide a safe harbor from state usury ceilings.
As a result, tens of billions of dollars in community development (CD) loans and investments — and tens of thousands of hours of CD services — have benefited Wilmington, Sioux Falls and Salt Lake City rather than the large metropolitan statistical areas sourcing those deposits. Despite containing less than 2% of the nation’s population, these three states are reaping nearly 100% of the CRA benefits primarily sourced by large MSAs.
This misallocation of CRA resources is inconsistent with former Democratic Sen. William Proxmire’s original intention of the CRA: that federally insured deposits be reinvested back into their community rather than some credit-card-friendly city a few thousand miles away.
While “banking deserts” are an important public policy issue, even more concerning are the “forgotten cities” shortchanged by branchless banks. This includes my hometown of Miami, the nation’s seventh-largest metro area, with 40% of the deposits in Florida, the third-largest state.
The largest deposit holders in the state have shifted in recent years as many out-of-state regionals are buying local banks and doing a good job reinvesting in the communities. Some of this is a result of a federal law that monitors nonlocal loan-to-deposit ratios for interstate branch banks.
Unfortunately, neither this law nor CRA does anything to prevent credit card and other branchless banks from taking deposits and reinvesting it elsewhere. The reform put forth in the OCC-FDIC notice of proposed rulemaking is a step in the right direction to correcting this inequity.
For example, consider the $69 billion in deposits that Synchrony Bank (formerly GE Capital Retail Bank), the nation’s seventh-largest credit card issuer, reported in its Salt Lake City-area main office. Like many other credit card banks, it regularly advertises above-market deposit rate (2% for a one-year CD) in South Florida newspapers.
It is reasonable to assume that with this targeted advertising in an MSA with 2% of the nation’s population (and even greater share of its wealth), that at least 5% of that bank’s deposits come from South Florida.
Synchrony Bank’s most recent 2018 CRA exam reported $464 million of community development investments and $548 million of community development loans, totaling more than $1 billion benefiting its hometown, Salt Lake City assessment area.
There was an additional $250 million of community development investments benefiting undisclosed outlying areas for a grand total of $1.25 billion of CRA benefits, representing more than 1% of their deposits.
While that bank may deserve its outstanding CRA rating for its performance in the Salt Lake City area, this is certainly not the case for other large MSAs, like Miami and others, being targeted by these banks and getting little to nothing in return for helping finance credit card operations.
Most of the largest credit card banks, plus many other internet and branchless banks, are based in one of the three credit card sanctuary states. These three states combined represent a whopping $1.6 trillion in deposits, or 12.8% of all FDIC-insured deposits, as of June 30, 2019.
And yet, these states have just 1.6% of the nation’s population and 1.7% of the businesses. In such a case, it is reasonable to assume as much as 95% of their reported deposits originate from other states.
To put this into perspective, the OCC recently estimated that all banks provided $482 billion of CRA (community development and non-community development) lending in 2017, representing some 4.1% of bank deposits.
The new joint proposal would not impose an undue regulatory burden, since it is standard operating procedure for branchless banks to geocode their deposits, down to the ZIP code level. Also, these branchless banks would now have more community development options around the country, instead of competing with other giant banks for limited opportunities in those three sanctuary states.
Community banks would likewise benefit since they often find it difficult to compete for CRA credits with the giant banks headquartered there.
The nation’s forgotten cities deserve a fair share of CRA benefits from banks targeting them for deposit funding. This will happen only if all banks are required to proportionally reinvest their deposits, in the spirit of CRA, as originally proposed with the 5% deposit rule.