Grading Treasury’s CRA reform memo: ‘Incomplete’

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The Treasury Department’s long-awaited memo on reforming the Community Reinvestment Act was long on glittering generalities but sadly short on specifics, which probably explains why the report punted the real job of making reforms to the regulators. Putting on my CRA Professor hat, I would grade their effort as “Incomplete.”

While the Treasury addressed several important issues, these are the top five critical omissions from its CRA reform playbook:

1. CRA requirement for credit unions

Massachusetts’ state CRA law has proven that different credit unions have markedly different CRA performance. Taxpayers of all states should benefit from the public knowledge of which credit unions are doing the best (and worst) jobs of serving their communities. Credit unions are the beneficiaries of federal deposit insurance, and this fact alone should justify a CRA requirement for them.

2. Consolidation of CRA regulatory oversight in one agency

The Treasury Department missed an opportunity to back a key reform that would improve supervision: transferring the entire CRA function of the three prudential regulators to the Consumer Financial Protection Bureau.

Putting one federal regulatory agency in charge of CRA regulations, examinations, ratings and enforcement, would eliminate inconsistent exams and ratings. The prudential regulators would, of course, oppose any reduction of their power. But my analysis of the last 28 years of CRA performance evaluations (since CRA ratings became public in 1990) has documented that the Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and Federal Reserve have been incapable of consistency in this critical function.

For example, just 6% of the FDIC’s CRA ratings since 2014 were Outstanding, compared with 18% for the OCC and 9% for all three agencies. The FDIC has given just one Outstanding rating since 2013 in my home state of Florida, the third-largest state, which has 80 FDIC-regulated banks, whereas the OCC — which regulates half as many banks in the state — gave out 14 such ratings. In Georgia, the FDIC has given out only one Outstanding rating since 2013, despite there being 143 FDIC-regulated banks there — whereas the OCC gave out four such ratings (out of its 34 regulated banks there) and the Fed gave out one such rating (out of its four regulated banks).

3. Economic incentives for earning an Outstanding CRA rating

The lack of any real motivation for banks to try to achieve an Outstanding CRA rating is a major public policy failure. Most bankers tell me they only want a Satisfactory rating to “blend in with the other 90% of banks.” They also say there is “only one way to go when you are at the top.” Most importantly, they tell me it costs their bank money to get and maintain the highest rating, not just in making contributions to community groups but internally with staff and other expenses.

A dollars-and-cents motivation for outstanding CRA performance could be in the form of reduced FDIC deposit insurance premiums, reduced borrowing costs from the Fed and Federal Home Loan Bank System, and/or even tax credits.

All banks with an Outstanding rating could also be given an additional year between CRA exams. Conversely, a bank with a failing CRA rating (only 2% get a Needs to Improve or Substantial Noncompliance rating) would be penalized in the opposite direction, biting into the income statement of banks that ignore CRA obligations.

Banks with Outstanding CRA ratings should be publicly highlighted in separate monthly regulatory releases like the current ones on enforcement actions where banks are criticized. At a minimum, the heads of the regulatory agencies should send a brief congratulatory letter to the CEOs of outstanding institutions.

4. Specific quantitative guidelines on key CRA metrics

Bankers need and deserve specific quantitative CRA guidelines. My decades of research on thousands of completed exams have resulted in these ratings guidelines for both the loan-to-deposit and assessment area penetration ratios of the Lending Test: 80% for an Outstanding rating, 65% for High Satisfactory (HS), 50% for Low Satisfactory (LS), 25% for Needs to Improve (NI), and Substantial Noncompliance (SN) below that.

Rather than rigid rules, such guidelines provide bankers with some needed direction in critical performance areas. An individual bank’s performance context will determine the appropriateness of these guidelines. Examiners would still retain their overall ratings discretion regarding a bank’s qualitative performance, such as responsiveness to community development (CD) needs, innovativeness, flexibility, etc.

5. Specific assessment area recommendations for nationwide banks

This omission was particularly disappointing. Modernizing banks’ assessment areas to account for technological changes and there being less emphasis on branch banking is on any CRA reform advocate’s to-do list. But Treasury provided no real guidelines on how to rethink assessment areas.

The most critically needed guidance is for fintech, credit card and other banks with a national deposit footprint but little or no retail branch footprint. My research has concluded that we need a Primary and Secondary assessment area for banks with a national deposit footprint. The Primary one would be the entire nation, allowing CRA credit for eligible community development activities anywhere. However, a Secondary assessment area would be triggered for each metropolitan statistical area (MSA) where a bank receives 5% or more of its deposits, thus requiring a commensurate amount of CRA benefits to be reinvested in those areas.

Today, 100% of the CRA benefits of nationally operating credit card and similar special-purpose banks headquartered in Salt Lake City, Utah, Sioux Falls, S.D., and Wilmington, Del., go to those communities where they have their only office, yet all three of those MSAs combined represent less than 1% of our population.

By punting to the three regulators, Treasury ignored the fact that the three regulators have not been on the same page since the OCC came out with its October 2017 CRA and fair-lending memo, which the FDIC and Fed did not adopt. It is possible that the OCC may act as a lone-wolf regulator on CRA reform, with or without the FDIC and Fed’s cooperation, in drafting an advance notice of proposed rulemaking.

Assuming that the three regulators can get their act together and put forth specific and needed CRA reforms, unlike Treasury, and further assuming that they get it right, there is reason to be hopeful about CRA’s future.

If, however, this is not the case, it is reassuring to know that there are some very concerned members of Congress, most notably the Congressional Black Caucus, closely watching this CRA reform effort. They could always move ahead with their own CRA reform package if the regulators don’t get it right.

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